Carlyle plans for life after Rubenstein

David Rubenstein: rejects the view that financial sponsors can play a significant role in industry consolidation.

That has almost obscured the fact that, with $17.5 billion in funds under management, 23 funds and a global investment team of more than 300 professionals, the Carlyle Group today ranks among the top private-equity investors in the world. It is an industrial scale fund-raiser and buyer and seller of companies. It boasts an impressive investment performance record, including an internal rate of return of 35% a year on realized corporate transactions since its foundation.

And it is now swapping the ex-politicians for businessmen as it pursues its global ambitions.

Carlyle is still best known for its high-profile defence and aerospace investments, with United Defense Industries of the US and former UK Ministry of Defence research unit Qinetiq among its portfolio companies. However, its major investment areas span a variety of industries, including telecoms and media, real estate, automotive, energy and power, healthcare and technology and business systems. Recent buyouts include the $7 billion yellow pages firm Qwestdex in the US, Japanese hoist maker Kito Corp and e1.6 billion Italian aerospace company Fiat Avio.

Its size has raised questions about its ambitions to be more than an investor and whether it would seek to  become a powerful industry player, perhaps in the defence sector. Although Carlyle often uses a buy and build strategy to glean synergies, its managing director and co-founder David Rubenstein rejects the view that financial sponsors can play a significant role in industry consolidation."It is very rare that a private-equity firm could agglomerate enough of an industry to make any real economic decisions or have a monopoly," he says.

Carlyle is a deal machine. Recent successful exits include French building materials company Matéris, which was sold in September to another private-equity house for more than two times Carlyle's investment, and the partial exit of United Defense via an IPO in August, which returned over five times Carlyle's equity investment to investors.

In Asia, the sale of Indian engineering service provider Worldzen produced 2.25 times Carlyle's equity investment. It is now looking to sell its 37% stake in Koram Bank in Korea.

As a buyer, Carlyle tends to shy away from the biggest private-equity auctions. "Our strategy globally is to stick to mid-market deals of about e500 million, as we find the very large deals attract too much competition," says Rubenstein. "The big auctions carry the threat of forcing you to overpay. So Qwestdex was an exception for us – we do not normally compete in the gigantic buyout business."

Global aspirations

Carlyle's main differentiating strategy is the breadth and number of its funds. It is one of a handful of private-equity houses that have truly global aspirations. While most private-equity houses are engaged in one or two investment areas, Carlyle's funds span five classes. In addition to buyouts, venture capital and real estate, it is also active in turnround situations and in debt management, with four high-yield funds that invest in bonds, leveraged loans and mezzanine debt.

Rubenstein feels the industry is undergoing a fundamental change, with two tiers of private-equity players emerging. "The major change right now is a sorting out of the firms that are going to be the true global fund-of-funds operations, with a variety of funds and a brand name, from the smaller firms that do not aspire to that," he says.

Blackstone, Texas Pacific Group, Bain and to some extent Warburg Pincus, are pursuing a similar strategy. Carlyle stands out from even these peers in its fundraising and the scope of its investments. "Only a handful of US firms are adopting a strategy similar to ours, of being a one-stop shop for investors. And to date, we are probably the most international, with the largest global presence," says Rubenstein.

In Europe most private-equity houses focus on just one or two investment areas – usually buyouts and venture capital or real estate. It terms of global ambitions, European private-equity firms are way behind their US counterparts. "The European firms do not seem to be dramatically expanding outside Europe in the way that US firms are expanding outside the US. Nor are the European funds offering multiple types of private-equity funds," says Rubenstein.

Until two years ago, Carlyle had been less visible in Europe, concentrating its efforts in the US and Asia. However, it is now arguably the best represented of the US firms, with offices in Barcelona, Frankfurt, London, Milan, Munich and Paris.

In addition to Qinetiq and Fiat Avio, recent European deals include French tile-maker Terreal and France Télécom's Dutch cable firm Casema. In November last year Carlyle lost the auction for DaimlerChrylser's German aerospace subsidiary MTU to KKR. Rubenstein says Europe will be a focus for Carlyle for the next few years, as "there are still a lot of companies that need to shape up their balance sheets and sell non-core assets".

Carlyle is also looking beyond western Europe for opportunities. Russia is a focal point – although rumours that the group is jointly setting up a fund with Alfa Bank are unfounded. "We find Russia, although treacherous at times, an appealing place, and we are considering setting up a team there. We are also setting up a team in Mexico, with plans after that for Brazil. We are looking at doing a venture capital fund in Israel and something in central and eastern Europe. In the Middle East there are clearly complications, but we'd like to find a way of investing there too," he says.

Much has been made of Carlyle's connections with former US defence secretary Frank Carlucci, former UK prime minister John Major, former US secretary of state James Baker, former US budget director Richard Darman and, until October, former US president George Bush Snr, among its advisers and board members.