PRIVATE EQUITY

Carlyle's partners bail out Brazilian developer hit by hundreds of lawsuits

Private-equity firm's partners inject US$67 million and the group another US$21 million to save real-estate firm hit by multiple lawsuits

PUBLISHED : Wednesday, 26 March, 2014, 7:34am
UPDATED : Friday, 04 April, 2014, 5:58pm

Carlyle Group's partners are reaching into their wallets to bail out one of the private-equity firm's first investments in Brazil, seeking to protect its growing business in South America's biggest economy.

Senior Carlyle professionals have injected US$66.9 million and their firm has poured another US$21.1 million into Urbplan Desenvolvimento Urbano, a real-estate developer that has been hit with hundreds of lawsuits, in part for failing to complete home sites across Brazil, according to court and regulatory filings. Urbplan needs as much as US$200 million to carry out Carlyle's turnaround plan after an overly ambitious expansion left it with US$305 million of high-cost debt.

Carlyle's misadventure in Brazilian real-estate highlights the risk of doing business in the country almost seven years after the firm's co-founder, David Rubenstein, said it would be a "huge" private-equity market. Buyout shops seldom use their own cash, let alone that of their partners to rescue investments. For Washington-based Carlyle that move may be necessary to protect its reputation and growing holdings in a country where courts increasingly hold directors and shareholders personally responsible for claims against their companies.

"Limited liability, which used to be the rule, has become the exception," Bruno Salama, a law professor at Fundacao Getulio Vargas School of Law in Sao Paulo, said in a telephone interview.

Shareholders, including private-equity firms, are typically shielded from being personally responsible for claims against the companies they own. While the Brazilian legal code has limited liability provisions, they offer little protection when it comes to consumer, tax and labour claims.

"This is a serious threat to certain industries, and private equity is one of them," said Salama, author of a forthcoming book, The End of Limited Liability in Brazil.

Carlyle funds spent a total of at least US$100 million to buy a majority stake in Urbplan in 2007 and to continue funding it through 2011. That investment was worthless as of the end of 2012, and fund investors did not put any more money into the company, according to Carlyle's regulatory filings. In an annual report filed last month with the US Securities and Exchange Commission, Carlyle said if Urbplan failed to complete construction projects, customers or other creditors might seek to assert claims against the private-equity firm "under certain consumer protection" or other laws.

Carlyle is taking steps to revive Urbplan, including hiring a new CEO who specialises in turnarounds.

"Unfortunately, despite our strong investment track record, not every investment works out," the firm said in an e-mailed statement. "We had an issue and we took action. Alongside the new management team and with a plan in place, we are working hard to turn this business around, including delivering on Urbplan's projects."

The investment is a rare black mark for Carlyle, founded by billionaires William Conway, Daniel D'Aniello and Rubenstein in 1987. As of December 31, the buyout firm had invested in more than 470 corporate transactions, returned an average of 30 per cent annually to investors, and oversaw almost US$189 billion. Even in the rarefied world of buyouts the partners are enjoying heady times. The co-founders collected US$279 million in pay and cash dividends last year, a 61 per cent increase from 2012.

Private-equity executives rarely use their own capital to rescue an investment made on behalf of one of their funds.

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