US - Carlyle Group, the world's second- largest private-equity firm, agreed to buy a 55 percent stake in Claren Road Asset Management, a $4.5bn long-short hedge fund focused on liquid credit assets.
Citigroup, which invested in Claren Road in 2006, and Goldman Sachs Group's Petershill Fund, which bought a minority stake in 2008, will sell their holdings, according to an e-mailed statement by Washington-based Carlyle. Claren Road founders Brian Riano, John Eckerson, Sean Fahey and Albert Marino will continue to manage the day-to-day operations and make all investment decisions.
Carlyle is adding more liquid investments as it prepares for a public share sale to join listed rivals Blackstone Group and KKR, who have diversified after the credit crisis.
Apollo Global Management, which is seeking to move its Class A shares, now held by private investors, to the New York Stock Exchange, entered into an alliance to offer hedge-fund investments for clients. A previous effort by Carlyle to add hedge funds failed in 2008 when the firm liquidated a pool hurt by investments in mortgage securities.
"We have a view of which strategies are necessary to exploit the market opportunities," said Mitch Petrick, global head of Credit Alternatives and Capital Markets at Carlyle. "Claren Road is an important piece of the puzzle and we are in various stages of development on additional strategies."
Petrick, who joined Carlyle in March, is seeking to build out the firm's credit business, which oversees $14.7bn in 34 funds as of Sept. 30.
The renewed push into hedge funds and more liquid investments may help Carlyle should it decide to sell shares in an initial public offering, according to Daniel Fannon, a San Francisco-based analyst at Jefferies & Co.
William Conway, who founded Carlyle in 1987 with David Rubenstein and Daniel D'Aniello, said the company is gearing up for a public share sale to amass permanent capital and contend with the growing challenge of raising money for buyout funds.
"There will be significant advantages to having a lot more capital," Conway, who oversees the Washington-based firm's investments, said in an interview with Bloomberg Businessweek. "Investors are reducing commitments to funds and making economic terms much less attractive."
Carlyle has considered an initial public offering since at least June 2007, when larger rival Blackstone began trading on the New York Stock Exchange. Plans were put on hold soon after when debt markets froze. Carlyle instead sold a 7.5% stake to Mubadala Development Co., an arm of the Abu Dhabi government, in September 2007.
Apollo, the buyout firm run by Leon Black, (this week) agreed to make a $75m convertible note investment in HFA Holdings, the parent company of Lighthouse Investment Partners, a manager of funds of hedge funds with $4.5bn under management. Through the alliance, Apollo will add hedge-fund and managed-account products to its offering for investors. Both firms will stay independent.
Bloomberg News reported in September that Carlyle was talking to firms including one hedge fund with as much as $5bn in assets, according to people briefed on the plans. Carlyle is also seeking $1.5bn for a new distressed fund and is marketing a new vehicle focused on mezzanine debt, the people said then.
Carlyle will pay for the Claren Road stake with a combination of cash, stock and payments contingent on performance, according to the statement.
Claren Road's founders, former members of Citigroup's credit trading department who established their firm in 2005, will invest "substantially all" of the cash proceeds into their funds. As a long-short fund, Claren Road can profit from rising as well as falling asset prices.
"We see the strategy as very scalable and will grow the business as opportunity presents itself," said Claren Road's Riano, who has worked with Eckerson and Fahey since 1994.
The credit crisis forced Carlyle two years ago to shut its only hedge fund, a venture it had started in March 2007 with Deutsche Bank executives Rick Goldsmith and Ralph Reynolds. Assets in that fund had dropped by a third to $600m.
Another fund, the publicly traded mortgage-bond fund Carlyle Capital Corp., was suspended from trading that year after it failed to meet more than $400m of margin calls on mortgage-backed collateral. The firm had started the fund less than two years before, hiring John Stomber, a former managing director of Cerberus Capital Management, to head it.
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