Carlyle Pitches Wall Street on IPO Valuation to Rival Blackstone
Carlyle Group, pressing ahead with plans for an initial public offering, is meeting privately with analysts to convince them the buyout firm is worth at least as much as its most richly valued competitor, Blackstone Group LP. (BX)
Carlyle, which manages $153 billion, is arguing that its steadier earnings should reward shareholders with a more predictable dividend than those of other private-equity firms, according to people briefed on the Washington-based company’s marketing materials. They asked not to be named because the talks are private.
Founded in 1987 by William Conway, Daniel D’Aniello and David Rubenstein, Carlyle is planning the largest IPO by a private-equity manager since Blackstone raised $4.75 billion in 2007. The registration statement for the potential $1 billion deal, which may be filed as soon as this month, will require Carlyle to disclose financial information it has kept secret for 24 years -- including the actual returns it has generated for investors. The firm’s ability to retain talent, create an exit for its founders and contribute capital to its next flagship fund hinge on the success of the offering.
“If they’re paying a decent dividend, especially in this marketplace, that’s going to get an attractive valuation,” said Mark Bronzo, who helps manage $26 billion at Security Global Investors in Irvington, New York. “I think you’ll see a good appetite for this company because of the sheer size and name recognition. This is a premier group.”
Chris Ullman, a spokesman for Carlyle, declined to comment on the IPO.
Carlyle has never disclosed the returns on its funds, except to private investors, so one of the only ways to compare the firm with peers has been by assets under management, which puts Blackstone first and Carlyle second. With its sights set on an IPO, Carlyle has made a push for growth, amassing assets totaling $153 billion. Blackstone said last month that its assets had surged 43 percent year-over-year to a record $159 billion.
Blackstone’s growth has helped it command the highest valuation among its peers, trading at about 7.2 times earnings. That beats both KKR & Co., which listed on the New York Stock Exchange last year, at about 6 times earnings, and Apollo Global Management LLC, which trades at 4.2 times earnings, according to data compiled by Bloomberg. Traditional asset managers such as T. Rowe Price Group Inc. trade for about twice as much.
Beyond bragging rights, Carlyle’s success in tapping the equity markets would bolster its efforts in raising a new flagship fund, which the firm expects to total at least $10 billion, said a person briefed on the plan. Private investors, who have so far seen less than 10 percent of the capital returned from the last flagship fund, are demanding that Carlyle contribute about 3 percent of the fund’s capital to ensure that managers’ interests are aligned with their own, the person said. At that rate, it would have to finance about $300 million in commitments over several years as the firm deploys capital.
Carlyle, which has deployed $9.4 billion, or about 70 percent of its last pool, may start marketing the fund as soon as next year, according to a person with knowledge of the plan.
Even before the firm decided to pursue an IPO, Rubenstein was focused on growth, starting new funds dedicated to geographic regions where investors said they wanted to put money to work. Rubenstein has pushed Carlyle’s buyout business into countries outside the U.S. and emerging markets, opening 35 offices on six continents, two-thirds more than Blackstone’s 21 global offices.
On the Road
The 62-year-old lawyer, a former staffer of ex-President Jimmy Carter, serves as the firm’s chief marketer and spends about two-thirds of the year on the road, according to a person familiar with his traveling. His sales pitch helped Carlyle build an investor base that includes governments ranging from Abu Dhabi to China’s Shandong Province, many of which have poured capital into its 89 private funds.
After the IPO, Rubenstein will be co-chief executive officer with Conway, and D’Aniello will be chairman, according to a person familiar with the plan.
Now Rubenstein and the firm’s most senior executives are spending time on Wall Street, seeking to convince investors that Carlyle’s model of spreading money into many small funds generates steadier earnings than competitors who concentrate larger sums in fewer pools, the people said. Rubenstein is arguing that Carlyle should be valued more like a traditional asset-management company.
Carlyle’s pitch is tailored to counter public investors’ perceptions about private-equity incentive fees, or carry. Stockholders place little value on these earnings, which are unpredictable especially during times when an economic slowdown makes it tougher to exit investments.
Investors aren’t paying anything for future carry, said Bank of America Corp. analysts led by Guy Moszkowski in a report on Blackstone titled “Valuation compelling: Get your free carry here,” which argued Blackstone’s stock is undervalued. Blackstone should command 8 times revenue on incentive fees, according to the report. That’s still less than half the 20 times revenue for management, transaction and advisory fees Moszkowski’s team factors into its estimates.
