Carlyle Group LP’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 $66.9 million and their firm has poured another $21.1 million into Urbplan Desenvolvimento Urbano SA, a real-estate developer that’s 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 $200 million to carry out Carlyle’s turnaround plan after an overly ambitious expansion left it with $305 million of high-cost debt.

Carlyle’s misadventure in Brazilian real-estate highlights a 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.

Little Protection

“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 labor 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.’’

Worthless Investment

Carlyle funds spent a total of at least $100 million to buy a majority stake in Urbplan in 2007 and to continue funding it through 2011. That investment was worthless as of the end of 2012, and fund investors didn’t put any more money into the company, according to Carlyle’s regulatory filings. In an annual report filed last month with the U.S. Securities and Exchange Commission, Carlyle said if Urbplan fails to complete construction projects, customers or other creditors might seek to assert claims against the private-equity firm “under certain consumer protection” or other laws.

Carlyle is taking steps to revive Urbplan, including hiring a new chief executive officer who specializes in turnarounds.

“Unfortunately, despite our strong investment track record, not every investment works out,” the firm said in an e- mailed statement. “We had an issue and we took action. Alongside the new management team and with a plan in place, we are working hard to turn this business around, including delivering on Urbplan’s projects.”

Rare Miss

The investment is a rare black mark for Carlyle, founded by billionaires William Conway, Daniel D’Aniello and Rubenstein in 1987. As of Dec. 31, the buyout firm had invested in more than 470 corporate transactions, returned an average of 30 percent annually to investors, and oversaw almost $189 billion. Even in the rarefied world of buyouts the partners are enjoying heady times. The co-founders collected $279 million in pay and cash dividends last year, a 61 percent increase from 2012.

“The guys who are the principals have more money than God,” said James Hill, the chairman of the private-equity practice group at Benesch, Friedlander, Coplan & Aronoff LLP, a Cleveland-based law firm. Their wealth notwithstanding, private- equity executives rarely use their own capital to rescue an investment made on behalf of one of their funds.

“It could create a bad precedent,” said Hill, adding “investors in another investment that is failing may say ‘Where is our’” bailout?

Relative Performance

Carlyle’s stock fell 0.3 percent to $33.21 at 12:42 p.m. in New York. The shares had risen 9.2 percent in the past year through yesterday, trailing Apollo Global Management LLC’s 43 percent gain and Blackstone Group LP’s 68 percent increase.

It’s not the first time Carlyle’s partners have rescued an investment with their own money. The firm’s employees put cash into Kuhlman Electric Corp. after a 1999 takeover went awry, ultimately fixing the company and selling it to ABB Ltd. in 2008. The private-equity firm also provided loans to Carlyle Capital Corp. during the credit crisis after the publicly traded fund was hit with losses on mortgage-backed securities. In March 2008, Carlyle executives weighed putting their own money into the fund, which ended up defaulting on $16.6 billion of debt that month.

Buyout Pioneer

Carlyle was a pioneer among buyout firms venturing outside the U.S., initially targeting Europe and later high-growth emerging markets, such as China. It created a Latin America real estate team in 2006 headed by Eduardo Machado, who structured one of the first real estate investment trusts distributed in Brazil and also worked for the Steinbruchs, one of the country’s wealthiest families.

One of the first investments was the acquisition of a 61 percent stake in Urbplan, then known as Scopel Desenvolvimento Urbano SA, a family-owned real estate company in Sao Paulo that focused on middle- and low-income housing as well as first-time homebuyers. Along with Carlyle funds, the Olayan family of Saudi Arabia agreed to invest directly in the developer.

Scopel Brothers

Eduardo and Ciro Scopel, the sons of the company’s founder, retained 39 percent as well as control over its day-to-day operations. Carlyle said its investment would foster the developer’s expansion, adding the company’s sales, then at 5,000 lots a year, were “expected to increase considerably” following the partnership.

At the time there was huge pent-up demand for housing as the hyperinflation and currency devaluations that had discouraged home-buying were being replaced with relative stability in prices and interest rates, said Roberto Ordorica, the former head of the Latin American division at Prudential Real Estate Investors.

“The result was a policy that created an incentive for developers to develop homes for the majority of the population,” said Ordorica, who now runs Mexrob Capital LLC, a Miami-based firm that provides investment capital to real estate ventures in Mexico.

Brazil’s Economy

Brazil’s economy grew more than 6 percent in 2007 and the government was also stepping in to make mortgages more available for first-time buyers. The housing market took off in 2009, when President Luiz Inacio Lula da Silva introduced his “My House, My Life” program, an initiative that Brazil’s current president, Dilma Rousseff, has also supported. While there are signs the market is cooling, home lending rose 33 percent in January from a year earlier, twice the pace of growth for consumer loans, according to Brazil’s central bank.

