Discuss the fund when it was launched in 2008. Some notable investments are BankUnited of Florida and Butterfield, Bermuda’s largest bank.
Carlyle Group had never really done a financial services fund before, other than some financial-service investments in Asia. The 2008 fund was very much focused on distress and dislocation in the markets. In our mind, that was where the opportunity was.
What challenges did you face? Was BankUnited one of the more high-profile deals because it involved the FDIC?
It’s an industry that’s heavily regulated. You have to have a healthy respect for the regulatory framework in which those banks operated. You have to have comfort working with regulators. … We were able to find that level of comfort. We have a very good reputation with the regulators and respect with how they handled the crisis. We dealt with the FDIC, the [Comptroller of the Currency] and the Fed.
How did Fund I address the financial crisis overall? You also invested in Duff & Phelps, a global valuation and corporate finance adviser, and TCW, a fixed-income manager.
The fund was positioned to invest in recovery from the crisis. Some of the money we put to work was focused on companies impacted by the crisis. About 65 percent of the fund was in companies that experienced some sort of distress. The rest of the fund was put into growth companies — businesses not impacted by the crisis.
How does Carlyle come up with new fund ideas and how did this one happen?
Each year, Carlyle thinks of new fund ideas that make sense to our LPs. Based on that annual effort, they saw a need for financial services private equity exposure from LPs and they picked up on that.
Financial services is an enormous sector in the economy. It’s a large percentage of the global economy and any equity market you look at. It’s always been somewhat underrepresented in the private equity world. Our founders had the foresight to see that as an opportunity and to smartly recognize that financial-services deals are different. The accounting is different. Your assets aren’t widgets, they’re people. The founders [Co-CEOs David Rubenstein and Bill Conway, plus Chairman Dan D’Aniello] decided that financial services would be best represented by the right experienced team to focus on that. Looking back, they made the right decision.
How did the fund set the stage for Carlyle Global Financial Services Partners II, which raised $1 billion?
With the back end of Fund I, we made more growth investments because we started to see a lot of opportunity in non-distressed companies. With the second fund, the composition of investments is more similar to the back end of Fund I. Fund II is about companies that are growing, with good cash flow. There’s not a lot of distress in the fund. It’s very different from the composition of Fund I.
How is the departure of Olivier Sarkozy being managed?
We hired Brian Schreiber from AIG [the hire was announced in June]. We’re co-heads of the team. I feel exceptionally good about where the team is today. It’s a veteran team. Even the junior members have been in place for six or seven years. And now Brian brings his AIG and insurance experience. The team is well positioned today. The team that did Fund I is largely the same that did Fund II with exception of Olivier Sarkozy’s departure. When he departed the fund, it was essentially invested. With the addition of Brian Schreiber, it doesn’t change anything that we do. We’ve found a good niche. Having a financial-services fund that was viable during the financial crisis was important. We developed a pretty good brand for our financial-services business.
Update: Carlyle Global Financial Services Partners I logged a multiple of invested capital of 2.0x and a net IRR of 13 percent as of September 30, 2016, according to the latest quarterly filings from Carlyle Group.
Photo of John Redett courtesy of the firm.