Friday Letter Market timing

Despite the poor stock performance of its private equity rivals, the time may be ripe for Carlyle to go public. 

On Tuesday, The Carlyle Group took the long-expected step of filing for an initial public offering with the Securities and Exchange Commission, following in the footsteps of The Blackstone Group, Kohlberg Kravis Roberts, Apollo Global Management and other private equity giants that have gone public in recent years.

Not that the stock performance of industry peers has been very promising for Carlyle, which is the second major private equity firm to pursue an IPO in recent months, after Oaktree Capital Management filed in June. Private equity stocks have been battered amid recent market volatility, with Blackstone, KKR, Apollo, Och-Ziff Capital Management and Fortress Investment Group all plunging more than 25 percent year-to-date, according to Renaissance Capital, a Greenwich, Connecticut-based investment advisor.

Despite these disappointing results, Carlyle still has several good reasons to come out with an IPO. In its filing, the firm, which reportedly is looking to raise up to $1 billion with its offering, said it will be using the proceeds to repay debts and fund growth initiatives, acquisitions and strategic investments. In addition, an offering would provide more liquidity to management by monetising some of the carry the firm would expect to receive in future years, as well as facilitating succession planning.

According to one private equity advisor, there’s still an appetite in the market to purchase shares of asset managers, which appear to have held up better than other sectors of the financial services industry, partly because of interest from retail investors to indirectly take part in private equity investments. And overall filing activity has been going strong, with 223 IPOs filed, up 15.5 percent from last year, according to Renaissance Capital.

It also doesn’t hurt that Carlyle, one of the world’s largest alternative asset managers, has been the third fastest growing private equity firm over the past five years. Raising $41 billion of capital during that time period, it is surpassed only by TPG, which has raised $51 billion, and Goldman Sachs, with $47 billion of capital raised, according to Renaissance Capital.

Adding some urgency to the IPO are changes in federal tax regulations with regard to carried interest. Currently, the fees earned by fund managers for assets under management are taxed as long-term capital gains. However, as pressure mounts in Washington to find ways to generate more income to balance the budget, there is a growing likelihood the rules will be rewritten to tax carry as ordinary income. Filing an IPO would allow the carry to be sold as a long-term capital gain, offering a way for a firm like Carlyle to get ahead of the tax law changes, observers noted.

Still, similar to other firms that recently have filed IPOs, Carlyle is expected to hold off on the actual offering – slated to occur sometime in 2012 – until the market stabilises. While volatile markets never present a good opportunity to sell shares, only time will tell if Carlyle’s patience will be rewarded.