NEW YORK Carlyle Group LP (CG.O) said on Tuesday it had bought a majority stake in a commodities-trading hedge fund manager, its biggest leap yet in an expansion that has seen it diversify from private equity into other alternative asset classes.
Carlyle, which has $156 billion of assets under management, said it bought a 55 percent stake in Vermillion Asset Management LLC, a New York-based commodities investment manager with approximately $2.2 billion of assets under management.
Like its publicly listed peers, such as Blackstone Group LP (BX.N) and KKR & Co LP (KKR.N), Carlyle has gone beyond buying and selling companies to managing other alternative assets including real estate, hedge funds, credit and infrastructure.
But Carlyle is the only major alternative asset manager to now offer commodities as an investment offering. Earlier this year, Fortress Investment Group LLC (FIG.N) terminated its commodities fund after poor performance and heavy withdrawals.
"For many years Carlyle has successfully invested in a variety of energy, agriculture and infrastructure companies," Mitch Petrick, Carlyle's head of global market strategies, said in a statement.
"Vermillion employs a liquid, relative-value, low volatility approach to trading both physical commodities and their derivatives to produce positive, uncorrelated returns," he added.
Commodities posted their biggest gain in nearly two years during the third quarter as prices hit multi-month highs in anticipation of bond-buying and other stimulus -- later confirmed -- by central banks in the United States, Europe and China.
APPETITE FOR PHYSICAL COMMODITY ASSETS
Vermillion trades agricultural products, metals, energy and staples such as coffee, sugar and cocoa beans. Carlyle said it acquired a stake in Vermillion in exchange for cash, an ownership interest in Carlyle and performance-based contingent payments payable over five and a quarter years.
If Vermillion achieves certain performance targets, Carlyle has agreed to issue to the Vermillion principals shares in Carlyle representing up to less than 0.5 percent of all the shares outstanding. Vermillion's principals reinvested cash proceeds from the transaction into Vermillion's funds, Carlyle said.
Vermillion was set up in 2005 by Drew Gilbert and Chris Nygaard. They will continue in their current roles as co-chief investment officers, managing investments and the day-to-day operations of Vermillion, Carlyle said.
As of February, Viridian, the flagship fund of Vermillion, managed some $2 billion in capital, making it one of the bigger players in the U.S. natural gas market. Hedge fund returns data obtained by Reuters earlier this year showed Viridian down by around 4 percent January through April.
Hedge funds have shown a growing appetite for owning physical commodity assets -- from copper mines to oil tankers -- and dealing in physical commodities -- from natural gas to metals to coffee beans -- because it gives them crucial insight and information that can be used for punting in the futures market.
Physical merchants and funds do not come under the same rigorous regulatory scrutiny as U.S. investment banks which have had to curb their ownership of physical commodity assets and proprietary trading under Dodd Frank legislation.
Sandler O'Neill + Partners LP and Katten Muchin Rosenman LLP advised Vermillion. Simpson Thacher & Bartlett LLP advised Carlyle. The funds have approved the deal, which was effective October 1.