UPDATE 3-Carlyle says U.S. best place to invest, reports profit

Thu Nov 8, 2012 1:28pm EST

* Conway cites low U.S. interest rates, improving housing

* Rubenstein sees comprehensive tax reform at least 2 years out

* Carlyle reports after-tax ENI 66 cents vs Street view 64 cents

* Carlyle profit reflects rising asset values as stocks rallied

By Greg Roumeliotis

Nov 8 (Reuters) - Private equity firm Carlyle Group LP on Thursday said the United States remained the world's best place to invest, citing low interest rates and the recovering housing market, as it reported a return to profitability in the third quarter.

The strong comments by Carlyle co-chief executive William Conway of faith in U.S. investment opportunities came after Wednesday's massive sell-off on Wall Street as many investors gave a wary reception to President Barack Obama's re-election victory.

Carlyle said it invested $1.6 billion in equity in 86 new or follow-on investments in the third quarter. It has committed to invest more than $4 billion in equity in 10 transactions in four countries that were announced in the third quarter but are expected to close in upcoming quarters.

"More than half of these investments, and virtually all of the larger ones, were made in the United States, with 62 percent of the equity for the committed transactions in the U.S. industrial and manufacturing sectors." Conway told investors and analysts on a conference call.

"There is a reason for this. To put it bluntly, we believe that the best place in the world to invest today is the United States," Conway said, citing a "revolution" in energy markets as well low interest rates and the strengthening housing market as some of the country's appeals.

Carlyle's third-quarter profit reflected rising asset values, largely due to its public holdings, which benefited from the stock market rally, and the cash it pocketed from exiting investments.

Blackstone Group LP and KKR & Co LP, rival alternative assets managers, have also reported their funds appreciated in the third quarter amid a buoyant stock market and profitable exits from the sale of assets.

Carlyle's private equity portfolio rose 5 percent in value in the third quarter versus a 7.1 percent rise in Blackstone's private equity funds and a 6 percent increase in the private equity holdings of KKR.

Washington, D.C.-based Carlyle, which was founded in 1987 by David Rubenstein and Daniel D'Aniello as well as Conway, has been very active in leveraged buyouts this year.

Carlyle reported third-quarter economic net income (ENI), a measure of profitability that takes into account the market valuation of its assets, of $219 million, compared with a loss of $191 million a year before.

This translated into after-tax ENI of 66 cents per common unit, in line with the average estimate of analysts in a Reuters poll of 64 cents.

Carlyle shares were 0.2 percent higher at $25.65 in afternoon trading. Through Wednesday the shares were up about 16 percent since the firm went public in May, compared with a 7 percent rise for KKR, a 14 percent gain for Apollo Global Management LLC, and a 12 percent rise for Blackstone Group.

Pre-tax distributable earnings, which included realized investment gains and accounted for cash available to pay dividends, came in at $206 million compared with $244 million in the third quarter of 2011.

CARRIED INTEREST TAX

As Congress prepares to grapple with $600 billion in spending cuts and higher taxes scheduled to start in January unless lawmakers come up with a plan to address the budget deficit, Rubenstein on Thursday said he expected that any comprehensive tax reform would take at least two years.

Rubenstein, a Democrat, said he did not expect carried interest -- the slice of private equity fund profits that is paid out to managers -- to be targeted disproportionately in the near term.

The tax treatment of carried interest became an issue during the presidential campaign as many Democrats focused on the money earned by Republican challenger Mitt Romney from his years at private equity firm Bain Capital LLC, which he co-founded.

Carried interest is now taxed as a capital gain at a rate of 15 percent. Many Democrats say it should be taxed as ordinary income, meaning that high-earning private equity managers would pay as much as 35 percent in tax on those earnings.

"Our best judgment and information on what will happen on carried interest taxation does not yet enable us to say how this or any other issue of interest to firms like ours will ultimately be resolved," Rubenstein, who served as a domestic policy adviser to President Jimmy Carter, said on the same conference call.

Carlyle has been expanding beyond private equity into other alternative assets such as corporate credit, real estate, hedge funds, and most recently commodities. Its assets under management were $157.4 billion at the end of September, up 0.8 percent from the end of June, while fee-earning assets under management were $115.1 billion.

Carlyle said its latest North American buyout fund, Carlyle Partners VI, has attracted $3.7 billion in commitments and is on track to reach its $10 billion fundraising target on schedule.

Carlyle is also raising a fourth $3.5 billion Asian buyout fund and said it expected to have some investor commitments finalized before the end of the year. Its energy mezzanine fund has raised about $1.1 billion and is expected to conclude fundraising by the end of the year, exceeding its target, Carlyle said.

ASSET SALES

Fee-related earnings increased 24 percent year-on-year to $46 million as cash compensation to employees declined and the company increased its compensation in Carlyle shares. Carlyle's so-called dry powder, or capital available to invest in deals, was $39.4 billion at the end of September, $15.6 billion of which was available for private equity.

The firm's funds that generate carried interest realized $5.1 billion in proceeds in the quarter from the sale of assets and on dividends from investments.

This included a stock sale in pipeline company Kinder Morgan Inc for slightly over $1 billion, a $721 million sale of shares in China Pacific Insurance Group Co Ltd, and a $367 million sale of a final ownership stake in Dunkin' Brands Group Inc, Conway said.

Carlyle declared a third-quarter distribution of 16 cents per common unit.

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