updatedThe Carlyle Group, a U.S. investment firm that expanded into venture capital deals over the last decade, isn’t doing very well.
Like a lot of its peers, it has lost focus and now needs to consolidate.
Last week, the firm slashed 10 percent of its 1,000 person staff and closed some offices, including the one in Silicon Valley. That office, in Menlo Park, Calif., had been open for less than a year and housed five investment professionals. The firm is basically abandoning its venture capital investment strategy.
With such drama, you wouldn’t be blamed for thinking a string of lawsuits filed by the firm are related. Most recently, the firm has filed a lawsuit against Sequoia Capital, another U.S. venture capital firm. It says one of Sequoia’s partners wrongly derailed a $10 million Carlyle investment in a Chinese medical research company. It follows two other lawsuits by Carlyle.
Carlyle spokesman Chris Ullman, however, insists the firm is doing well. He says the lawsuits have nothing to do with the firm’s performance.
The Carlyle fallout comes amid news of a bunch of other problems at high-profile “private equity” firms. The firms differ slightly in their investment focus, but they invest large amounts of private money into private companies and sometimes even buy entire public companies or divisions of them — taking them private. These investments can be in companies of all stages, from early-stage startups to mature companies requiring hundreds of millions of investment dollars. The problem is, there’s no way for the firms to lock into profits because few people are buying their investments anymore.
Some say the entire industry as we know it is “dead.”
Carlyle Group is suing Sequoia for $206 million, specifically seeking damages from managing partner Neil Shen, who is a partner of Sequoia’s China fund. Carlyle says Shen backdated an investment offer he made to the company, called Green Villa Holdings, so that the contract was dated four days before a competing contract signed by Carlyle. Carlyle claims that the company’s founder, Ren Jun, later sent an email to Carlyle with a message that read in Chinese “pray forgive.”
The rebuff hurts because Sequoia’s Shen was originally close to Carlyle. He was the founder of Ctrip.com, an online flight company that was an early IPO hit for Carlyle in China. Sequoia picked up Shen three years ago, which we reported about. A year ago, Shen said his investment philosophy is to stick to “the four basics”: food, clothes, housing and travel.
Sequoia did not respond to a request for comment.
Earlier this year, Carlyle was one of the firms that sued the founder of Chinese credit guarantee firm Credit Orienwise Group Ltd. In October, Carlyle said it was suing a Russian steel company, Novolipetsk Steel, for backing out of a $3.5 billion deal.
Of course, this may all be coincidental, and Carlyle may be having a streak of bad luck. China has been known to be a difficult place to invest, with opaque regulations. Earlier this year, Carlyle walked away from investing in Chinese machinery maker Xugong Group after the Chinese government delayed approval — following years of talks. Beijing has likewise been protective of many other of its large companies, making it challenging for private equity firms to invest there.
Carlyle has had a difficult year, seeing the collapse of its real estate hedge fund group as well as investments going sour in its SemGroup and Hawaiian Telecom.
It recently raised $14 billion for its fifth main buyout fund, Carlyle Partners V. Also, the firm has had two profitable exits (amounting to at least three times the invested capital) in the past few months, including AxleTech and WCI, according to a source close to the firm.