CCC's Woes Seen as Small Blemish for Carlyle Group

PHILADELPHIA Fri Mar 14, 2008 8:01am EDT

PHILADELPHIA (Reuters) - U.S. private equity firm Carlyle Group should emerge relatively unscathed by the cratering of affiliate Carlyle Capital Corp CARC.AS (CCC), which invested in mortgage-backed securities and defaulted on about $16.6 billion of debt, analysts said on Thursday.

CCC, a fund listed in Amsterdam, said late on Wednesday that it expected its lenders to seize its remaining residential mortgage-backed securities assets after failing to reach a deal to refinance its debt.

The problems faced by CCC -- the decline in the value of its mortgage investments -- marked another example of the broader global credit crunch instead of a warning sign of trouble ahead for The Carlyle Group [CYL.UL], analysts said.

"They don't lose much on a fund like this. It's like when you drop an egg in your kitchen. You just clean it up and throw it away. It's bad if you're the egg, but your kitchen is going to be fine," said Roy Smith, a professor at New York University's Stern School of Business.

The Carlyle Group's exposure to CCC is minimal from a financial standpoint, analysts said. The Carlyle Group said CCC is a separate legal and business entity, and CCC's defaults did not trigger cross-defaults for any Carlyle borrowings.

"The people who invest with private equity funds are savvy investors. They recognize that this was an experiment undertaken by Carlyle to get into the mortgage business and they have little other exposure," Smith said.

The Carlyle Group, one of the world's largest private equity funds with more than $75 billion under management, owns companies including TV ratings firm Nielsen, doughnut seller Dunkin' Brands and former General Motors unit Allison Transmission.

Managers at Washington, D.C.-based buyout firm The Carlyle Group own about 15 percent of CCC, which listed in July 2007 as the credit crisis began spreading through globally. Shares of CCC sank 87 percent to 35 cents, a fraction of their $20 debut price last July.

The Carlyle Group said it actively participated in the negotiations with CCC's lenders and last year extended a $150 million credit line to its affiliate.

The one area where The Carlyle Group could face a minimal public-relations blemish is in trying to attract new funds at a time of big headlines about its affiliate collapsing.

"The Carlyle Group's general reputation continues to be excellent; however, its fund-raising ability for private equity ventures was certainly not helped by the problems with Carlyle Capital," said Ray Soifer of Soifer Consulting LLC.

"In this, Carlyle is not alone; the entire private equity community is encountering similar issues, to one degree or another," Soifer said.

One lawyer, who specializes in private investment firms, said The Carlyle Group will likely be unaffected by the CCC meltdown, both in financial liability and in public perception terms.

"These firms consist of a whole bunch of different businesses and they are all structured as limited liabilities," said Jay Gould of Pillsbury Winthrop Shaw Pittman, who does not represent Carlyle.

Gould said Carlyle's long-cultivated image as astute investors would probably remain largely unaffected, since many banks, brokerages, hedge funds and others have been forced to take big write-downs over declining asset values amid credit travails in recent months.

"A lot of people are getting a pass on this and ultimately they will too," said Gould.

(Reporting by Jessica Hall in Philadelphia and Dane Hamilton in New York, editing by Leslie Gevirtz)

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