Winner's Circle: Informational Alpha with the Carlyle Group l Ep 16

Lincoln: hate them or love them you know that's kind of part of their strategy it's like hey let's get let's get all these political advisors on our team and make sure that we know how the you know these budgets and rules are fined and then how can we properly exploit them Welcome to Funds That Won, where we dive into some of the world's most renowned investment funds. We'll interview investment managers across the alternative landscape and learn how they built their million and even billion dollar asset management empires. We'll explore teams, structures, strategies, and best practices in launching and running alternative investment funds. All right, what's up guys? Today, we're going to be talking about the Carlyle Group, one of the biggest, baddest private equity firms out there. They have about $385 billion under management across a couple of different products. Today, we're going to be talking about their founders, how they started, kind of some of their product list, and honestly, some of the headwinds that they faced as they built a multi-billion dollar investment firm. So three founders here, David Rubenstein, William Conway, and Daniel Daniello. David Rubenstein is probably the most public-facing. He's also a regular commentator on Bloomberg, so that's where most people know him. But he had a background in politics. He served on Jimmy Carter's administration. He was attorney and then a partner at a prestigious law firm. William Conaway worked in venture capital and leveraged buyouts, you know, the traditional corporate finance career. And he was the CFO at a defensive company before they started the firm. And then finally, Daniel was a VP of finance at PepsiCo and Marriott Corporation. So kind of like these three random industries, but they had gone to school together. All these guys were between the ages of 38 and 41 when they decided to set up the Carlyle Group. And it was honestly kind of on a whim. They were all working in their careers, and they started consulting kind of on the side some companies. And they said, well, we should put some money to work with these guys. They started with $5 million. It wasn't a lot of money. They weren't really serious about or maybe methodical about getting a big prestigious private equity firm started. like I said, they kind of put 5 million bucks together and started investing it into some companies they were advising. And then they started performing really well. And that's when they're like, Oh, dang, you know, like we can build an awesome business here. And so in 1987, they started the Carlyle group and it was, uh, I don't know if you guys are familiar, but that's the year of black Monday. It was in the middle of a recession. And then four years later in 1991, there was another recession. I've said it before and I'll say it again, funds, a lot of great funds start out of recessions. They start out of market downturns because there's so many opportunities for managers to create alpha. So at this point in time, private equity really was just recently starting to get its legs. You know, there were obviously several other firms that had started like KKR, but they were all single strategy firms. The Carlyle Group was one of the first to launch and very quickly have a multi-strategy or a multi-discipline platform. They started with really two primary disciplines, private equity and private credit. Just to recap on those, private equity is the business of buying stakes in other businesses. So there's buyouts, right, which is typically where you're purchasing a majority share of a company and then either turning over management, some sort of financial recapitalization, infusing it with debt, you know, a lot of different strategies to increase the enterprise value and then selling it later. Or growth equity, where you come in and you purchase a smaller stake and kind of infuse the company with more capital to grow quickly. So they started primarily on buyout. So private credit is really just a fancy term for lending. It's the business of investing money via debt with fixed terms associated with it, some sort of fixed repayment terms. And this could be lending to businesses, to real assets, to real estate, to infrastructure, like anything. And side note, I'm actually extremely bullish on private credit right now. With high interest rates, traditional financing is drying up left and right. So it's a great opportunity for private creditors or private credit fund to come in and provide financing solutions to companies, businesses, real assets in need of financing. Hey guys, thanks for listening. As you know, we don't run ads on this channel, so if you could really help me out, if this podcast has added any value to you or your business, please subscribe, rate, and review. I would appreciate that greatly. Thank you. They are governed by four core principles, financial strength, product diversity, which we talked about, sector experience, and then global reach. So they are quite a global firm. uh, you know, all over, all over the country. And part of that was due to, uh, an acquisition they made back in 2011. So in 2011, they were managing primarily just their private credit and their private equity vehicles. They ran into this fund called Alpenvest, uh, which was a Dutch firm, uh, based out of Europe. And they were managing about $32 billion. And they were operating in the fund-to-fund space, secondaries, co-investments. And Carlisle came in and they actually made an offer to purchase this other fund, this other asset management company. Um, and so they originally came in and they bought 60% of it up front and then they bought an additional 40% later, but they, you know, brought on an additional $32 billion, uh, you know, of assets under management through acquisition. So you can either. Yeah. You know, we say this all the time. If you're trying to grow, you can either grow by, you know, hard work. You can either become. You know, they weren't professionals in fund-to-funds or co-investments or secondary. So they could either become one, they could build that business, they could partner with somebody in that business, right? Somebody who's maybe done it and then brought it into their firm. Or you can always buy it. You can always buy that experience. And so that's exactly what they did where they bought that arm. And I think it's really interesting, they actually still today, if you look on their website, the Alpinvest functions as a separate brand altogether. And I think it's part of building an international presence where Alpinvest already had brand recognition across Europe and Middle East. And so as part of the acquisition, they elected to keep Alpenvest functioning as its own, you know, sort of company brand. Now, it's all the same, right? Carlyle Group owns entirely Alpenvest, but it just functions as a different asset management firm. So today, when you're looking at the Carlyle Group, 82% of its assets are in private credit and private equity strategies. And then 18% is managed, uh, you know, via, you know, kind of their other segment that Alp invests overseas. Okay. Any big firm doesn't go without its headwinds though. Um, you know, so really interesting story here about the Carlisle group as they were getting off the ground. 