The Scopel family had operated in Sao Paulo state for four decades, specializing in acquiring the rights to develop residential lots from landowners in return for a share of the eventual lot sales, a bartering system known locally as “permuta.” The company would then install basic infrastructure to the land, such as roads and electrical and sewer hook-ups, and sell the individual lots to prospective homeowners, who would then hire their own builders.

Urblan Expansion

After Carlyle’s acquisition, Urbplan expanded across Brazil, South America’s largest country, making it difficult to track regulations, consumer preferences, and prices.

Every city and state has its own building permit legislation, and developers face a lack of credit and data, said Eduardo Scopel, who left Urbplan in May and couldn’t comment on the company’s specific issues.

“When you expand beyond Sao Paulo state, you can’t use the same methodology,” he said in a telephone interview.

Construction Stopped

Construction became paralyzed and some customers stopped making payments on their lots, said Mirian Abe, an analyst in the Sao Paulo office of Fitch Ratings. As of November, 26 percent of customer receivables that Urbplan had packaged into securities were more than 90 days overdue, while some 17 percent were more than 180 days late, Fitch said.

As financial and operational problems escalated, prospective homeowners sued Urbplan. In the state of Sao Paulo alone, Urbplan and its predecessor company have been hit with 154 lawsuits, most of which were filed in or after 2011, said Ivan Lobato Prado Teixeira, the head of litigation at Woiler & Contin, a Brazilian law firm that specializes in real estate and private equity. Of that, 84 appear to be consumer-related cases seeking the termination of purchase and sale agreements and “recovery of moral and material damages.”

Jeopardized Investments

Letting the company fail could have jeopardized Carlyle’s other investments in Brazil, which range from a lingerie maker to CVC Brasil Operadora e Agencia de Viagens SA, a travel agency that sold shares to the public in December. In 2011, the firm raised $1 billion for a pair of buyout funds that planned to focus on Brazil.

The personal assets of Urbplan’s past and present directors could also be at risk, according to three local private-equity experts.

When presented with consumer complaints, a Brazilian court can disregard a company’s legal status in the event there has been a violation of law, an abuse of power, a wrongful act by the company, or even a violation of its articles of association, according to a March legal memo prepared by Woiler & Contin.

Corporate Veil

The “corporate veil” can also be pierced when the company files for bankruptcy or becomes inoperative as a result of corporate mismanagement, according to the memo. A judge could freeze the assets of private-equity fund companies in Brazil until customer disputes are resolved, Woiler & Contin said.

Beginning in April of last year, Carlyle negotiated the removal of the Scopels, and the brothers are now directors at Scopel Empreendimentos e Obras SA, another developer of land allotments. The firm also looked to exit Urbplan, either through a sale, a joint venture or an infusion of third-party capital, according to the January letter to the SEC.

By mid-November, the buyout firm concluded none of that was possible, even though Carlyle and some of its senior professionals had lent money to one of its original Scopel co- investment funds, which in turn invested in the developer. While Carlyle and its partners had invested $88 million as of mid- February, the company estimates Urbplan will need a total of $200 million to continue, according to regulatory filings.

Turnaround Expert

According to Carlyle’s annual report, a potential buyer might also want the firm to guarantee Urbplan’s existing obligations. At the end of last year, these included debt with a face value of $305 million that bore interest at floating rates of 13.7 percent to 19.3 percent and commitments to develop land at an estimated cost of $125 million.

Carlyle has installed Andre Machado Mastrobuono as Urbplan’s new CEO, a turnaround expert with an MBA from the University of Chicago who has previously taken the helm at companies including Parmalat Brasil SA and San Antonio Internacional. Urbplan is working to get construction restarted at delayed projects and houses delivered on time.

Market Cooling

After failing to capitalize on the Brazilian government’s effort to make housing widely available to low income homebuyers, the market has now begun to cool. Homebuilders, suffering from rising costs, delays in deliveries of new homes, and a sluggish economy, are reducing the number of new developments they take on, a sign that the market is going to slow down, Abe said.

Jive Investments Holding Ltd., the biggest buyer of distressed assets in Brazil, is starting the first fund that will invest solely in troubled real estate within the country. Jive decided to start the fund after receiving 35 properties that had been used as collateral on non-performing loans.

“If Carlyle intends to sell the company, I don’t think it is going to happen in the short term,” Fitch’s Abe said. “They have to fix everything up there and show some results.”

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