The apparent collapse of Carlyle Capital, a unit of one of the three largest institutional owners of the general partner of sell-recommended Kinder Morgan Energy Partners (KMP), illustrates the one-sided nature of the KMP deal. It seems that the politically-connected Carlyle Group, whose partners have reaped billions of dollars of personal reward when financial leverage worked for them, will walk away from billions of dollars of obligations when leverage turned against them.
The equity investors who trusted in the Carlyle Group connection to Carlyle Capital have lost all their capital, we understand. Similarly the general partners of KMP, including a unit of Carlyle Group, reap almost half the cash flow from limited partners’ borrowings and investments without any significant capital contribution or legal obligation to stand behind the debt of KMP.
Thus, an investment in KMP is no more secure, in our opinion, than an investment in Carlyle Capital proved to be. In contrast our income buy recommendations are financially sound, offer a more secure return and provide oil and gas price appreciation potential not available in KMP.
Originally published on March 14, 2008.