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Why Carlyle’s IPO Doesn’t Excite Investors

Without robust M&A and IPO activity, there's little growth ahead for private-equity firms


Last night, private-equity powerhouse Carlyle Group (NASDAQ:CG) priced its IPO at $22, which was below the $23-to-$25 range. So far in today’s trading, the stock is up only 0.5%. In all, Carlyle raised $671 million. The lead underwriters included JP Morgan (NYSE:JPM), Citi (NYSE:C) and Credit Suisse (NYSE:CS).

While Carlyle employs some of the world’s best dealmakers, it had a tough time selling its own offering. IPO investors were worried about the aftermarket performance, as seen with other lackluster private-equity deals, such as Blackstone Group (NYSE:BX), Apollo Global Management (NYSE:APO) and Fortress Investment Group (NYSE:FIG).

Why the concern? Private-equity operators can be volatile because they depend on fees from corporate transactions, such as public offerings and mergers and acquisitions. This activity has been muted over the past couple years.

Another issue is that the leaders of the top private-equity firms are getting close to their retirement ages. In the case of Carlyle, Daniel D’Aniello is 65, and William Conway and David Rubenstein are both 65. They have all been managers since Carlyle’s founding in 1987.

When analyzing a private-equity firm, investors generally look at distributable earnings, which exclude compensation and other one-time items. Based on this, Carlyle’s valuation looks fairly cheap, trading at 7.6 times distributable earnings. This compares to 21X for the Blackstone Group.

Yet unless M&A activity and IPOs come roaring back, investors should not expect much growth from Carlyle.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.

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