1998 they kind of made, you know, all these guys were, had affiliations in Washington, you know, they were based out of Washington DC. That's where David Rubenstein had been working. And they started bringing on all of these political advisors onto like anyone that had political financial influence. They targeted them and they brought them onto their boards of advisors, even so much that they got former president George W.H. Bush to come on as an advisor on their firm in 1998. George W.H. Bush had just left the presidency five years earlier. He left in 1993. And so they started bringing on all these political advisors. Then they started getting all this, there was a lot of controversy around it. You know, the firm focuses in a lot of different verticals, but its primary verticals include aerospace, defense, energy, healthcare, tech, and consumer goods, all of which have, you know, very much heavy, are politically influenced, right? They're heavy discussion topics, they're heavy budget topics. And so, you know, these portfolio companies that the Carlyle Group started picking up, all of a sudden they started winning government contracts more and more. So, you know, and the government side is, you know, you'll go out and, you know, the government needs a million, a million tanks built. You know, and then they go out and they bid it out to other firms, you know, who's going to develop this, right? Is it, and that's where they'd take it over to like SpaceX or Northrop Grumman or NASA, or, you know, I don't know all these aerospace companies, but they would go out and they would bid these, these contracts. And all of a sudden the Carlyle Group's portfolio companies started like winning everything. and for pretty favorable terms. And so, you know, people are starting to say, hey, what's going on here? Is this really, you know, is this really kind of a free market or are we picking the winners? Hate them or love them, you know, that's kind of part of their strategy is like, hey, let's get all these political advisors on our team and make sure that we know how the, you know, these budgets are and rules are defined and then how can we properly exploit them. And so, yes, like, I don't know, I kind of sit on the sideline there. I'm like, yeah, that's just really good strategy, but you can also hate it for them. There's also some other, you know, distaste with the Carlyle Group in early 2000s at, As you know, in light of 9-11, they had actually taken a few years earlier a lot of Bin Laden money. So they had ties with the Bin Laden family and they faced a lot of scrutiny over there. So, you know, if any of you guys are starting funds and you're having any political affiliations, it's a very sensitive line and I would just encourage you to be cautious. You know, but again, to their credit, there are three different types of alpha. Russell Fisher writes, he wrote this research paper on the three different types of alpha you can exploit in the private asset space. One, there's informational alpha. Two, there's analytical alpha, and there's behavioral alpha. Informational alpha is really just there's this abundance of information out there, but you have privy information. You are able to better exploit information about a certain topic, therefore you're able to capitalize on that. Secondly, analytical alpha derives from the fact that, hey, everyone has the same access to information, but we're better at synthesizing it than you. We're better at understanding what parts of the data matter most, and therefore we can make our best investment decisions. And then lastly, behavioral alpha, where, hey, you know, be greedy when others are fearful and fearful when others are greedy, as Warren Buffett always says. You know, that people are emotional, investors are emotional, allocators, businesses. And behavioral alpha is the thought that you have a better outlook, right? If everyone thinks that the world's falling apart, but you believe that you know, semiconductors of the future, and, you know, that's where the entire market is going, and it's, our entire world is gonna be based on them. That would be more of a behavioral alpha outlook. So, all strategies at their core derive from one of these alpha sets. And, you know, as the Carlyle Group, they really just, you know, capitalized on that first one, saying, look, we are gonna get the best information in the political landscape that we possibly can. by finding experts that are just coming out of industry that know all the lines that are being drawn in the sand and where we should be playing. So I honestly kind of give them credit that I just think they're brilliant, but there's also a lot of backlash in there as well. So that is a cover on the Carlyle Group, again, a $385 billion asset management firm. They're not as public, right? You don't often see the private equity firms or private credit I don't know, I guess it's not as sexy of a field where they're not on the news all the time. So a lot of people actually don't know who the Carlyle Group is, even though they should, but they're definitely one of the behemoths out there that are moving markets. So to quick recap on today's conversation, three guys, random experience, got together and started a private equity firm with 5 million bucks. You don't need a lot of money. They honestly, they didn't have an entire, you know, full business plan scripted out. They just started consulting firms and they wrote them some checks and they made some money and they're like, wow, we should do this full time. They built their business through acquisition, which you can do, right? You can either buy it, build it or partner with it. But this business is not easy sailing. There's going to be a lot of headwinds and you just need to learn how to navigate them and do your best to come out on top. Thanks guys. Hope you enjoyed today's conversation. All information shared are the sole thoughts and opinions of the author. Do not take any information as legal or financial advice. You should seek a certified accountant and a professional legal team before taking any further action. 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