Carlyle Group LP (CG:US), the world’s second- largest private-equity firm, failed to provide investors with the big first-day trading gain it was seeking after pricing its initial public offering at a discount to rivals.
The stock, priced at $22 a share in the IPO, less than Carlyle initially sought, closed at $22.05, a gain of less than 1 percent. It was a blow to the company and its underwriters, which sought to avoid the fate of Blackstone Group LP (BX:US), Apollo Global Management LLC (APO:US) and other alternative-asset managers whose stocks have tumbled in public trading.
The firm raised $671 million by selling 30.5 million shares at $22 each, according to a statement yesterday. The price for Washington-based Carlyle, which had offered the shares for $23 to $25, represents a 65 percent discount to larger rival Blackstone.
Investors have struggled with how to value private-equity firms partly because their earnings are hard to predict, with the bulk coming from buyout funds that sell assets at various times.
“Private-equity firms in general struggle with initial public offerings mainly because of the way their business is structured, and Carlyle is no different,” Thomas Murphy, a partner in the law firm of McDermott Will & Emery LLP, said in a telephone interview from Chicago. “The market has just not been receptive to managers taking themselves public.”
Growing ‘Long Term’
David Rubenstein, Carlyle’s co-founder and co-chief executive officer, said in an e-mailed statement that he thinks the firm accomplished its objective in the IPO.
“Our principal focus in the offering was to attract a large number of highly respected institutional investors who support our emphasis on cash earnings and who will support our efforts to grow the firm over the long term,” Rubenstein said.
Carlyle, which oversees $147 billion in assets, sold about a 10 percent stake and is listed on the Nasdaq Stock Market under the symbol CG. The IPO price values the firm at $6.7 billion, or 7.6 times last year’s distributable earnings of $881.6 million, adjusted for the effects of the IPO and the acquisition of AlpInvest Partners NV, according to data compiled by Bloomberg.
Blackstone, by comparison, has a market value of $14.6 billion, or about 21 times its 2011 distributable earnings of $696.7 million. The earnings measure largely reflects profits made from selling companies owned through buyout funds.
Carlyle’s peers have almost universally lost money for investors.
Blackstone, based in New York, has declined 58 percent since raising $4.75 billion in a 2007 IPO. Fortress Investment Group LLC (FIG:US) and Och-Ziff Capital Management Group LLC (OZM:US), which held their own U.S. IPOs that year, have since lost 80 percent and 74 percent. Apollo, whose shares were previously traded on a private exchange run by Goldman Sachs Group Inc., held a $565 million U.S. share sale in March 2011 and has lost 35 percent since then.
“It hasn’t been an easy road for private equity,” Reena Aggarwal, a finance professor at Georgetown University’s McDonough School of Business in Washington, said in a telephone interview. “The firms are getting pressured on fees, they’re getting pressured on fundraising and they have dry powder that investors want them to invest.”
The exception is KKR & Co. (KKR:US), which has gained 29 percent since moving its listing to the U.S. from Amsterdam in July 2010. The company didn’t hold an IPO, choosing instead to combine with its publicly traded European fund.
In marketing its deal, Carlyle had touted its record of taking companies public in private discussions with investors, according to a person familiar with the meetings. Seven of the 11 U.S. IPOs the firm led for portfolio companies since 2010 are trading above their initial prices.
As of yesterday, Carlyle-backed companies such as Dunkin’ Brands Group Inc. (DNKN:US) and Nielsen Holdings NV had gained 72 percent and 27 percent, respectively, since their IPOs and rose 38 percent and 13 in the 30 days after going public, according to data compiled by Bloomberg. The 11 companies that Carlyle has taken public in the U.S. since 2010 gained an average of 4.5 percentage points more than the Standard & Poor’s 500 Index (SPX) in the first 30 days after their debuts, Bloomberg data show.
JPMorgan Chase & Co., Citigroup Inc. and Credit Suisse Group AG led Carlyle’s offering, whose proceeds will go toward paying off debt.
Co-founders David Rubenstein, Bill Conway and Daniel D’Aniello, who started the firm 25 years ago, didn’t plan to sell any of their personal holdings in the IPO. Each was to own about 15 percent of the firm following the offering, or about 47 million shares, according to a regulatory filing (CG:US). Those stakes are now worth $1.04 billion apiece.
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