As the US buyout company founded in 1987 grew to become one of the biggest in the world, Abu Dhabi's Mubadala Development played a key role with two significant investments. With an IPO on the cards, the UAE firm stands to benefit. Asa Fitch reports:
Timeline: The rise of Carlyle
1987 Carlyle is founded by five executives in Washington. They were William Conway Jr, Stephen Norris, David Rubenstein, Daniel D'Aniello and Greg Rosenbaum. Mr Rosenbaum soon left, and Mr Norris departed in 1995.
2000 CalPERS, the mammoth California pension fund, acquires 5.5 per cent of Carlyle for US$175 million (Dh642.75m), marking the first time a major outside investor is given a stake.
2007 Abu Dhabi's Mubadala Development pays $1.35 billion for 7.5 per cent of Carlyle. Assets under management reach $82bn.
2010 Mubadala makes an additional $500m investment in the form of a loan and additional equity, bringing its stake to 9.35 per cent.
2011 Carlyle files to go public. Assets under management stand at $153bn.
When Mubadala Development bought 7.5 per cent of the Carlyle Group in 2007, the private equity craze was in full swing.
Many of Carlyle's competitors in the booming buyout business were launching initial public offerings (IPOs), tapping stock market optimism for cash to expand. Fortress Investment Group made its IPO in February of that year. Blackstone Group, then the world's largest buyout firm, raised US$4 billion (Dh14.69bn) in June.
Private equity was heavily in vogue thanks to many years of bumper returns. The industry had risen to prominence before, during the leveraged-buyout boom of the 1980s. It then went under the radar before re-emerging alongside other so-called alternative investment strategies as popular options for institutions and wealthy people.
Carlyle, however, decided not to go the IPO route until this month. The move will raise the share owned by Mubadala, a strategic investment company owned by the Abu Dhabi Government.
"I believe the last five years were the five greatest years we could possibly imagine," David Rubenstein, one of five Carlyle founders and by far its most outspoken executive, said in September 2007, when Mubadala made its first investment. "Life isn't going to be so easy always, and I think the industry has responded reasonably well."
Mubadala's initial investment of $1.35bn valued Carlyle at about $18bn. The price Mubadala paid was called cheap in some quarters, given the huge amount of interest in private equity at the time. But it was a far higher price than the amount CalPERS, the California public employees pension fund, paid in 2000. CalPERS paid $175 million for a 5.5 per cent stake - the first major outside investment in Carlyle.
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The company, founded in 1987, was especially prized because of its connections to powerful politicians. Many alumni of the George HW Bush administration joined its ranks as board members and advisers, including the former president himself. Former Clinton administration officials also joined the firm. John Major, the former British prime minister, is chairman of Carlyle's European business.
Those kinds of connections, coupled with Carlyle's investments in the defence industry, have occasionally drawn scrutiny.
The financial crisis that took hold in 2008 hurt Carlyle's business, its IPO prospectus shows. Carlyle posted a $608m loss that year as it was burnt by lower asset values and declining fee income.
Carlyle, however, managed to recover quickly from the global downturn. By 2009, it was $694m in the black. It made $1.5bn last year and booked $1.27bn of profit in the first half of this year.
How well Mubadala's investment fares depends on the pricing of the IPO, which has yet to be determined. After its investment in 2007, Mubadala put in $500m last December in the form of a loanand obtained additional equity that brought its stake to 9.35 per cent. The loan is set to convert to Carlyle shares in the IPO at a 7.5 per cent discount, giving it an even bigger shareholding. Mubadala can own up to 19.9 per cent of the company, the prospectus says.
In view of Mubadala's strategy to invest for the long-term, it is probably going to keep its Carlyle shares for a long time after the IPO. Securities regulations prevent Mubadala from discussing the matter ahead of the offering.
"Mubadala is not in a position to provide any comment during Carlyle's registration process," a company spokeswoman said.
For the public, the IPO means the world will know a lot more about the company Mubadala has been pumping money into for four years now. Like many of its peers, Carlyle began as a company closely held by its partners and employees. Even now, speculation has it that Carlyle's three remaining co-founders own about half of it, although that is impossible to confirm.
The company's IPO prospectus does not disclose exactly what share its partners own, although revisions before the issuance may show this. It also does not say what its executives are paid or how much they used the company jet, details that could also be filled in later.
Investors will be looking closely at these details not simply out of prurient interest in the luxurious lifestyles of a few finance big shots, but because retaining key people is crucial to Carlyle and other private equity firms.
The company acknowledges as much in the prospectus.
"Our success will depend on the continued service of these individuals," it says. "Our founders currently have no immediate plans to cease providing services to our firm, but our founders and other key personnel are not obligated to remain employed with us."
