Tuesday, January 10, 2012

Tax Wise: Carlyle Group NonProfit for Billionaires

The Carlyle Group's latest IPO filing bolstered its virtual nonprofit status.  Of nearly $920 million in net income, Carlyle paid Uncle Sam $25.7 million, a corporate income tax rate of 2.79%.

Carlyle co-founders and investors bear the tax burden, discounted via preferred carried interest taxation.  Here's the breakdown:

Billionaires Rubenstein, Conway and D'Aniello are the three largest equity holders of Carlyle.  They stand to make billions more from monetizing their holdings.

Our founders currently have no immediate plans to cease providing services to our firm, but our founders and other key personnel are not obligated to remain employed with us. In addition, a portion of the Carlyle Holdings partnership units that certain of our key personnel will receive in the reorganization, as described in “Organizational Structure,” will be fully vested upon issuance.

After going public, this troika will continue to make executive compensation decisions, not the Board of Directors.  The S-1/A states:

Compensation Committee Interlocks and Insider Participation

We do not have a compensation committee. Our founders, Messrs. Conway, D’Aniello and Rubenstein, have historically made all final determinations regarding executive officer compensation. The board of directors of our general partner has determined that maintaining our current compensation practices following this offering is desirable and intends that these practices will continue. Accordingly, the board of directors of our general partner does not intend to establish a compensation committee. For a description of certain transactions between us and Messrs. Conway, D’Aniello and Rubenstein, see “Certain Relationships and Related Person Transactions.”
Add the Equity Incentive Plan, also under co-founder control via a double delegation move:

The board of directors of our general partner will administer the Equity Incentive Plan. However, the board of directors of our general partner may delegate such authority, including to a committee or subcommittee of the board of directors, and the board intends to effect such a delegation to a committee comprising Messrs. Conway, D’Aniello and Rubenstein.

What the Egyptian Army couldn't do, Carlyle's co-founders accomplished.  The state of their pay is solely in their hands.  NASDAQ shareholders' place is helping them cash out.  PEU boys know best.

Update 1-11-12:  Crain's Business finally picked up Carlyle's preferred tax status as a PEU, which I noted in September 2011.  The S-1/A stated “If we were taxed as a U.S. corporation, our effective tax rate would increase significantly.”

Update 1-19-12:  NYT finally noticed Carlyle's shareholder unfriendly IPO   Better late than never.

Update 2-2-12:  The latest in Carlyle's unfriendly IPO, shareholder wise.

Update 4-9-13:  Carlyle's non-founders talked about the taxes the public company pays.