The Carlyle Group filed for an initial public offering on Tuesday that would allow it to join rivals Blackstone and KKR as listed private equity firms, but the filing comes amid deep uncertainty on global equity markets.
The U.S. IPO market has struggled as concerns about Europe's debt crisis and a weak recovery in the United States have made markets volatile. A number of deals were pulled last month.
Not only does Carlyle's business model depend on using the public markets as an exit for its portfolio companies, but it is now trying to bring itself public.
"If Carlyle files in this time frame, in basically a market meltdown, something doesn't seem right," said Scott Sweet, senior managing partner at IPO Boutique.
The market conditions and the poor performance of other listed private equity players like Blackstone Group and Apollo Global Management, and the complex listing of Kohlberg Kravis Roberts & Co may also dampen investor appetite.
"There is going to be pricing pressure for this deal, given the weak demand for financial IPOs and the performance of the listed companies," said Josef Schuster, founder of Chicago-based IPO research and investment house IPOX Schuster.
Shares in Blackstone, currently valued at $14.6-billion, have dropped by a third since a near three-year high in late-April.
Carlyle's filing with the U.S. Securities and Exchange Commission lists an offering size of $100-million, though that may be a placeholder amount. Sources said in June the offering could be as large as $1-billion.
If Carlyle moves ahead with an IPO as quickly as possible, it could sell shares late this year. However, a flotation early next year would avoid the holiday doldrums and give the market more time to recover, said Steven Kaplan, a finance professor at the University of Chicago who specializes in private equity.
"This is probably a mildly bullish signal about next year," Mr. Kaplan said. "They wouldn't be doing this if they thought we were in the fall of 2008."
Still, the timing of the filing raises questions. Investors in the last six weeks have shied away from the U.S. junk bond market, and instead flocked to U.S. Treasuries and other lower-yielding assets that are considered safer, Bank of America Merrill Lynch data show.
Junk bonds are often used to finance buyout deals. Firms like Carlyle could be in a challenging position if both the IPO market, which provides an exit, and the junk bond market, which provides financing for new deals, are struggling.
Carlyle was valued at $20-billion in September 2007, before the credit crisis sent stock markets sliding.
The buyout firm said it generated economic net income – a measure of profitability used by private equity firms – of over $1-billion last year and around $770-million in the first half of this year.
Blackstone's second-quarter economic net income was $703-million.
Carlyle will be managed by its general partner Carlyle Group Management LLC, which intends to make quarterly dividend payments to common unit holders.
Carlyle Group's expected IPO will put the firm, historically famous for its Washington connections, firmly into the public eye and fulfill a long-time goal to become a publicly traded global brand.
Carlyle has been famed – and sometimes criticized – for its political connections and a history of having Washington heavy hitters on its payroll.
"We were seen by many as a shadow government ... a Trilateral Commission and that we were out to rule the world," co-founder David Rubenstein said at a conference in 2004.
Carlyle is controlled by its senior managers and investors which own minority interests in the business – Mubadala Development Co, an Abu-Dhabi based strategic development and investment company, and California Public Employees' Retirement System (CalPERS).
Private equity companies and hedge funds typically give little, if any, power to shareholders in decision making.
"Investors have to be very comfortable with the fact that they are just a speck of sand on the beach when it comes to having any say in what's going on with the company," said David Menlow, president of IPOfinacial.com.
Carlyle, founded in 1987 by David Rubenstein, Daniel D'Aniello and William Conway, said it currently manages about $153-billion in assets – versus Blackstone's $159-billion.
The buyout firm told the U.S. Securities and Exchange Commission in a preliminary prospectus that JPMorgan, Citigroup and Credit Suisse are underwriting the IPO.
Carlyle has invested in companies including Dunkin Brands, Alliance Boots and Freescale Semiconductor.
The filing did not reveal how many units the company planned to sell or their expected price.