A new metric: For successfully transforming the way investors perceive alternative asset managers by applying new valuation metrics and undertaking a global roadshow to explain its differentiated investment philosophies, Carlyle Group’s US$671m float is IFR’s US IPO of the Year.
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The Carlyle Group faced steep challenges when it first indicated its intention to go public in early September 2011.
The goal was to create a financial institution that would stand the test of time and shift from its partnership roots to a public company, akin to the transition undertaken by investment banks in the 1990s and more recently by other alternative asset managers.
The most glaring obstacle was the poor performance of the private equity IPOs that preceded Carlyle and the flawed methodologies by which they went public. Blackstone Group (2007), KKR & Co (2010) and Apollo Global Management (2011) had all lost money for equity investors post-IPO. Underlying their lacklustre returns was investor uncertainty over valuation methodologies and, more specifically, how much credit should be ascribed to unrealised carried interest.
JP Morgan, Citigroup and Credit Suisse, the trio of banks assigned to lead the Carlyle IPO, sought to differentiate the manager from its rivals in several significant ways.
Important to that effort was the introduction of the “distributable earnings” metric as the primary methodology of valuation rather than the historic but more vaporous “economic net income” metric. The former measures highlighted cash generation, overcoming concerns about the often lumpy nature of earnings streams generated from exiting private equity investments.
To further distinguish itself, Carlyle and the underwriting banks conducted five days of pre-marketing that targeted 12 institutions and permitted longer, more in-depth discussions about the firm and its investment philosophy. Building on that momentum, the formal IPO roadshow some months later ran a full 15 days and featured three management teams that canvassed four continents.
This resulted in 138 one-on-one meetings with institutions and 16 group meetings. Carlyle reached more than 350 investors in total.
Carlyle COO Glenn Youngkin said the teams covered “every country you could throw a dart at”.
The marketing effort culminated in the pricing of 30.5m limited partnership units in May at US$22, below the US$23–$25 marketing range. The effect was to value the firm at a slight discount to Blackstone on the basis of ENI, but roughly a 30% discount on the newer DE, or cash, metric. If the DE metric, whose introduction is generally credited to Credit Suisse analyst Howard Chen, was not used, it is likely that a more severe discount would have been necessary.
“If we hadn’t proposed the cash valuation strategy I am sure it would have priced at a 15%–20% discount to peers because investors would not have understood how to value the company,” said Liz Meyer, JP Morgan’s head of Americas ECM.
Carlyle also offered investors a prospective dividend yield of 8.9%, nearly 350bp more than Blackstone and highlighting the sector’s yield generation potential. The ability to offer an attractive yield also supported Carlyle’s contention that its diversified platform of 89 funds and 52 funds of funds could generate more predictable cashflow than other managers.
Since going public, Carlyle has moved even more aggressively to make new investments and harvest gains on older investments. In the third quarter, its first full quarter as a public company, Carlyle realised US$5.1bn from carry funds, nearly half of the US$11.9bn realised in the year to date and including the sale of interests in companies such as Alliance Boots, AMC Entertainment, Three Rivers and Goodman Global. It has also made large investments in Genesee & Wyoming, Getty Images and Party City, among others.
“If you only have two faucets that are turned on [private equity] is very lumpy,” Youngkin said. “But if you have 50 faucets the flow is more consistent. We have so many faucets we can turn on.”