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Hedge fund views cheap Carlyle stock a 'no-brainer' bargain

[NEW YORK] A little-known hedge fund has emerged as Carlyle Group LP's biggest outside shareholder after seizing on a sell-off of the US private equity firm's stock as a "no-brainer" buying opportunity.

New York-based Okumus Fund Management Ltd is so convinced that Carlyle has been unfairly discounted by investors that it bought US$110 million worth of Carlyle shares in December - an 8.8 per cent stake that accounts for a fifth of its US$550 million fund.

By Okumus' estimate, Carlyle's stock, which nosedived about 43 per cent last year in its worst annual performance since its 2012 listing, could be undervalued by as much as 50 per cent.

"It's a no-brainer," said Ahmet Okumus, chief executive officer of the fund. "It's a good business that generates a lot of free cash flow."

Founded in 1987 by William Conway, David D'Aniello and David Rubenstein, Washington DC-based Carlyle is one of the world's largest alternative asset managers with US$188 billion worth of assets under management.

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Like other alternative asset manager stocks, Carlyle has been hammered in recent months by a stock market rout, plunging oil prices that have depressed its energy investments, and investor fears that a wobbly credit market could undermine buyout deals.

But Carlyle's stock has been especially hard hit as investors punished it for its loss-making hedge fund unit Claren Road Asset Management, and its troubled buyout of Symantec Corp unit Veritas.

Financial markets were stunned in November when banks failed to drum up investor interest in US$5.6 billion worth of loans and bonds for Veritas, which Carlyle agreed to buy for US$8 billion in August in the biggest buyout deal for 2015. As such, the closing of the deal has been pushed back to Jan 29 from Jan 1.

Yet Okumus believes investors are judging Carlyle too harshly. The banks - not Carlyle - are on the hook for any unsold Veritas debt, Ahmet Okumus said.

Any risk to Carlyle's business from choppy markets should also be priced in at the current share price level, he said. "If you look at Carlyle's returns, they've been around for 30 years. They've invested in much more difficult markets than this, and they've done well."

According to Okumus' calculation, investors pay 6.6 times for each dollar of Carlyle's projected 2016 earnings - defined as economic net income. That is cheaper than some of its peers, including Blackstone Group LP's 9.6 times, but pricier than KKR & Co LP's 6 times.

Carlyle declined to comment when asked about Okumus'investment.


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