2008 Annual Report - The Carlyle Group

let ter from the FoundersFrom LeftDavid M. RubensteinDaniel A. D’AnielloWilliam E. Conway, Jr.The Carlyle Group general partnership finished 2008 in excellent financial shape. Our balancesheet is strong, enabling us to withstand the global financial crisis and positioning us wellwhen the markets begin to recover. Nonetheless, the year 2008 was a humbling experience forus and most of the financial services industry. After several spectacular years of unprecedentedgrowth, product innovation, geographic expansion, capital deployment and investment gains,our world changed dramatically.On its face, the private equity industry doesn’t appear tohave altered much. But look closer and the changes beginto appear: deal flow has slackened; exits are fewer; investorsare hesitant to commit fresh capital; stock prices aredown; and debt and equity valuations have been hardhit. Some portfolio companies have restructured, soughtbankruptcy protection and even liquidated.But despite this bad news, we see reason for optimism.Our firm is strong. We believe that our global portfolio isin relatively good shape. We believe that we are positionedto create and take advantage of the extraordinary investmentopportunities that troubled times historically bring.Though the depth of the financial crisis and economicdownturn shocked all of us, we anticipated a contractionin the credit markets and took early steps to prepare. Ina January 2007 letter to all Carlyle investment professionals,we warned that the then-excessive liquidity environmentwould inevitably deteriorate and instructed them toredouble their focus on minimizing risk.Then, in May 2007, we wrote in our annual report:“…we will strive to make investments that achievetop-quartile returns without top-quartile risks. Whileconcern about risk has not been overly rewarded in theprivate equity industry during the last several years,we believe it is the most prudent way to invest in thisindustry and in these times. In other words, if in 2007economies begin to grow more slowly, stock marketsdecline a bit, and debt becomes more expensive andharder to secure, we will be ready.”When the extent of the macroeconomic crisis beganto be known, we responded quickly. We held annualCEO conferences in which we helped portfolio companymanagement understand how to manage in a downturn.We drew down credit lines early, especially for U.S. buyoutcompanies, increasing liquidity. We cut costs andrestructured portfolio companies. And our cash reservesput us in excellent shape as the situation worsened.When the year came to a close, we had some goodnews to share with our investors. In 2008, despite thedownturn in global merger and acquisition activity,we exited several transactions and achieved attractivereturns for our investors, including:• Kuhlman Electric. We sold this manufacturer of electrictransformers for 9.3 1 times invested equity afterholding it for nearly nine years.• Transics International. We fully exited our investmentin this Belgium-based provider of fleet managementsolutions for the transport and logistics sectorin 2008, after it completed an initial public offering in2007, for approximately 4.2 times invested equity.1 All equity multiples are gross and include remaining value in addition to cash received. They measure proceeds before reduction by the cost of fees and carry attributableto the relevant investments. Carlyle’s base fees generally range from 1.2% to 2.0% per annum of assets under management, and carry is typically 20% of profits.2008 The Carlyle Group 13