- As Seeking Alpha contributor Stone Street Advisors correctly points out in their post(http://seekingalpha.com/article/320660-carlyle-group-ipo-is-the-juice-worth-the-squeeze-glencore-redux), the fact that savvy investors are issuing stock itself indicates that they feel the market will overvalue them. One may contend that this is true for ALL issuers(maybe another reason why IPO returns are low), but looking at the post IPO records of financial service firms like Goldman Sachs and Blackstone, it does not inspire confidence. However, given that President Obama may treat hedge funds as a separate taxable entity instead of a pass-through partnership for tax purposes, Caryle may be in a hurry to raise funds before that proposal becomes law and leads to a steep hike in its tax bill. Hence, the market conditions timing argument may not hold water
- Corporate governance limits typical to other PE firms:-Strictly speaking, Carlyle Group L.P is a limited partner, and as the name indicates, it has limited liability(and therefore limited rights). While it is but natural that limited partners cannot "remove" the general partner, the prospectus takes it to the other extreme and does not allow public shareholders to appoint directors on their own behalf of Carlyle Group L.P. Also, typical to the banking industry which prefers counterparties to clients, any fiduciary duty of the general partner towards the limited partners is eliminated.
- Unit holders have uncontrollable tax liabilities without assurance of compensating dividends: The Carlyle Group L.P. will be treated as a partnership for U.S. federal income tax purposes, and unitholders will be taxed on their pro-rata share of items of income, gain, loss and deduction in computing their U.S. federal income tax liability. Yet, in the event of profits, they are not assured of adequate cash distributions to meet the same. While the company may yet declare to avoid unit price erosion, that is a material risk, especially for large unit holders.
- Squeeze out provisions at market value without premium if declared as investment company under the U.S. Investment Company Act of 1940:-Besides the regular squeeze out provisions if public holding falls to 10% or less, there is another clause allowing the General Partner to purchase all public interests at the outstanding market price(or if greater, the highest price paid by it during last 90 days). This does not envisage takeover premium, and imposes a substantial tax risk on shareholders, for no rational reason without compensation.
Tuesday, February 7, 2012
The Caryle Group IPO governance/tax analysis
The above analysis is based on the Jan12 prospectus filed with the SEC(read it http://www.sec.gov/Archives/edgar/data/1527166/000095012312000638/w83442a2sv1za.htm), and the only reported amendment till then is that they have dropped the statutory arbitration for resolving disputes. But a host of other governance and valuation issues remain. My analysis on the IPO is as follows