Carlyle Acquires 55% of Tiger-Backed Emerging-Market Fund

Carlyle Group agreed to buy a 55 percent stake in Tiger Management LLC-backed Emerging Sovereign Group LLC, which oversees $1.6 billion in assets, its second purchase of a hedge-fund manager in six months.

ESG’s principals, including Kevin Kenny, the founder, will receive an undisclosed amount of cash, a stake in Carlyle and payments contingent on performance, the companies said today. Tiger Management, headed by Chief Executive Officer Julian Robertson, will keep its shares of New York-based ESG, which focuses on emerging markets, and its stakes in the firm’s funds.

Private-equity firms are expanding into asset management and advisory businesses as profits from leveraged buyouts decline. The diversification efforts make the firms more attractive to public shareholders, whom Washington-based Carlyle seeks to court through an initial public offering. Carlyle hired Mitch Petrick, Morgan Stanley’s former sales and trading chief, as a managing director in 2010 with a mandate that included adding pools that trade securities on a daily basis.

“They’re in our sweet spot,” Petrick said of ESG in an interview. “The team has a good track record, a diverse set of strategies and was incubated at a great place for the last decade.”

ESG’s principals will reinvest most of the initial proceeds from the transaction into the firm’s funds, according to the companies. The deal is expected to be completed by July 1, they said.

Emerging-Market Forecasts

The firm’s Emerging Sovereign Master Fund returned 6.9 percent this year through May after gaining 8.5 percent last year, according to an investor, who asked not to be named because the fund is private. The fund returned 9.8 percent in 2009 after losing 21 percent in 2008, the investor said.

Carlyle, Petrick and Kenny declined to comment on performance.

Emerging-market hedge funds averaged gains of 0.8 percent this year through May, 11 percent last year and 40 percent in 2009, according to Hedge Fund Research Inc. The funds slumped 37 percent in 2008, according to the Chicago-based research firm.

Emerging-market economies are forecast to expand 6.3 percent this year, compared with 2.2 percent for developed nations, according to the Washington-based World Bank.

The MSCI emerging-market gauge dropped 2.3 percent this year through yesterday, compared with a 0.7 percent advance in the MSCI World Index of developed-nation shares. Stocks in the emerging-market index are valued at about 10.6 times analysts’ 12-month earnings estimates, versus 11.7 for the MSCI World Index members, according to data compiled by Bloomberg.

Winners and Losers

“The dispersion of winners and losers is growing every year, which makes for great stock picking,” Kenny said in an interview. “On the macro side, we’re experiencing the greatest monetary-policy experiment in our lifetime, which creates great risk-return opportunities.”

ESG, with 26 employees, will maintain its relationships with New York-based Tiger Management, Kenny said.

“You can’t generate great returns unless you have a great team,” Kenny said. “The number-one objective is keeping my team together and attracting talent. The Carlyle relationship goes a long way toward that goal.”

Petrick in December negotiated Carlyle’s acquisition of a majority stake in Claren Road Asset Management LLC, a $4.5 billion long-short hedge fund focused on liquid credit assets. He then turned to finding an emerging-markets manager, a key step in the firm’s broader expansion plan that includes buying and building teams.

Second Time Around

“Carlyle’s global platform gives managers an edge,” he said. “When Kevin goes to China, he has the benefit of Carlyle contacts and employees there. You can’t underestimate the importance of access on the ground in these regions.”

Carlyle, the world’s second-largest private-equity firm with $107 billion under management at yearend, has 990 employees in 19 countries, according to its website.

Petrick and Kenny will be working together for the second time. Kenny, 43, who will continue running ESG’s day-to-day operations, led emerging-markets bond trading at Morgan Stanley. He left the bank in 2002 and established ESG with seed capital from Tiger Management’s Robertson, an industry pioneer who now backs emerging fund managers.

Emerging Sovereign Group oversees four strategies, including macro and long-short equity hedge funds. Macro funds are designed to profit from broad economic trends, and long- short managers can bet on, or against, stocks.

IPO Plans

Carlyle is adding more liquid investments as it prepares for a public share sale to join U.S.-listed rivals Blackstone Group LP (BX) and KKR & Co., which diversified after the 2008 market declines. Apollo Global Management LLC, which completed a $565 million IPO in March, formed an alliance with Lighthouse Investment Partners, a fund-of-funds manager in Palm Beach Gardens, Florida, in December to offer hedge-fund investments for clients.

A previous effort by Carlyle to add hedge funds failed in 2008 when the firm liquidated a pool hurt by investments in mortgage securities as property prices declined and credit markets froze.

William Conway, who founded Carlyle in 1987 with David Rubenstein and Daniel D’Aniello, said in December the company is gearing up for a public share sale to amass permanent capital and contend with the growing challenge of raising money for buyout funds. The IPO filing may occur late this year with a sale in 2012, according to people briefed on the matter, who asked not to be identified because the plans are private.

Gleacher & Company Inc. and Seward & Kissel LLP served as financial and legal advisers to ESG, respectively. Simpson Thacher & Bartlett LLP served as legal adviser to Carlyle. All three firms are based in New York.

To contact the reporters on this story: Cristina Alesci in New York at calesci2@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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