Even as Carlyle aims to persuade investors to pay more for carry, the firm is also trying to convince them its management fees outside of leveraged buyouts are on the rise, the people said. The company is seeking to replicate Blackstone’s success in getting shareholders to pay up for its diversification efforts. Blackstone’s valuation stems in part from hedge funds, including a fund-of-funds manager, because inflows and earnings from that business are less volatile than private equity, according to Marc Irizarry, a Goldman Sachs Group Inc. analyst.
Assets at Blackstone’s hedge-fund business grew to $40.6 billion as of June. The firm’s founder, Stephen Schwarzman, has said his hedge fund-of-funds unit is the largest in the world.
Blackstone’s total fee-earning assets under management, a measure of assets that generate management and incentive fees, rose 27 percent to $129 billion in the second quarter. The hedge-fund business accounted for the largest portion, at $37.2 billion, or 29 percent more than a year earlier.
Carlyle, which hasn’t disclosed comparable figures publicly and is still dependent on buyouts for most of its revenue, is attempting to diversify along similar lines. With its purchase of Dutch money manager AlpInvest Partners NV, which allocates money for investors across several buyout funds, Carlyle entered the private-equity fund-of-funds business. AlpInvest, which manages about 42 billion euros ($60.4 billion), generated about 105 million euros in 2010 revenue, which included management and incentive fees, according to its annual report.
Carlyle, which ventured into real estate investing in 1997 and formed a credit fund in 1999, has since made other acquisitions to increase assets. Its Global Market Strategies group, led by Mitch Petrick, Morgan Stanley’s former sales and trading chief, has overseen deals to buy majority stakes in two hedge funds since he joined Carlyle as a managing director in 2010. Petrick, 49, plans more acquisitions and hires, according to one of the people.
Carlyle has a network of 1,440 private backers, known as limited partners, who committed a total of $4.2 billion in capital in 2010 for six funds and several so-called co- investments, according to the annual report. During the same period, New York-based KKR, with 350 private investors, has raised $5 billion, company officials have said. A person with knowledge of the figures said Carlyle has raised a total of $26 billion since the beginning of 2008.
Blackstone, which has a base of 1,300 private investors, attracted $5 billion of inflows during the first half of this year through the hedge-fund unit alone, the firm’s regulatory filings show. On a conference call with analysts in March, Schwarzman said the firm attracted $18 billion of capital in 2010, including commitments to its flagship fund.
In making its case for a higher multiple than at least Apollo and KKR, Carlyle must also overcome concern from investors pointing to the decline of other private-equity stocks in the past four years.
Blackstone completed its IPO on June 21, 2007, at $31 a share. The stock fell below that level a week later and never rebounded, hobbled by unrealized losses during the credit crisis and investors’ reluctance to invest in companies that relied on leverage for profits. Blackstone traded at $13.73 yesterday at the close on the New York Stock Exchange.
KKR and Apollo, also based in New York, lost value from the time they sold stakes to investors through a listing in Amsterdam and a private exchange, respectively. KKR is up about 5 percent since it listed shares on the New York Stock Exchange last year.
“If you look at Blackstone, they timed the market perfectly and lost a lot afterwards,” said Josef Schuster, founder of Chicago-based IPOX Schuster LLC, which oversees about $2.5 billion. “There’s a precedent from the incumbents that indicates to me that this shouldn’t trade markedly differently. Investors are not going to step up and pay a substantial premium.”
Carlyle’s push into new regions and investment strategies outside of buyouts has paid off in some cases. Raising an Asia buyout fund more than 10 years ago made Carlyle the first major U.S.-based manager to start a dedicated pool in the region. Today, the firm manages nine non-Japan Asia-focused funds.
Still, expansion has driven costs higher than its peers, people familiar with the firm’s financial statements said.
Its first foray into hedge funds ended when the credit crisis forced Carlyle three years ago to shut its only hedge fund, a venture it had started with Deutsche Bank AG executives Rick Goldsmith and Ralph Reynolds. Assets in that fund had dropped by a third to $600 million.
Another fund, the publicly traded mortgage-bond fund Carlyle Capital Corp., was suspended from trading after it failed to meet more than $400 million of margin calls on mortgage-backed collateral. The firm had started the fund less than two years before, hiring John Stomber, a former managing director of Cerberus Capital Management LP, to head it.
To contact the reporter on this story: Cristina Alesci in New York at firstname.lastname@example.org