The Carlyle Group wants to be valued like Blackstone. Is it a fair request?
The Carlyle Group keeps crawling toward an initial public offering, so it can join its listed private equity brethren like The Blackstone Group (BX) and Kohlberg Kravis Roberts & Co. (KKR).
The latest iteration is a Bloomberg report about how Carlyle is “trying to convince” analysts that their firm should be worth at least as much as Blackstone. We assume that’s the $15.25 billion Blackstone was worth before its shares fell more than 9% in mid-day trading. And certainly not Blackstone’s $16.37 billion enterprise value at the time of its its June 2007 IPO — a moment that many private equity investors believe was their market’s apex.
So, does Carlyle deserve the comp it’s asking for?
As of last year, I would have said no. The California Public Employees’ Retirement System (CalPERS) bought a 5.5% stake in Carlyle a while back, and valued the position through Q2 2010 at $334 million. That was an enterprise value of around $6.07 billion, compared to Blackstone’s June 30, 2010 mark of nearly $11 billion. Blackstone obviously gained ground in the subsequent year, thanks largely to rising public equity prices that impacted carrying values of both public and private holdings. And it’s safe to assume that Carlyle experienced a similar bump, but not the type of exponential increase required to help it close the gap with Blackstone.
Today, however, I think Carlyle might have a better case.
Publicly-traded private equity firms need three things:
- 1. Highly-diversified business lines, which make them look more like asset management firms than private equity firms.
- 2. Large PE-like funds (buyout, real estate, etc.) that produce stable fee income without significant redemption risk
- 3. A track record of producing strong PE-type returns, which will keep the aforementioned fees flowing.
On the first point, Carlyle has taken giant steps over the past year. The largest was its acquisition of AlpInvest, a €32 billion Dutch fund manager that suddenly gave Carlyle an enormous fund-of-funds, secondary and co-investment business. But take a look at all these other firm-focused moves:
- Acquired a majority stake in $4.5 billion hedge fund Clarion Road Asset Management
- Added $5.2 billion in CLO assets, via multiple transactions
- Launched a $250 million energy mezzanine business
- Raised its first China-focused funds
- Established a joint venture to invest in Peru
- Launched a mid-market private equity effort
- Launched effort to invest in sub-Sarahan Africa
- Acquired a minority stake in investment bank Sandler O’Neill
Carlyle now has nearly $155 billion in assets under management, which is nearly identical to The Blackstone Group’s $159 billion. This includes 19 PE-type funds raised since 2007 at an aggregate value of around $36 billion, according to CapitalIQ. It also has two small funds currently in market, and Bloomberg suggests it soon will begin marketing a new global buyout fund targeted at $10 billion (this process has not yet begun, according to a longtime Carlyle limited partner). In other words, ongoing fee income is strong.
Carlyle’s returns also have been impressive. The firm reports that it returned $7.5 billion to investors last year, and CalPERS reports that its flagship buyout funds match up fairly well with Blackstone. Just look at this data, as of Dec. 31, 2010:
- Blackstone Group:
Invested $835 million in Blackstone IV (2003) and Blackstone V (2006)
Realized and unrealized value = $1.1 billion - Carlyle Group:
Invested $744 million in Carlyle IV (2005) and Carlyle V (2007)
Realized and unrealized value = $924 million
Carlyle under-performs Blackstone a bit here — 32% paper increase vs. 24% — but not by a rate that would cause it to have difficulties raising future funds. And, yes, I’m assuming similar fee structures.
To be sure, Blackstone also has made some major moves over the past year. It continues to bulk up its flagship private equity fund (plans are to close by year-end on more than $16 billion), raised its first RMB-denominated fund, acquired Brazilian alternative asset manager Patria and reportedly entered talks to buy Merrill Lynch’s remaining property investment portfolio. But Blackstone did it major bulk-up and diversification a while back, and it’s reasonable to believe that Carlyle has now closed the gap.
So don’t be surprised if the analysts give Carlyle what it asks for. Whether the public markets have any interest in a new financial issuer in these tumultuous markets, however, is much more debatable.