Emerging markets-focused hedge fund ESG to separate from Carlyle

August 24, 2016 2:13 PM EDT

A general view of the lobby outside of the Carlyle Group offices in Washington, U.S. May 3, 2012. REUTERS/Jonathan Ernst/File Photo

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By Greg Roumeliotis and Lawrence Delevingne

(Reuters) - The partners of Emerging Sovereign Group LLC (ESG) have agreed to buy back the majority stake in the emerging markets-focused hedge fund manager that was acquired by Carlyle Group LP in 2011, Carlyle said on Wednesday.

The move comes as Carlyle has chosen to focus more on credit-oriented investment strategies, such as direct lending, distressed debt and collateralized loan obligations, while ESG has remained an equities-focused hedge fund firm.

ESG was founded in 2002 by former Morgan Stanley colleagues Kevin Kenny, Mete Tuncel and Jason Kirschner with seed capital from Tiger Management founder Julian Robertson. It has $3.5 billion is assets, up from $1.25 billion when Carlyle acquired a controlling stake in it in 2011.

"ESG is a strong organization, has been a terrific partner to Carlyle and will thrive as an independent business... We wish Kevin Kenny and his team continued success in the future," Carlyle co-founder and co-chief executive William Conway said in a statement.

Many hedge funds targeting emerging markets have struggled to produce stellar returns in recent years, as bets on economic growth in some countries such as Brazil and Russia have gone sour.

The split with ESG will further reduce Carlyle's hedge fund offerings, after it shut down its hedge fund-of-funds manager, Diversified Global Asset Management Corp (DGAM), earlier this year, citing a challenging market environment that made it difficult to gain scale.

Its remaining hedge fund units, Claren Road Asset Management and Vermillion, have continued to generate losses amid poor financial performance and investor redemptions, even as Carlyle has continued to invest in new products and strategies, Carlyle Chief Financial Officer Curt Buser said on the firm's latest quarterly earnings call last month.

Carlyle also said last month that it anticipated greater operating losses from some of the hedge funds and associated commodities products than it previously expected.

Hedge funds, as well as distressed debt, mezzanine credit and direct lending offerings, are part of Carlyle's Global Market Strategies (GMS) business, which had $34.7 billion in assets under management as of the end of June, down 5 percent year-on-year.

Buser said last month Carlyle had expected GMS to be a larger contributor to distributable earnings and fee-related earnings at this point than it actually is.

Carlyle had total assets under management of $175.6 billion at the end of June, of which $57.6 billion were in private equity, $37.5 billion were in real estate, and $45.7 billion were in so-called investment solutions, such as fund-of-funds.

(Reporting by Greg Roumeliotis and Lawrence Delevigne in New York; Editing by Bernard Orr)

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