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

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.