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Quite A Week For Carlyle
PE acquires storied consultancy but suffers another blow to its public market efforts.
August 1, 2008
The Carlyle Group took one step forward and one step back this past week.
The Washington private equity firm completed its $2.5 billion acquisition of Booz Allen Hamilton through a deal that separates the McLean, Va.-based government consulting practice from its commercial and international-focused businesses, while simultaneously disclosing that it was getting out of the hedge fund business.
As a result of the purchase of the global consulting organization announced by Carlyle on Thursday, Booz Allen’s commercial and international businesses will operate separately as an independent company under the Booz & Co. name. The storied government consultancy that Carlyle is acquiring, which helped the US Navy prepare for World War II in 1940 and won its first US Air Force contract in 1947, will continue to operate as Booz Allen Hamilton.
“We look forward to supporting Ralph Shrader and his management team as we enter this new and important phase of Booz Allen’s leadership in the government services sector,” said Peter Clare, a managing director at Carlyle and head of its global aerospace, defense and government services team.
Besides having strong inroads with the US government and intelligence community over the years, Booz Allen carried out some major achievements in the 1970s. For instance, it raised its profile with the banking community in 1973 when it issued a report titled The Challenge Ahead for Banking. Three years later and one year after winning a Trident submarine contract, the consulting organization underwent its own leveraged buyout in the wake of hitting $100 million in sales and ending its reign of being a publicly held company that began in 1970. In 1979, it assisted Chrysler executives with the automaker’s turnaround.
Credit Suisse served as financial advisor to Booz Allen, which received counsel from Latham & Watkins. Debevoise & Plimpton provided counsel to Carlyle, while Banc of America Securities and Lehman Brothers served as its financial advisors.
Also on Thursday, Carlyle disclosed some less glamorous news.
The firm, which manages $82.7 billion of assets and 60 investments funds, said it was winding down its Carlyle-Blue Wave Partners Management hedge fund business, and liquidating positions in the Carlyle Multi-Strategy Partners funds. It marked the termination of Carlyle’s New York-based hedge fund investment unit, launched last spring by former Deutsche Bank professionals Ralph Reynolds and Richard Goldsmith.
Reynolds, Goldsmith and 39 employees are expected to leave Carlyle as a result of the $600 million hedge funds’ liquidation. The hedge fund group ran into trouble last year because of the subprime mortgage market implosion, which left its credit investment portfolio in trouble.
In 2008, Carlyle-Blue Wave launched a separate equities-only share class, essentially trying to make a new start with a clean slate, says a person familiar with the matter. That portion of the group’s business proved its worth, increasing by more than 2% in 2008, exceeding the S&P 500 index by 14%.
Ultimately, however, it wasn’t enough to sustain the investment group’s infrastructure at a time when the credit market remains mired in problems and the stock market remains volatile. As the firm’s official statement says, the funds weren’t able “to achieve the critical mass of assets under management necessary to support a multi-strategy fund infrastructure.”
“This is an orderly liquidation to assure a fair and equitable treatment of all investors,” said a spokesman for Carlyle, which holds a minority stake in Carlyle-Blue Wave. He declined to comment further on the wind-down.
The hedge fund casualty is the latest blow to Carlyle’s efforts to tap into the public market. In March, its Carlyle Capital business was shuttered after the fund, which invested in AAA-rated government agency residential mortgage-backed securities, didn’t meet margin calls and couldn’t reach agreement with its lenders.
Carlyle’s business is focused on generating returns from buyouts, venture capital and growth equity, real estate and leveraged finance.
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