The hedge fund, known as Vermillion, was to receive a share of revenue at the refinery, which ran into financial trouble and was seized by Moroccan authorities later in 2015, the people said. The refinery, known as Societe Anonyme Marocaine de l’Industrie du Raffinage, or Samir, was put into liquidation this year.
In a note in the Washington, DC, private equity firm’s quarterly filing last week, Carlyle said it believes $ 400 million in petroleum commodities were “misappropriated by third parties outside the US” It didn’t identify the soured deal or name the third parties. The note, which hasn’t previously been reported on, refers to Samir, the people said.
Carlyle has spent $ 5 million in legal and professional fees trying to get its money back and expects the matter could lead to litigation and “significant additional costs or liabilities,” according to the filing. It has also received a redemption request from an unnamed investor as a result of the episode, additional details of which remain murky.
Carlyle expects to join a group similar to creditors committees that are formed in US chapter 11 cases, the people said. But the prospects for a recovery of its investment are less clear than they would be in a US bankruptcy proceeding. Other creditors include BP and Glencore.
The loss represents the latest misstep in Carlyle’s hedge fund business, which has suffered declines in commodity and credit investments and investor withdrawals. Carlyle is pulling back from the business and plans to focus more on corporate lending.
Co-founder William Conway said on an earnings call last month that Carlyle is decreasing its “exposure to shorter-term trading businesses, areas where, frankly, we have not performed well.” Carlyle expects to have about $ 1 billion of hedge fund assets by year-end, down from $ 14.7 billion as of the third quarter of 2014.
Carlyle and other big private equity firms moved into hedge funds to diversify beyond their corporate buyout businesses. Carlyle’s most-recent foray into hedge funds began in 2010. It bought a majority stake in Claren Road Asset Management, followed later by deals for Emerging Sovereign Group, or ESG, and Vermillion. It also purchased a Canadian fund of hedge funds firm, Diversified Global Asset Management.
Carlyle has since sold back its stake in ESG to that firm’s founders, closed DGAM and is in the process of winding down Vermillion, which is now called Carlyle Commodity Management. It is evaluating options for Claren Road, including selling back its stake to the firm’s founders or shutting the business down, a person familiar with the matter said.
The two former Morgan Stanley executives who oversaw Carlyle’s push into hedge funds, Mitch Petrick and Jacques Chappuis, have stepped down from the business. Petrick remains a senior adviser to Carlyle and Chappuis has returned to Morgan Stanley.
The troubled African commodities deal highlights the risks US investors face in emerging markets with less familiar investor-protection laws. Firms focused on credit and commodities have ventured to Brazil, Greece and other far-flung locales looking for bargains amid soaring prices for some assets in the US and other developed markets.