In 2020, the amount of market activity generated by a group of organizations known as "Private Equity" firms is massive. McKinsey, a consultancy, estimates that the net asset value held by private equity firms has grown more than 7x since 2002 - a rate twice as rapid as growth in public equity markets. Further, its estimated that the number of private equity backed businesses in the United States increased over 100% between 2006 and 2017. Generally speaking, private equity firms can be thought of as an alternative investment vehicle for institutional investors and ultra-high net worth individuals who want to deploy capital in private markets. Typically, a private equity firm acquires a target business using a large amount of leverage (a process referred to as an "Leveraged Buyout"), grows the company and uses the resultant cash flows to pay down debt before selling after 3-7 years. Returns on such investments can be extremely high but they're also highly variable, and only a few private equity firms have become globally renowned for their investing prowess.
One of these well-know PE "mega funds" is The Carlyle Group - a publicly traded, multi-national private equity concern that engages in a multi-product alternative asset management strategy. Founded in 1987 by three partners, the firm now has overt 1,500 employees on six continents and completed its IPO in 2012. Although the firm's Private Equity Segment is perhaps its best known, The Carlyle Group also operates Real Assets, Global Credit, and Investment Solutions segments. Shares in the firm have appreciated slowly but surely over the last five years before taking a hit during the early days of the global coronavirus crisis and have yet to print new highs.
As discussed above, The Carlyle Group operates via four main business segments:
- Corporate Private Equity: Focused on identifying and executing leveraged buyout and growth capital investments with specific industry and geographical focus. Through the Private Equity segment, The Carlyle Group has invested in well known firms such as Dunkin' Brands, Supreme, BoozAllen Hamilton, Getty Imagers, Hertz, and Nielsen.
- Real Assets: Focused on advising local and internationally focused real estate investment funds, infrastructure funds, and power & energy funds.
- Global Credit: Focsed on advising investment funds that invest in distressed assets and a variety of highly specialized and highly structured lending opportunities.
- Investment Solutions: Focused on advising other global private equity and real estate "fund of funds" as well as related co-investment opportunities.
As the chart below indicates, The Carlyle Group's empire is vast, extremely complicated, and incredibly valuable.
Per the firm's most recent 10K filing, Carlyle's Corporate Private Equity segment is its largest, with over $86 billion in Assets Under Management ("AUM") and $43 billion deployed over 178 active investments. Next by size is the Global Credit segment with $49 billion in AUM, followed by the Investment Solutions and Real Assets segments with $45 billion and $43 billion in AUM, respectively.
Firms like the Carlyle Group make their profits by charging clients a fee for managing and deploying their capital for them as well as taking a cut of any successful investments that are sold for a profit down the road. The five year income statement published by the firm below shows that this business model can be very profitable, if a bit uneven:
Bumpiness aside, investors would be wise to keep track of firms like The Carlyle Group and its peers and see how they maneuver in a time of high market volatility. Persistently low federal interest rates have brought down the expected return on every asset class and are pushing more large, institutional investors to throw more cash at alternative asset classes like private equity. With so much dry powder floating around out there, big private equity firms have the ability to make waves in the market and individual investors can learn a thing or two from watching the pros.