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Carlyle IPO: Can You Trust Private Equity Companies That Go Public?


If you missed your chance to buy the IPOs of Blackstone Group (BX) or Fortress Investment Group (FIG) in 2007 you're in luck, the private equity bigwigs at the Carlyle Group (proposed ticker: CG) are looking to go public. In filings made Monday, the once exclusive and secretive firm is set to raise over $700m in an IPO as soon as early May, according to a Bloomberg estimation.

Publicly traded Private Equity firms have often performed abysmally for shareholders. The aforementioned Blackstone and Fortress both peaked on their first day of trading and haven't seen those levels since. The reasons PE firms go public are obvious; they cash out partners, sell non-controlling stakes, and raise cheap capital. The question for shareholders is why should you buy what smart people are selling?

"Before you jump in on this one you really have to get a perspective on the little kabuki dance that's going on between private equity and the public market," says Jack Ablin, chief investment officer at Harris Private Bank.

"They tend to dump and run," he adds, referring to the PE firm endgame of taking a company private, nurturing it, then selling, generally via an IPO. Ablin suspects partners at Carlyle are playing much the same game with their own shares, opining that the CG IPO is "more of a shorter term opportunity than a long term partnership with the public markets."

That being the case, investors need be cognizant of the fact that they are not actually investing "alongside" Carlyle partners, they are giving existing partners liquidity with which they may do as they choose. CG didn't become mysterious, powerful and rich by selling what's theirs at a discount.

Ablin doesn't think Carlyle or its predecessors in the private to public game have any perfect timing on the market as a whole in terms of when they sell-out. What he does think is that "there is perfect timing on their own valuation." In other words, Carlyle is selling their own top.

It's something of a miracle that people widely thought to be brilliant are able to find a market selling assets they know much better than the buyer, yet it's a tried and true formula for success. The burden of proof is on Carlyle Group to prove that their IPO is less an attempt to cash out than it is a chance to bring shareholders into their previously private ranks.

Unless CG is able to do so investors are better off taking a pass.

Do you trust Carlyle and its private equity predecessors that have gone public? Let us know your thoughts in the comment section below or visit us on Facebook.