As Carlyle Group LP’s management fanned out across the globe over the past two weeks to pitch its initial stock sale, the man whose business is critical to the firm’s success as a public company was at his desk in New York.
Mitch Petrick, the 50-year-old head of Carlyle’s hedge-fund and structured-credit group, isn’t the type who schmoozes with investors or rubs elbows with superiors. At Morgan Stanley, where Petrick spent 20 years gaining a reputation as a hardnosed trader, he preferred reading through stacks of offering memorandums to the small talk and after-work drinks that others used to build teams and win promotions, according to interviews with seven former executives at the bank.
That attitude stands out at Washington-based Carlyle, a 25-year-old firm run by deal makers who have thrived by carefully tending political and corporate relationships, while struggling to break into markets such as hedge funds and debt trading where rivals have expanded. That’s starting to change under Petrick, whose success is necessary for the firm to convince potential shareholders it has evolved from a specialized buyout shop into a diversified asset manager with a more stable revenue base.
“Diversification is crucial to create a sustainable, long-term business that’s not personality-driven,” Richard Marin, former chief executive officer of Bear Stearns Cos. asset management unit, said in a telephone interview. “You need that so you can’t literally have the wind taken out of your sails because one segment of the industry goes into a decline.”
Carlyle, which is scheduled to price its initial public offering on May 2, is seeking a market capitalization of as much as $7.6 billion. That’s about three-quarters the value of KKR & Co., even though KKR manages less than half the assets of Carlyle. The firm would have half the market capitalization of Blackstone Group LP, which oversees 29 percent more money. Carlyle’s numbers are as of Dec. 31, the most recent available. KKR and Blackstone assets are as of March 31.
Carlyle co-founder David Rubenstein told investors in New York last week the firm is selling its shares at a discount to competitors to increase the chances that shareholders see gains after the IPO. Most private-equity IPOs have fared poorly. Blackstone has lost about half of its value since selling shares in 2007.
Yet the lower valuation for Carlyle also reflects that it has trailed Blackstone and KKR, which are both based in New York, in reducing its reliance on leveraged buyouts, a business whose fees rise and fall with the value of fund holdings.
Relying on Buyouts
Carlyle depends on private equity for more than half of its revenue, compared with almost 18 percent at Blackstone. The company’s fee-related earnings, which exclude its cut of profits from buyout investments, have over the past three years lagged behind those of Blackstone and KKR. Fee-related earnings are a key metric for public investors.
Stockholders put less value on buyout profits, also known as performance fees or carry, because they are unpredictable, especially during an economic slowdown when it’s tougher to exit investments.
Carlyle last year met privately with analysts in an effort to convince them it should be worth at least as much as Blackstone, people briefed on the meetings said in August. Carlyle has one of the most global private-equity businesses in the industry with 26 funds dedicated to specific regions from the Middle East and North Africa to South America.
Private-equity firms pool money from investors such as pension plans and endowments, with a mandate to buy companies, overhaul and then sell them, and return funds with a profit after about 10 years. The firms, which use debt to finance the transactions and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments.
Hedge funds raise money from many of the same investors and have a similar fee structure, though they usually don’t lock up capital for long periods and buy more liquid assets. Unlike most mutual funds, they can bet on rising and falling securities.
To reduce reliance on buyouts, Carlyle last year acquired a private-equity fund-of-funds business. It recruited Petrick in 2010, one of the firm’s biggest executive hires ever, to expand investments various types of credit, equities and other liquid alternative assets.
Those efforts have helped the firm triple assets under management since 2006 to $147 billion. Petrick’s global market strategies unit has almost doubled assets and quadrupled revenue since he started, and now employs 145 professionals overseeing $24.5 billion, or 16 percent of Carlyle’s assets as of Dec. 31. His business accounts for more than 19 percent of Carlyle’s economic net income and has the highest growth rate within the firm, co-founder Daniel D’Aniello told investors this month.
Aiming for CEO
Petrick declined to comment for this story, as did Chris Ullman, a spokesman for the firm. Companies close to an IPO usually refrain from speaking publicly to avoid violating rules on promoting stock sales. The people who spoke about Petrick’s career and personality asked not to be identified because they didn’t have his approval to speak publicly.
Petrick, who received a B.S. in chemistry and economics from Grinnell College in Iowa and a master’s of business administration in finance from the University of Chicago, spent the bulk of his career at Morgan Stanley.
Two people familiar with his plans at the time said he had his sights set on one day running the New York-based bank. He worked 15-hour days, according to one of his former colleagues, and was promoted to head of sales and trading in 2007 after his boss at the time, Zoe Cruz, was fired.
Petrick was part of a team assigned to clean up the bank’s balance sheet, which had ballooned to more than $1 trillion, was leveraged more than 30 times and held more than $10 billion of subprime assets. The firm was coming off a quarter in which it had written down more than $9 billion related to mortgage assets, leading to its first-ever quarterly loss.
