Saturday, June 18, 2011

Carlyle Group to Tuck Private Tail for IPO

Bloomberg reported The Carlyle Group's motivation for an independent public offering.   The private equity underwriter's (PEU's) aim is twofold.  Carlyle wants to raise money for diversification and monetize founders' investments in the firm, according to Colin Blayden, Director of the Center for Private Equity and Entrepreneurship at Dartmouth's Tuck School of Business.  Blayden remarks include:

1.  The challenge comes in predicting future cash flows of these companies.

2.  The private equity business has never had trouble raising capital.  Carlyle hadn't gone to the public markets to raise money to invest, until now. (The firm with over $106.9 billion under management may ask for $1 billion via the IPO, which is 0.9% of funds under management)

3.  Stock is a form of currency for diversification, future acquisitions.

4.  Looking for liquidity for founders and senior partners who want to monetize a portion of their holdings.  (Think Pete Peterson and Blackstone)

5.  What's being sold is a piece of the management company, the part that generates management fees, carried interest and other fees.  Carlyle is not selling their investments, which remain in limited partnership form.  Carlyle will continue to raise billion dollar investment funds under their usual limited partnership model

6.  Bain Capital and TPG plan to stick to the private PEU model. They may sell a part of their management company to a private investor group, but have sworn off an IPO. 

Carlyle is part owned by CalPERS, a pension fund, and Mubadala Development Corp, a United Arab Emirates sovereign wealth fund, which makes the IPO Carlyle's third monetization.

Flash back to 2003, when Tuck Forum stated:

The private equity industry has been a remarkable engine of growth in the United States. The industry's preference for privacy, however, has led to one of its primary challenges: the lack of consistent portfolio valuation and financial reporting. Accurate valuation is becoming more critical as public employee pension plans and other institutional investors increase their stakes in venture capital and buyout funds. 

Center head Colin Blayden added:

There are no standards dictating how a VC firm should account for its fund returns or for the rise or fall in value of its portfolio companies. It's all too common for limited partner investors (LPs) to rant about receiving three different valuations of the same portfolio company from three different venture funds.

Colin Blaydon, a professor at the Tuck School, argues that LPs are often unsure of which number to believe and may even suspect one of the firms is lying to them. This is a problem because LPs must report these numbers to their oversight boards, and, naturally, want them to be accurate.

PEU's addressed the issue in 2004:

"What they're trying to do is to make reporting reflect actual valuations and they've prescribed specific mechanisms in which to do that," said Colin Blaydon, a professor at Dartmouth College's Tuck School of Business, who has provided feedback. "But the proof is in the pudding." 

The now seven year old, moldy pudding says Carlyle is hard to value because of the difficulty in predicting future cash flows.  Scrape off the top and put the pudding on the table.

Carlyle isn't the only PEU hoping to pull a Pete Peterson.  OakTree Capital announced a $100 million IPO.  It went with Goldman Sachs and Morgan Stanley.  Carlyle chose JPMorgan, Citi, and Credit Suisse.  The competition to push PEU stakes is clearly delineated on Wall Street, where the landscape is filled with greed addicts.

Update 6-25-11:  Masters of the Universe are cashing out.  It's all about the carry, which we'll hopefully find in Carlyle's S-1.

Update 6-28-11:  Universe Master David Rubenstein did his usual puffery regarding how private equity beats public companies, except The Carlyle Group is going public, thus eating Rubenstein's proverbial Golden Goose.