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'Opportunity' for Carlyle

The Baltimore Sun

Carlyle Group co-founder David M. Rubenstein said yesterday that he sees a "great opportunity" for his private equity firm to buy distressed debt and assets amid a credit crunch that has slowed the buyout boom.

Rubenstein said his firm - one of the world's largest - is evolving into a global company that invests in venture capital, real estate and debt from its traditional role of buying out assets.

The Baltimore native made his comments before speaking at the annual Society of American Business Editors and Writers conference, which is being held at a downtown hotel this year. His appearance drew protests from a union opposing Carlyle's recent buyout of a nursing home company.

"Today, banks don't want to lend money as much," Rubenstein said in an interview. "And so, the great opportunity is to buy debt instruments at a discount because many ... are now trading at discounts. If you could buy something that you think is worth 100 cents on a dollar but you could buy it at 70 cents, that is a good deal."

To that end, Carlyle recently raised $1.35 billion to invest in bonds and bank debts as well as buying financially distressed companies.

Rubenstein told reporters and editors that he sees investment opportunities in financial institutions, whose balance sheets include marked-down assets. Moreover, Rubenstein said he believes banks will become more open to selling debt, including those of Carlyle companies, at a discount.

"The most attractive thing right now is buying back my own debt," he said. "I know the companies are good but the debt is not structured the way it should be and is not valued as it should be. That's what a lot of people are doing, and that's what we're going to do, too."

Rubenstein, who grew up in Northwest Baltimore and graduated from Baltimore City College in 1966, co-founded Carlyle in 1987. It now manages more than $81 billion in assets. The firm has more than 1,000 employees in 21 countries. Its holdings include well-known brands, such as AMC Entertainment, Hertz Corp. and Dunkin' Donuts.

Rubenstein, who now lives in Bethesda, serves on the board of the Johns Hopkins University and Johns Hopkins Medicine.

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In recent years, Carlyle has begun straying from its core leveraged-buyout strategy by offering other investment products. But such diversification has also brought challenges.

Carlyle Capital Corp., a $22 billion fund that invested in mortgage debt issued by Fannie Mae and Freddie Mac, collapsed last month amid the housing and credit crises as creditors demanded greater collateral.

Carlyle Group served as an investment adviser to Carlyle Capital and the firm's management owned 15 percent of the fund's securities, but the two are separate business entities, he said.

"The reason you know about it ... is because of the fact that Carlyle's name was on it," he said, noting that the firm's $40 billion equity investment during the past two decades has averaged a 30 percent rate of return. "People say Carlyle investments are very successful, look at their track record. The fact that it did not do well was such a surprise."

Before his scheduled remarks, Rubenstein said he expects private equity firms to invest more of their money abroad, especially in emerging markets such as China, India and the Middle East. And, Rubenstein said he expects consolidation in the industry, although he noted Carlyle does not "have anything we're about to do."

"A lot of private equity firms will buy other private equity firms. And you'll see hedge funds merging with private equity firms to give them more balance," he said. "Right now, there is a race going around among private equity firms to build out the most successful platform to enhance them for the future."

'Less exotic'

When the market recovers and big buyouts are possible, Rubenstein predicted, deals will be structured with less leverage than before.

"And they'll use less exotic types of leverage," he said. "You'll see that in the next couple of years when the buyouts come back. They'll have more equity than they did one or two years ago."

Rubenstein's nearly one-hour talk during the conference at the Sheraton Inner Harbor was nearly interrupted by members of the Service Employees International Union. The union has protested Rubenstein's recent appearances to highlight its objection to Carlyle's $6.3 billion buyout of Manor Care, the nation's largest nursing home operator. The deal closed in December.

The SEIU wants better working conditions, better training and staffing as well as the ability to organize 60,000 workers, spokeswoman Julie Eisenhardtsaid. About 60 Manor Care employees, including a dozen from a Towson nursing home, made it inside the hotel before Rubenstein's speech yesterday afternoon. They were escorted out by hotel security.

Rubenstein said the union wants him to put pressure on Manor Care's management. But he said the firm has decided to let management make its own labor-related decisions.

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