“Not a big surprise,” said Tim Loughran, finance professor at the University of Notre Dame who specializes in private equity and initial public offerings. “The market is not interested in the stock. In the past, [Carlyle] made a lot of earnings, but going forward, the market has a limited sense on whether they can continue to make these great deals like Dunkin’ Donuts and Hertz.”
Others cautioned not to read too much into the stock’s behavior on its first day.
The Washington-based private-equity giant had planned to sell its 30.5 million shares — about 10 percent of the company — for $23 to $25. But industry experts said big institutional buyers wanted a lower price, so Carlyle reduced the price Wednesday evening.
With shares priced at $22, the Carlyle IPO raised $671 million, the fourth-largest IPO for a private equity company on record, according to Dealogic, which follows the buyout industry. It is the second-largest U.S.-listed IPO this year.
Carlyle had cast its $23-to-$25 price range as a conservative approach, designed to manage expectations and build the company’s value for the long-term shareholders.
In hopes of reassuring markets, the company had said in regulatory filings that none of its partners will sell any shares at the time the firm goes public. In addition, the firm has self-imposed restrictions on sales that allow its founders and employees to sell only during certain windows.
The company also said in filings that it plans to pay quarterly dividends of 16 cents once it is public, which will help the appetite for the stock and provide an additional income stream for the firm’s partners, all of whom own shares.
Still, many of Carlyle’s private-equity peers have faced headwinds after going public.
Fortress Investment’s stock closed earlier this week at 79 percent below its 2006 offering price; the Blackstone Group was around 56 percent below its IPO price; and Apollo Global Management is around 32 percent below its offering.
Los Angeles-based Oaktree went public last month during a rocky patch in the stock market and saw its shares open below its $43 offering price. Oaktree sold only around $400 million of the more than $500 million in stock it had hoped to sell.
Dan Primack, a senior editor at Fortune.com who specializes in private equity, said he believes the big firms are undervalued.
“I am suggesting Carlyle, Blackstone and KKR are underpriced when you look at what analysts are valuing these firms at,” Primack said. He said that analysts were not counting carried interest and the looming potential for big profits when private equity firms start harvesting profits that have built up in their portfolio companies.
“If you believe Carlyle is about to enter a harvesting phase, from companies purchased in 2005 and 2006 . . . the feeling is that there is going to be a good amount of [carried interest] over the next two years,” Primack said. “I don’t think the street is working any of that money into the firms right now.”
Kent L. Womack, professor of finance at the University of Toronto’s Rotman School of Management, said demand wasn’t strong enough to give the Carlyle stock a boost on its opening.
“The initial demand for shares simply wasn’t strong enough to support an initial pop, and the underwriters understood that in their pricing,” Womack said.
He said the fact that it took more than an hour after the opening bell for Carlyle shares to begin trading was not extremely unusual.
“This happens. It doesn’t happen all the time, but I wouldn’t call it outrageously unusual,” Womack said. “This is not a strong signal in either direction as far as the demand for the stock in the next few days or so. If you are the underwriters’ trading department, you are as happy as can be that you found a price that is stable for an hour or two.”
The three co-founders each took home $138 million last year, according to filings earlier this year.
Carlyle’s value is much lower than in the private-equity industry’s heyday back in 2007, when giant deals funded with cheap credit were the norm. In 2007, Abu Dhabi state investment firm Mubadala paid $1.35 billion for a 7.5 percent stake in Carlyle, valuing the private-equity firm at $18 billion.
California Public Employees’ Retirement System (CalPERS) also owns a significant stake in the firm. The rest is owned by Carlyle’s 100 or so partner/employees.