US NEWS: On the public bandwagon

The Carlyle Group made headlines last month when it filed for an initial public offering with the US Securities and Exchange Commission. It also raised a few eyebrows for the timing of the move, which comes as the shares of listed private equity firms have been battered.

To be sure, Washington, DC-based Carlyle is one of the largest and most diversified alternative asset managers in the world, with approximately $153 billion in assets under management. It also has been the third fastest-growing private equity firm in the past five years, raising $41 billion in capital during that period, according to PE Connect.

About eight percent, or $12 billion, of Carlyle’s assets under management are held in the firm’s 11 active real estate funds, which focus on investment opportunities in Asia, Europe and the US. Its latest fund, Carlyle Realty Partners VI, is expected to close on $2.5 billion in commitments during the fourth quarter, according to sources.

“The motivation for going public is clear,” said Jim Sullivan, managing director of Green Street Capital Advisors, an independent research and consulting firm focused on real estate securities. “By going public, they avail themselves of a broader menu of capital raising opportunities by getting access to the public equity market.”

In its filing, Carlyle – whose co-founder, David Rubenstein, hinted at plans to take the company public as far back as 2007 – said it would use the net proceeds of the offering to repay outstanding debts and for general corporate purposes, including operational needs, capital commitments to its investment funds, growth initiatives and strategic acquisitions and investments, such as purchases of new teams or product groups. The firm said it intends to raise $100 million through the IPO, although that figure represents only the calculation of the registration fee and not the total target amount, which is expected to be much higher.

“The timing is harder to get your hands around,” said Sullivan. “The equity market is uncertain, to say the least. It’s harder for a company to bring an IPO to the finish line just because investors are so skittish.”

Indeed, Carlyle’s decision to file for an IPO comes at a time when the stocks of industry rivals have been battered by recent market turmoil, with Apollo Global Management, The Blackstone Group, Kohlberg Kravis Roberts & Co and Fortress Investment Group all down more than 25 percent year-to-date.
Carlyle declined to comment on its IPO filing, but one source familiar with the matter said the firm will go public “only if market conditions are good.” While the asset manager indicated in its filing that it expected to hold its IPO next year, the firm is prepared to wait longer if market volatility continues.

As with any private equity firm seeking to go public, “there are negative consequences from a management standpoint” for Carlyle – most notably greater transparency requirements, said Sullivan. While some firms are prepared for the additional scrutiny, “some are uncomfortable to have the spotlight shined on them by the public market,” he added.

As a listed company, Carlyle also would need to answer to public shareholders that are often focused on short-term quarterly earnings, which potentially could clash with the firm’s long-term investment focus. In its filing, however, the asset manager said its private fund investors will continue to come first, which “is in the long-term best interests of Carlyle and its owners, including our prospective common unitholders.”