Carlyle, the private equity group preparing to go public on Nasdaq, raised money from a shareholder late in 2010 only to then pay most of the proceeds out to its shareholders in the form of a dividend, according to regulatory filings.
The relationship with Mubadala Development Co, an Abu Dhabi-based sovereign wealth fund, illustrates the difficulty valuing private equity partnerships ahead of Carlyle’s initial public offering.
In December 2010, Mubadala lent Carlyle $500m in return for subordinated notes that paid 7.25 per cent interest and could convert to equity at a later date. It also received an additional 1.8 per cent stake in the group, lifting its total stake to 9.3 per cent.
At the time, the Washington-based group said that “among other things, the investment proceeds will be used to expand product lines and offerings to Carlyle’s investors”. It then paid $398.5m in dividends to its shareholders, equivalent to just under four-fifths of the proceeds, the filing said.
Such dividend recapitalisations are a way to extract value from a business without surrendering ownership. Founders William Conway, Daniel D’Aniello and David Rubenstein own around 60 per cent of Carlyle and do not intend to sell shares in the IPO, due in the second quarter.
However, the deal with Mubadala was in part made to correct an overly optimistic valuation put on the group when the sovereign wealth fund purchased 7.5 per cent of Carlyle at the height of the private equity boom, according to people familiar with the situation.
In 2007, Mubadala paid $1.35bn for the stake, valuing Carlyle at $18bn, which said that was a 10 per cent discount to the $20bn valuation the two parties had agreed upon. Mubadala also put $500m into an investment fund managed by Carlyle.
Carlyle declined to comment; Mubadala did not respond to a request for comment.
Carlyle has since repaid half of the $500m borrowed from Mubadala. As of September 30 2011, the Carlyle partnership had assets of $4.5bn, excluding those related to collateralised loan obligation assets it manages for clients, according to regulatory filings. Against that, it had about $700m of loans and debt outstanding, compared with cash and cash equivalents of $713m.
Many companies have issued loans and bonds to fund dividend payments, often to private equity sponsors, and stock buybacks when the capital markets are robust. At $56.5bn, 2011 was a record year for this type of issuance by companies with ratings below investment grade, as demand for these assets soared in the first part of the year, according to Standard & Poor’s Leveraged Commentary & Data, a research group.
In the second half of 2011, as concerns about Europe’s debt problems escalated, demand for risky assets fell and issuance dried up.
This year, as markets rebounded, shareholder-friendly loan and bond issuance has picked up, with nearly $20bn of such issuance so far this year, S&P LCD said. These type of deals were also popular at the height of the credit boom during the past decade, when issuance totalled $56.2bn in 2006 and $55bn in 2007.
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