CARLYLE'S LACUNAE

For the second year in a row, The Carlyle Group tops our list of the world's largest private equity firms, having raised an astonishing $52 billion for private equity strategies over the past five years (see p. 71). But the firm's AUM aspirations have only just begun.

If you were working in private equity prior to 2000, you may remember that Carlyle was often mocked by boutique supremacists for trying to turn itself into a kind of Fidelity of private equity. Fast forward to 2008 – Carlyle has demonstrably succeeded at becoming the Fidelity of private equity, and of alternative investments generally, and no one questions either the feasibility or value of this anymore.

Carlyle's bet proved prescient. It was that institutions everywhere would develop a huge appetite for all forms of alternative investments, and embrace the crazy concept of multiple strategies coming from a single purveyor.

A global, diverse set of investment platforms fed by a global, diverse set of alternatives-crazed investors makes for a nice business – the kind of business that could probably get a rich valuation in an IPO once the market firms up again.

There are, however, two major pieces of the franchise that Carlyle wants to have in place before going public – energy and hedge funds. The firm is currently taking action with regard to both, according to market sources.

Carlyle already has an energy affiliate in New York-based Riverstone Holdings, led by former Goldman Sachs aces Pierre Lapeyre and David Leuschen. From its inception in 2000, however, Riverstone wasn't quite like the other members of the Carlyle family. It has tapped Carlyle's massive fundraising network and back office infrastructure, but Riverstone is an independent firm and well aware that its success going forward will be due to its own impressive track record, not to the Carlyle brand.

The departure of Riverstone from Carlyle's stable of products would leave huge lacunae, strategically and numerically speaking. Although the first Carlyle/Riverstone fund raised a modest $222 million, the Riverstone team is now on track to close on roughly $13 billion in LP commitments. Some $9 billion of this is for a main global energy and power vehicle, while another $4 billion will be raised in a renewable energy fund, according to sources.

While information on the Riverstone team is fully integrated into the Carlyle website, Carlyle is not mentioned on the Riverstone site except in deal and fund announcements. Another small indication of Riverstone's spreading wings is evident in the firm's latest PPMs, which are branded Riverstone/Carlyle instead of Carlyle/Riverstone, as was past practice.

Carlyle doesn't want the decoupling to go any further. The firm is now negotiating with Riverstone to take a greater stake in Riverstone's management company in exchange for temporarily forgoing some economics from Riverstone funds, according to a source briefed on these discussions.

If the opportunity in energy private equity looms large for Carlyle, the hedge fund opportunity may loom even larger. Carlyle conspicuously does not have a substantial hedge fund or fund of hedge funds platform. This is not for lack of trying. In 2001, Carlyle hired Afsaneh Beschloss away from the World Bank to launch Carlyle Asset Management, a fund of hedge funds. Two years later the firm unwound its partnership with Beschloss. Last year Carlyle hired two Deutsche Bank pros to launch a multi-strategy hedge fund. The group reportedly raised $700 million and has since seen steep losses.

In the meantime, The Blackstone Group's “marketable alternative asset management” business has grown to $40 billion in assets under management, adding size and revenue diversity to its hugely successful public offering last year.

Rubenstein is now considering buying instead of building a hedge fund business. He has approached at least one hedge fund about such a deal, according to a source briefed on the meeting. It's not an uncommon move in today's consolidating alternatives space. Blackstone, recognising a hole in its debt business, recently acquired credit-focussed GSO Capital Partners. With redemptions on the rise, a talented but growth-constrained hedge fund team may well find appealing the thought of plugging into Carlyle's global fundraising machine, especially if Carlyle is willing to go easy on the economics early in the relationship.

An energised Carlyle, bolstered by a major absolute-return business, and with the casualties of the current credit meltdown well behind it, would be among the most highly sought-after IPOs in history.