Wednesday, June 5, 2013

Lunch with CEO Bill Conway of the Carlyle Group

Together with a handful of other analysts, I had the chance yesterday to hear from Bill Conway, co-founder of the Carlyle Group.

Carlyle is one of the successful alternative asset class managers in the world.

 Its founders - Conway, David Rubenstein and Daniel D'Aniello - started the firm in 1987. Today the firm has $190 billion in assets under management (AUM), and made its founders billionaires in the process.

The Calfornia Public Employees Retirement System (CalPERS) had invested in Carlyle in 2001, and watched the value of its investment soar as Carlyle prospered.  However, on Monday CalPERS announced that it wanted to sell its position after reaping huge gains on its investment.

To get a sense of just how profitable it has been to invest alongside Carlyle, I thought I would share this excerpt from the Washington Business Journal (I added the emphasis):

The California Public Employees' Retirement System, or CalPERS, plans to sell its entire ownership stake in D.C.-based The Carlyle Group LP....

CalPERS, one of the Carlyle Group's earliest investors, has had a good run with the global asset manager. The stake in Carlyle acquired by CalPERS in 2001 for $175 million has generated $225.2 million in carried interest, fees and distributions, and Reuters estimates that including Carlyle's distributions as a public company since May 2012, CalPERS will have made close to 3.5 times its money on the Carlyle investment over a period of 12 years.

I had received an email early yesterday asking whether I would be interested in attending a lunch with Carlyle, and I naturally said yes.

Full disclosure:  Up until recently, Carlyle owned 25% of the outstanding shares of my employer. They currently own 5%.

Little did I realize, however, that Bill Conway would be in attendance. The opportunity to listen to one of the leaders in alternative assets was a treat.

First, you should know that Conway flew on a commercial airline (US Air) yesterday from Washington.  I could just imagine this billionaire investor sitting in row 15 next to someone in a T-shirt and shorts!

However, it also says something about Conway. At age 63, with more money than anyone could possibly spend, he still is actively engaged in the business, and does not apparently consider himself any different than anyone else.

Here's what was so impressive about Bill Conway:  he spoke for an hour about the activities of the Carlyle Group, and never once referred to a note or presentation slide.  Carlyle has investments literally all over the world, yet you got the sense that he know what was going on with each one of them.

In a chat prior to the start of lunch, I mentioned to him that I worked at a bank that Carlyle has a small stake in. He immediately knew everything about my employer, much to my surprise, since it is such a small part of their overall portfolio. His insights into our business strategy were, frankly, very observant and accurate.

Conway said that while they believe the U.S. is the most attractive place to invest, they are seeing more opportunities in the emerging markets and Europe.

Europe in particular seemed to intrigue Conway, especially the peripheral countries like Spain and Italy.  The reason?  Asset prices in Europe are much cheaper than in the U.S.

Conway said that one of the most common misconceptions in investing is that investing in countries with the fastest growth produces the best results.

He said that Carlyle analysis had indicated that the best returns often came from the slower growing parts of the world. The emerging markets, and their faster growth rates, had offered the worst returns for investors over the years.

Europe obviously has a huge number of economic issues, yet Carlyle's five European offices are finding numerous opportunities.

The problem has been getting companies to sell; Conway indicated that European managements are "holding on by their fingernails" because they do not want to sell at today's depressed prices.

Although it has done numerous investments in China, Carlyle takes a very cautious stance in its Chinese investment activities.  In most cases Carlyle does not take a majority ownership position, since it wants the local managements to have a substantial stake in profitable operations.

In general, Conway said that they are seeing more opportunities to "harvest" profitable opportunities than new investments.  My impression was that this is not as much of a call on the stock market as it is the discipline that Carlyle follows in all of its investment activities.

Carlyle requires all of its investments to meet certain internal "hurdle" rates of return. With interest rates so low, the world has in some cases lowered the types of return it expects from its investments.  However, Carlyle refuses to chase opportunities, and so for the moment is not seeing the type of return opportunities it would like.

My problem with investing in Carlyle's publicly-traded stock is that I find it hard to be able to follow whether Carlyle's activities are doing well or not.  I asked Conway what I was missing.

In a friendly fashion, but still pretty direct (you don't get to be a billionaire by being shy!), he said that I was not appreciating the breadth of Carlyle's investment portfolio. Their activities are so diverse, and their financial disciplines inbred in every activity the company undertakes, that any significant reversals are not as likely. 

There are other reasons that Carlyle has been so successful.  For example, each Monday the managing directors are given a 30 page briefing booklet with reams of economic and business data gathered from their offices around the world.  Conway said that they probably have better information than Fed Chairman Ben Bernanke, and I do not doubt it.

I asked a question about fees.  Much has been written in recent months that all alternative managers charge too much relative to the returns they have given shareholders.  However, Conway indicated that while some of their largest investors (e.g. the Government of Singapore) have pushed them on fees, for the most part their overall fee rate had not changed over the past five years.

He made an interesting point:  When Carlyle was started, the annual management fees (typically between 1% to 2% of AUM) were really intended to pay the bills while waiting for the returns from their investments to show up.  Carlyle has always focused on the investments to make their real money.

Conway was a terrific presenter, and I am not surprised that he has been so successful at raising funds for Carlyle.

Oh, did I mention that he committed last fall to give away $1 billion to help the poor of Washington, D.C.?