Carlyle Sells Emerging Sovereign Stake Amid Hedge Fund Woes

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  • ESG principals will retain authority over hedge fund firm
  • Carlyle suffers hedge fund client redemptions this year

Carlyle Group LP, whose hedge fund business has been bleeding assets, is exiting its majority stake in $3.5 billion Emerging Sovereign Group after only five years.

Carlyle, which was co-founded by David Rubenstein, held a 55 percent position in ESG. The founders Kevin Kenny, Mete Tuncel and Jason Kirschner are buying the stake and will take full control over operations after the close of the deal, expected on Oct. 31, according to an ESG letter to investors obtained by Bloomberg.

“ESG is a strong organization, has been a terrific partner to Carlyle and will thrive as an independent business,” Carlyle co-founder Bill Conway said in a statement. “Assets under management have grown from $1.25 billion to $3.5 billion during the time of our investment.”

Carlyle has struggled with its hedge fund business after buying majority stakes in three firms from 2010 to 2012 -- Claren Road Asset Management, which focuses on credit, Vermillion Asset Management, which has been renamed Carlyle Commodity Management, and ESG. Carlyle returned $600 million in redemptions to hedge fund investors in the second quarter of this year and expects to give back $1 billion to $2 billion more over the next several quarters, the company has said.

ESG has two main strategies that make up 90 percent of the firm’s $3.5 billion -- the Cross Border Equity Strategy, which manages $1.5 billion, and the Domestic Opportunity Strategy. Cross Border is down about 7 percent so far this year, according to a person familiar with the matter. The fund has gained an annualized 8 percent since inception in 2004, according to another person will knowledge of the matter.

ESG was founded in 2002 with seed capital from hedge fund Tiger Management before Carlyle agreed to purchase the majority stake in 2011.

After the deal closes, Tiger will maintain an ownership interest in ESG, and Carlyle will be given a portion of its profit for a limited period of time, the letter said.