There are some people who believe that Carlyle Group LP’s initial public offering is a sign that the company believes the market will stay strong and that the company's recent profitability will only skyrocket in the next few years.
It’s a valid view. But there’s an equalling compelling alternative opinion. The first six months of 2011 sent asset values soaring, and that boosted performance fees. With strong numbers on the books, Carlyle’s managers are trying to go public while they can, because they know it’s impossible to guarantee stable markets for the next year or two.
The numbers demonstrate just how uncertain you have to be when judging the company’s potential. The private equity firm’s "economic net income," which is what is used as its primary profit metric, is up to $770-million (U.S.) for the first six months of 2011. For all of 2010 it was $1-billion, and then $416-million in 2009 and a loss of $260-million in 2008. Sure, it’s been rising coming out of the crisis, but this spike could be short-lived and any banker knows you should try to strike a deal when dealt a positive spike.
In its IPO document filed with the Securities and Exchange Commission, Carlyle noted that the bump in profit during the past six months has been propelled by much higher performance fees on its traditional private equity assets. These assets have seen valuations rise, and the percentage-based fees have brought in more dollars because of it. Performance fees were $1.2-billion in the first six months of 2011 compared to $114-million in the same period last year. (The fair value of the underlying funds jumped about 15 per cent during the first six months of 2011.)
If the market continues its downturn, however, those asset values could very quickly move in the other direction. Especially considering that assets in the Americas make up two-thirds of Carlyle’s traditional private equity investments.
Still, there have been some longer-term bright spots. For instance, distributions are back up to pre-crisis levels. Carlyle gave away $12-billion during the first half of 2011. When annualized, that number puts distributions much higher than during the boom years of 2006 and 2007. Moreover, the firm has been able to fundraise. From the start of 2008 to June 30, 2011, Carlyle has closed 26 funds with commitments totalling approximately $28-billion.
J.P. Morgan is the lucky investment bank that is leading the IPO.