Saturday, April 4, 2009

Carlyle Group Comes Out of G20 Just Fine

G20 leaders released a statement on global financial regulation. Politicians catered to the global big money boys and kindly made no mention of private equity underwriters (PEU's). Hedge funds, large enough to provide systemic risk, will be regulated for the first time.

I predicted private equity would avoid the regulatory lens, given the PEU chairmen of various financial reform efforts. Carlyle Group co-founder David Rubenstein chaired the World Economic Forum study. He commented on its release:

“The Future of the Global Financial System report provides financial leaders and policy makers with an examination of the impact of short-term changes in the financial markets and challenges us to consider broader, systemic changes to the financial system and global economies over the long-term.”

Carlyle Senior Adviser Arthur Levitt chairs a U.S. reform study group. Thus, no surprise on the G20 statement on financial regulatory reform and its failure to mention private equity:

to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds

What kind of systemic risk does private equity pose? Bloomberg shed light on it with a recent article on private equity's returning to huge investors for capital calls during the financial meltdown. The California pension fund Calpers was the PEU victim:

Eight Apollo funds called a total of $1.71 billion from Calpers last year. Washington, D.C.-based Carlyle Group, the world’s second-largest private-equity firm, made $681.3 million of capital calls on the pension fund in 2008. Fort Worth, Texas- based TPG, which also has piled into distressed debt, drew down $272 million, and Blackstone Group LP in New York, manager of the world’s largest buyout fund, called $143 million.

Calpers received requests for $2.8 billion to backstop declining equity positions in over leveraged PEU funds. This request came after Carlyle Capital Corporation imploded. The offshore hedge fund, leveraged 40 to 1, went bankrupt. Rubenstein commented on his firm's first bankruptcy:

Rubenstein said he did not think that "one fund out of 60 will spoil a reputation built up over 20 years."

"A year from now, hopefully people will say, `Carlyle made a mistake,' or `The markets just moved against them,"' Rubenstein said. "We're going to try and do some things to make amends to investors."

Those amends have grown since Spring 2008. Add capital calls to any loss of investment principal. Reuters reported:

Buyout firms have written to investors, highlighting increased communication, adjusted fees or changed management structures as they struggle to keep investors and attract new capital.

Carlyle Group joint founder David Rubenstein said LPs would hold the “balance of power” for the next few years and their concerns on issues like fees and the size of funds would have to be heard much more.

According to a recent report by research company Preqin, 21 percent of investors had already exceeded their optimum level of exposure to private equity.

Systemic risk? What if Calpers didn't pony up $2.8 billion in new capital? What if they did a PEU run and asked for their original investment back? PEU run!

Treasury Chief Tim Geithner suggested covering their back with his proposed nonbank wind down authority. Carlyle already knows how to turn affiliates over to bankruptcy court. SemGroup, Hawaiian Telecom and Edscha are proof.