To whom it may concern

18 September 2012 By Jeffrey Goldfarb

Bill Conway’s annual missive has gone missing. The January letters from the Carlyle Group co-founder are eagerly anticipated, especially after the 2007 edition foresaw a credit crisis. With the buyout firm on something of a buying binge, Breakingviews has drafted this year’s edition for him.

TO: All Investment Professionals, Carlyle Group
FROM: William E. Conway, Jr.
DATE: Sept. 18, 2012

You normally hear from me in January each year, but preparations for our initial public offering in May and our accelerating deal flow left me busier than usual. Though I conveyed some of my views to you orally this spring, let me catch you up in writing on the current market environment and what to expect.

Some five years ago, in anticipation of an end to an era of excess liquidity, I urged you to play it safe. Then, it was better to sacrifice higher returns in exchange for lower risk and preserving the funds pledged by our investors, including many of you. It is now my view that we can buy assets – even compete for them – with somewhat less caution.

Our firm’s activity already reflects my outlook. Carlyle’s $15.1 billion worth of deals announced so far this year is more than Apollo, Bain, Blackstone and KKR combined, according to Thomson Reuters data. That’s partly because of our respective investment cycles and the large distributions we have been able to make to our limited partners. But beyond that you could say we are putting our money where my mouth is. As it happens, some of our new public investors like to see our funds put to work, too.

I am further encouraged that Ben Bernanke just told us money will remain cheap until at least 2015. That fosters an environment well-suited to Carlyle. As I told the Washington Post recently, the average cost of borrowing for our last six deals at the time was 6 percent. Detailed information from more than 60 American portfolio companies, along with broader trends like inexpensive energy, relatively more affordable domestic labor and technological investment also give me renewed confidence about U.S. growth.

Europe is still infected by fear but I see good contrarian investment opportunities. And despite slowdowns in larger emerging markets, there are many transactions worthy of our consideration. It’s why in the last month we have announced the acquisition of control in Brazilian furniture retailer Tok&Stok and a $3.5 billion offer for Shanghai-based Focus Media Holding.

Of course, there are always risks. In today’s market, we must often use a higher percentage of equity than we have in the past to satisfy lenders. As an industry, we are buying more companies from each other, as Carlyle recently did with Getty Images. Rival buyout firms have an extraordinary amount of committed capital to deploy. All three phenomena can leave us with less scope to make the high returns we strive for.

Dysfunction in Washington also means it isn’t exactly clear how rules affecting private equity will change. The presidential run of Mitt Romney is keeping our industry in the headlines, generally not in a positive light. And public markets are volatile, affecting both the cost of acquisitions and our ability to exit on the terms we want.

These all present distinct challenges for Carlyle, but unlike in 2007 it is not the time to play it completely safe. I want you all to be optimistic – but you must still be prudent with your choices and precise in your execution. Now more than ever, our returns depend on it.

 

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