As it lays the groundwork for its upcoming initial public offering, Carlyle Group has been meeting privately with analysts and investors to persuade them that the firm is worth at least as much as its most richly valued competitor, Blackstone Group. It may be a tough sell.
There are only a handful of publicly traded private equity firms, and the stock market has not been kind to them. Blackstone completed its IPO on June 21, 2007, at $31 a share. The stock fell below that level a week later and never recovered. KKR has lost value since it sold stakes to investors in Amsterdam in May 2006. Its shares are up about 25 percent since listing on the New York Stock Exchange last year. Apollo Global Management’s shares are down 32 percent since they began trading publicly in March.
Nevertheless, Carlyle, founded in 1987 by William E. Conway Jr., Daniel A. D’Aniello, and David M. Rubenstein, is pushing ahead with what would be the largest IPO by a private equity manager since Blackstone raised $4.75 billion in 2007. The registration statement for Carlyle’s potential $1 billion deal may be filed as soon as this month. The firm wants the money to make it easier for its founders to cash out as they retire, as well as to retain talent and contribute capital to its next buyout fund. Christopher W. Ullman, a spokesman for Carlyle, declined to comment on the IPO.
Even before the firm decided to pursue an initial public offering, Rubenstein, 62, was focused on growth, starting new funds dedicated to geographic regions where investors said they wanted to put money to work. He has pushed Carlyle’s buyout business into countries outside the U.S., opening 35 offices on six continents, two-thirds more than Blackstone’s 21 global offices. With its sights set on an IPO, Carlyle has made a push to add assets. It now manages $153 billion. Blackstone, the largest private equity company, said in July that its assets had surged 43 percent over the previous 12 months, to a record $159 billion.
Rubenstein and the firm’s most senior executives are spending time on Wall Street, explaining why Carlyle should be valued more highly than its peers. The key to their argument is that Carlyle’s strategy of launching many small funds concentrating on different global regions will result in steadier earnings than other private equity shops achieve.
Carlyle has funds dedicated to Asia, Japan, Latin America, Europe, the Middle East and North Africa, and the U.S. Blackstone has one global private equity fund, which invests around the world. KKR’s flagship fund invests in North America. The firm has a fund devoted to Europe, one that focuses on Asia, and recently launched one targeting Chinese growth companies. Carlyle contends that its region-specific approach, which rival firms have recently started to adopt, reduces the risk that Carlyle will overexpose itself to one large deal or single market.
To back up the claims, marketing materials related to the IPO have charts showing that Carlyle’s earnings have been steadier than those of Blackstone, KKR, and Apollo. Carlyle has never publicly disclosed its earnings or the returns it has generated for investors—it will have to do so in conjunction with the IPO. Spokesmen for Blackstone, KKR, and Apollo declined to comment.
While Carlyle may be diversified geographically, it is still dependent on buyouts for most of its profit—unlike Blackstone, where hedge funds accounted for 29 percent of total fee-earning assets under management in the second quarter. That’s part of Blackstone’s appeal to investors, according to Marc Irizarry, a Goldman Sachs analyst, because earnings from hedge funds are less volatile than those from buyouts.
Carlyle has been attempting to diversify its business mix. Over the past 10 months, it has purchased AlpInvest Partners, a Dutch money manager that allocates money for investors across several buyout funds, and bought majority stakes in two hedge funds. Investors are divided on how well the IPO will fare. “I think you’ll see a good appetite for this company because of the sheer size and name recognition,” says Mark P. Bronzo, who helps manage $26 billion at Security Global Investors.
Josef Schuster, founder of Chicago-based IPOX Schuster, which oversees about $2.5 billion, believes investors will be discouraged by the tepid performance of other private equity stocks. “There’s a precedent from the incumbents that indicates to me that this shouldn’t trade markedly differently,” he says. “Investors are not going to step up and pay a substantial premium.”