Carlyle Capital Calls It Quits
The news is grim for Carlyle Capital. Unable to meet margin calls, the highly leveraged hedge fund and publicly traded affiliate of Carlyle Group is calling it quits. Investors in the fund are likely to lose $900 million.
Carlyle Capital’s troubles came to a head in early March, when margin calls from Deutsche Bank, J.P. Morgan Chase and other lenders reached more than $400 million. Some lenders then began to seize the fund’s collateral and its chief asset – AAA-rated mortgage-backed securities.
David Rubenstein, along with William E. Conway Jr. and Daniel D’Aniello, is a co-founder of Carlyle Group, and reportedly was planning a restructuring arrangement to invest up to $500 million in Carlyle Capital. The idea was that lenders would hold off from seizing the company for up to a year to allow time for the securities to increase in value.
The securities – which were from Fannie Mae, Freddie Mac and Ginny Mae – had a historic record as safe investments, according to Rubenstein, and therefore unlikely to decline in value. But as the credit crisis took hold, the banks demanded more money, which Rubenstein and the others could not produce.
After the fund defaulted on more than $16 billion in assets, shares in Carlyle stock dropped 93 percent, closing at 35 cents on March 16.Â
The demise of Carlyle Capital is a shock to many. The fund holds a record of returning an average of 26 percent – net of fees – to investors of nearly 60 funds. Its parent company, the Carlyle Group, manages $81 billion in assets for unions, pensions, endowments, individuals and foreign governments. In the past two years, it returned $18 billion in profits and equity to clients.
Rubenstein reportedly will outline additional details of the fund’s fall from grace for investors at a later date. He also has gone on record saying that the Carlyle Group remains healthy.
Looking ahead, Carlyle Capital could be the first in a long line of funds in trouble. Among those that have suffered collateral damage thus far:
• Peloton Partners of London was forced to liquidate its funds earlier this year.
• Drake Management’s three hedge funds – nearly $5 billion under management – are looking at liquidating assets and have suspended investor redemptions.
• Nuveen Investments faces lower profits and slower growth because of higher borrowing costs brought on by tightened credit markets.
• Citigroup has committed $1 billion to support its hedge funds.
• Thornburg Mortgage failed to meet lenders’ margin calls recently.
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