IPO Preview: The Carlyle Group

| About: The Carlyle (CG)

Based in Washington, DC, Carlyle Group (NASDAQ:CG) scheduled a $732 million IPO with a market capitalization of $7.3 billion at a price range mid-point of $24 for Thursday, May 3, 2012.

CG is one of six IPOs scheduled for the week of April 30th. (Full IPO calendar here).

Notice that CG's S-1 is 460 pages, which is a bit much.

Manager, Joint Managers: J.P. Morgan; Citigroup; Credit Suisse.

SUMMARY
$500 million of debt to be repaid was incurred from the sheikdom of Dubai, originally in December, 2010 to pay cash dividends to CG shareholders. If CG is so great why did Dubai force a repayment in March, 2012 a month or so before CG's IPO to repay the re-financed debt?

Also, Carlyle says it will IPO at a discount to other alternative investment managers, based on Carlyle producing $862 million in distributable earnings for 2011. Those earnings, however, cannot be considered recurring in any way, and probably were inflated for the IPO.

And, CG is parading around saying it is developing a new credit platform that will generate recurring earnings. However, CG has no proprietary intellectual property in that area, and whatever they do can be duplicated quickly, if it is successful, by Blackstone (NYSE:BX) and other industry competitors.

VALUATION
Except for price to distributable earnings (probably inflated CG for 2011) IPOdesktop can find no real or significant discount to peers, as suggested by CG's management in its road show.

And the sector has been weak in the last 30 days.

max % stock

Stated

Mrkt Cap /

chg in last

Equity*

Bal Sh Equity

30 days

Blackstone

$4,670

3.4

-18%

Oaktree Capital Group (NYSE:OAK)

$1,137

5.2

-9%

Carlyle

$817

8.9

Apollo (NYSE:APO)

$726

2.3

-11%

Fortress Investment (NYSE:FIG)

$487

3.9

-4%

*from balance sheet in SEC filings & Google Finance
Click to enlarge

BUSINESS
CG is one of the world's largest and most diversified multi-product global alternative asset management firms.

Since CG firm was founded in Washington, D.C. in 1987, CG has grown to become a leading global alternative asset manager with approximately $147 billion in AUM across 89 funds and 52 fund of funds vehicles.

CG has 1,300 employees, including more than 600 investment professionals, in 33 offices across six continents, and serves over 1,400 active carry fund investors from 72 countries. Across CG's Corporate Private Equity and Real Assets segments, CG has investments in over 200 portfolio companies that employ more than 650,000 people.

ORGANIZATIONAL STRUCTURE
CG's business is currently owned by four holding entities: TC Group, L.L.C., TC Group Cayman, L.P., TC Group Investment Holdings, L.P. and TC Group Cayman Investment Holdings, L.P. - the 'parent entities.'

The Parent Entities are under the common ownership and control of senior Carlyle professionals and two strategic investors that own minority interests in the business - entities affiliated with Mubadala Development Company, an Abu-Dhabi based strategic development and investment company ("Mubadala"), and California Public Employees' Retirement System ("CalPERS").

The organization chart is complicated. IPOdesktop doesn't like complicated organizational charts.

Also, Mubadala forced a repayment of investment of $500 million which was financed by CG borrowings, the repayment of which is the use of funds.

If CG is such a great deal, then why did Mubadala force a re-payment of its that portion of its investment just before the IPO?

CASH DISTRIBUTION POLICY
CG expects to pay quarterly distribution of $0.16 per common unit, which is a 2.7% annual return at the price range mid-point of $24. But CG could pay more, see below.

"In addition, we currently anticipate that we will cause Carlyle Holdings to make annual distributions to its partners, including The Carlyle Group L.P.'s wholly owned subsidiaries, in an amount that, taken together with the other above-described quarterly distributions, represents substantially all of our Distributable Earnings in excess of the amount determined by our general partner to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and our funds or to comply with applicable law or any of our financing agreements.

"We anticipate that the aggregate amount of our distributions for most years will be less than our Distributable Earnings for that year due to these funding requirements." S-1 p92.

The quote above gives CG considerable latitude regarding the actual payout rate. To IPOdesktop the quote sounds like a 'trust us' statement, which is not exactly bankable.

If in fact CG had paid out all it's distributable earnings for 2011 then the dividend rate would have been 11.8%, which is very different from the stated policy of a 2.7% annual return.

USE OF PROCEEDS
CG expects to net $691 million from its IPO. The funds are allocated to repay re-financed debt.

Where did the debt originate?
In December, 2010 CG $500mm borrowed from Mubadala. Those notes were fully redeemed in March 2012, from additional borrowings…read more.

Mubadala's December, 2010 investment was used to pay dividends to CG shareholders. "The 2010 Mubadala investment was a non-recurring transaction that resulted in a distribution to the existing owners of the Parent Entities in 2010." S-1 page 93

If CG is so great then why did Mubadala force a repayment a month before the IPO?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This CG IPO report is based on a reading and analysis of CG's S-1 filing which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.