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Carlyle: Private equity IPO’s are leprosy

(MARKET VIEW) / 14 May 2012

It did not surprise me that the Carlyle IPO was a loser on Wall Street.

 In fact, I want to short both Carlyle and Blackstone. I believe Carlyle’s IPO will struggle to attract public shareholder as it makes a mockery of corporate governance. The founding troika controls the firm and public shareholders have no voting rights. No independent directors in plan. No annual board meetings are planned (why bother since shareholders do not vote). A Carlyle director resolves all conflicts of interest. Want to sue Carlyle in a class action lawsuit. Impossible. Only private arbitration is allowed. Hello? This is medieval corporate governance for a fund that preaches shareholder value at a decibel count heard all over the world.

My other problem with Carlyle is that its strategic shareholder Mubadala, the Abu Dhabi investment house, has lost serious money in the fund since it purchased an almost eight per cent stake in 2007 at a $18 billion valuation, almost three times the current valuation of $6.4 billion on Nasdaq (why would Carlyle not list on the NYSE? You guess). This means that there is a constant risk of a colossal seller.

In any case, Carlyle insiders can repurchase shares from the public at any time. In short, heads I win, tails you lose. Eat your heart out, smart dumb money. The environment for private equity is a disaster in any case. Europe is in recession. Bank debt is becoming scarce. The IPO was launched to reduce debt and allow the founders to become instant billionaires. There is pressure on fund raising worldwide. The wars in Iraq and Afghanistan are winding down (Carlyle made serious money in defense since the 1990’s, the reason it once had Frank Carlucci and John Major on its payroll. Besides, ex-statesmen help open doors in the Middle East). I know this all too well, as I am often on the receiving end of ex-luminaries who once made history struggling to pitch intricate finance complex. Morgan Stanley even hired a MI6 ex-director-general as a client advisor. Yummy.

Carlyle is impossible to value because it owns 200 companies, dozens of different funds, (89 in the SEC IPO filing) holdings in property, hedge funds and mezzanine/buyout funds. Frankly, in private equity funds, the only winner are insiders and a handful of limited partners, not public shareholders. The past proves it.

This is the reason I refused to invest in the Blackstone IPO in the summer of 2007 at $32, even though Pete Peterson and Steve Schwartzman were my boyhood heroes at Wharton. (greed and glory on Wall Street at the old Lehman pre-the Gorilla). The crème de la crème of UAE institutional investors put money in Blackstone while I shorted BX with a vengeance. Blackstone dropped from 32 to $6, to the embarrassment of its white shoe, Wall Street DIFC underwriters. (No names now. I live and trade in their Mount Olympus of haute finance).

Apollo, Fortress and Och Ziff (where GCC sovereign funds were strategic investors) also lost 50-60 per cent since their IPO. Private equity IPOs are leprosy on Wall Street. Period. These were not liquidity events but a liquidity guillotines. Obama, if he wins, will shin alive the private equity IPOs with tax increases. This prospects dictates a short on CG and BX, alas.

Carlyle is a stellar fund house, with $147 billion in assets (the biggest MENA fund is $7 billion in AUM one twentieth the size of Carlyle). Yet the Carlyle IPO’s market cap is only 6.7 billion. Sure, Carlyle is far cheaper than Blackstone, which trades at an unjustified 21 times distributable earnings. Boogie wonderland for the shorts, citoyen et cityonnes!


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