“When many people at the bank thought the world was coming to an end, Mitch took a surprisingly reassuring tone by saying we’d see the other side of it,” said Thomas Nides, the bank’s former chief operating officer and a deputy secretary for management and resources at the U.S. State Department. “Then he went to work grinding through the portfolio, selling toxic mortgages and assets.”
His weakness, Nides said, is “he expects people to work as hard he does.”
Among the deals Petrick was involved in at Morgan Stanley was the turnaround of Marvel Entertainment. Morgan Stanley was a creditor when the comic book publisher sought bankruptcy protection. Petrick persuaded other debtors in the late 1990s to back the company’s turnaround plan. In 2009, Walt Disney Co. agreed to buy Marvel Entertainment for about $4 billion in stock and cash.
In 2007, he and other Morgan Stanley executives were responsible for a 2007 deal to back construction of Revel, a 3,800-room resort in Atlantic City, New Jersey. The investment turned sour after Atlantic City casino revenue registered its worst decline ever in 2009 and financing markets had dried up. Morgan Stanley wrote down its $1.2 billion investment a year later. The resort’s developer has since found new backers and the casino opened on this year.
James Gorman, Morgan Stanley’s current chief executive officer, ousted Petrick in 2009 as part of a broader management shuffle and after revenue in Petrick’s division fell below rivals.
Mark Lake, a spokesman for Morgan Stanley, declined to comment on Petrick’s departure.
Culture of Collaboration
People who worked with Petrick describe him as detail-oriented, thoughtful about risk and technology, and fair. He had few friends and kept his thoughts to himself, though he could be very blunt when he did talk, said one these people.
“A trading background is extremely helpful for a senior investment guy,” said Marin. “That said, trading is not asset management.”
Before Petrick joined in 2010, Carlyle’s credit business was a loose collection of funds with 57 investment professionals. Although offerings included distressed and mezzanine funds, the cornerstone of Carlyle’s credit business was a manager of collateralized loans.
The firm consolidated those operations under Petrick, who then went on a year-long deal-making spree, scouting for teams with investing strategies that could set Carlyle’s offerings apart. Today, Petrick’s unit oversees 46 active funds investing in mezzanine debt, distressed assets, collateralized-loan obligations and two recently acquired hedge funds.
For Carlyle, which prides itself on a culture of collaboration, Petrick’s hire was the biggest commitment yet to expanding these businesses, according to a person familiar with the company, who asked not to be named because the person wasn’t authorized to speak.
Unlike competitors who began their careers in investment banking, the three founders came from government and the Fortune 500. Rubenstein is a lawyer who worked in the administration of President Jimmy Carter. Co-founders D’Aniello and William Conway held executive posts at Marriott International Inc. and MCI Communications Corp., respectively. With its main competitors domiciled in New York skyscrapers, Carlyle has maintained its headquarters in second-floor offices along Washington’s Pennsylvania Avenue.
The trio has built a firm that pushed into overseas markets to raise funds and buy companies. For introductions and advice, they tapped people like former U.S. Defense Secretary Frank Carlucci; Louis Gerstner, the ex-CEO of International Business Machines Corp.; and former Secretary of State James Baker, once a Carlyle senior adviser. Carlucci was the firm’s first chairman.
Carlyle’s earliest deals involved buying unwanted pieces of defense contractors and selling them for profits several years later. Even as Carlyle moved beyond government deals it maintained a non-Wall Street feel.
“We differentiate ourselves by combining deep industry expertise with a strong ‘One Carlyle’ cultural base of collaboration across all of our funds and geographies,” said D’Aniello in a pre-IPO marketing presentation posted on RetailRoadShow.com. “In our business, information and resource sharing are keys to success.”
Carlyle’s previous attempts to expand into the Wall Street domain of credit trading left the firm scarred. A foray into hedge funds ended when the credit crisis prompted Carlyle four years ago to shut its only hedge fund, a venture it had started with Deutsche Bank AG executives Rick Goldsmith and Ralph Reynolds. Assets in that fund had dropped by a third to $600 million.
Another fund, the publicly traded mortgage-bond fund Carlyle Capital Corp., was suspended from trading after it failed to meet more than $400 million of margin calls on mortgage-backed collateral. The firm had started the fund less than two years before, hiring John Stomber, a former managing director of Cerberus Capital Management LP, to head it.
Today, the Madison Avenue office where Petrick works is Carlyle’s biggest. Petrick’s unit is larger than KKR’s credit business, which has tripled in size over the past five years to $15.4 billion as of Dec. 31 and was responsible for 7.7 percent of profit last year. KKR oversees $62.3 billion across all units.
Blackstone’s credit investment arm, GSO Capital Partners LP, managed $37 billion, about 22 percent of the New York firm’s assets at the end of last year. GSO has 92 deal makers in offices in New York, London and Houston.
Carlyle has “fantastic relationships in places like the Middle East, but if you’re only selling blue widgets and the world is buying the full rainbow, what a missed opportunity,” said Marin, the former CEO of Bear Stearns Asset Management. “And obviously that’s the opportunity Carlyle is trying to seize.”