Carlyle: Expect protracted credit crisis

The financial services sector has been reeling from over $300 billion in writedowns due to the credit crisis that has spread globally. I expect further losses to hit this sector in the U.S. due to commercial real estate, credit cards, auto, Alt-A mortgages and an inadequate levels of reserves for bad debt. Moreover, losses are due to spread to Europe, especially for British and Spanish investment houses. Ultimately, another major financial services bankruptcy is likely.

David Rubenstein agrees. Last week, Rubenstein, the founder of the famous Carlyle Group private equity firm was quoted by Bloomberg as saying he thought the credit crisis had legs and was far from over. He doubts whether further huge writedowns will lead sovereign wealth funds (SWFs)to invest again with the same exuberance. The article begins:

U.S. and European banks and financial institutions have “enormous losses” from bad loans they haven’t yet recognized and may have a harder time wooing sovereign-fund rescuers, Carlyle Group Chairman David Rubenstein said.

“Based on information I see,” it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. He didn’t name any companies.

“The sovereign wealth funds are not likely to jump into the fray again to bail out these institutions,” Rubenstein said. “Many financial institutions aren’t going to be able to survive as independent institutions.”

Rubenstein said sovereign wealth funds are becoming wary after losing $25 billion on their investments in struggling banks and securities firms worldwide.

Financial institutions worldwide have recorded $329.2 billion in credit losses and writedowns and raised $246.6 billion in capital since the beginning of 2007. Rubenstein said about $60 billion of that capital was provided by sovereign funds last fall, and their investments today are worth about $35 billion.

Bloomberg News

Apparently, Carlyle, which saw the collapse in February of one of its hedge funds, Carlyle Capital, is also looking elsewhere for future bets. In particular, they have targeted the federal government and defense industry in a huge purchase from Booz Allen, the consultancy. Bloomberg News says:

Carlyle Group, the private-equity firm run by David Rubenstein, agreed to acquire Booz Allen Hamilton Inc.’s U.S. government-consulting business for $2.54 billion, its biggest buyout since the credit markets collapsed in July.

Booz Allen, based in McLean, Virginia, will split off its corporate-consulting unit into a separate company, Carlyle said today in an e-mailed statement. Booz Allen Chief Executive Officer Ralph Shrader will run the Carlyle-owned entity focused on government clients. Carlyle and Booz Allen had been in talks since at least January.

The purchase would be Carlyle’s biggest since it agreed to buy nursing-home operator Manor Care Inc. last July for $6.3 billion. Deal-making may be rebounding from a 68 percent decline in the first quarter as investment banks begin writing new commitments for private-equity transactions. Buyouts ground to a halt last year because of a global credit freeze triggered by record U.S. subprime-mortgage defaults.

“The private-equity firms are not going away,” said Steven Kaplan, a professor of finance at University of Chicago Graduate School of Business. “They have too much capital.”

The Booz Allen government-consulting unit has more than 18,000 employees and annual sales of more than $2.7 billion. Its clients include branches of the U.S. military, the Department of Homeland Security and the World Bank.
Bloomberg News

Carlyle seems to be diversifying away from the epicenter of the bubbles in the U.S. and Western Europe. In April, Bloomberg News also reported that the private equity group was looking in the Middle East for new investments.

To continue attracting investors, Carlyle needs new markets. Last year, Carlyle began raising a $750 million Middle East fund — its first — that aims at taking stakes in local family-owned companies or doing buyouts.

“We were early in Europe, early in Asia and hopefully early here,” Rubenstein said in an interview in December in Dubai. “Now we have to prove we can do the deals.” So far, Carlyle hasn’t announced any.
-Bloomberg News

David Rubenstein and Carlyle are very shrewd despite the hedge fund implosion which sullied their reputation. Given Rubenstein’s public statements about the potential for future losses in the financial sector it may be best to avoid this sector altogether. There are lurking time bombs waiting to explode.

Sources
Carlyle to Acquire Booz Allen Unit for $2.54 Billion, Bloomberg News, 16 May 2008
Rubenstein Says `Enormous’ Bank Losses Unrecognized, Bloomberg News, 12 May 2008
Carlyle Scrounges for Buyouts in Dubai as Rubenstein Rues Fund, Bloomberg News, 23 Apr 2008

See also: Credit Crisis Timeline for a full list of writedowns and capital raising by institution and a timeline of the credit crunch.

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