The Carlyle Group Goes Public: Why the Stocks Won’t Thrive

Zachary Karabell explains why he thinks its stock won’t thrive.


The Carlyle Group, a Washington-based private-equity firm that manages in excess of $150 billion, is going public. That, at least, is the intent of the company, which has filed papers with the Securities and Exchange Commission to set the process in motion. While it isn’t likely to happen before early 2012, the announcement generated a fair amount of attention. And the reason is that Carlyle evokes not just images of Wall Street titans, but of a shadowy nexus of money, politics, and power that hovers just under the radar of public awareness.

Carlyle’s core private-equity business is relatively simple and straightforward. It invests in private or public companies that its partners believe are undervalued. Its most recent success was the public offering of Dunkin’ Brands, owner of Dunkin’ Donuts, which went public in June to the tune of nearly $500 million.

But it isn’t doughnuts that agitate people. It’s two decades of Carlyle doing deals involving military contractors and employing figures such as former defense secretary Frank Carlucci, former president George H. W. Bush, former British prime minister John Major, the brother of French President Nicolas Sarkozy, and a host of others. It’s the fact that its operations until now have been shrouded in secrecy, largely because it has been a private company with no obligation to disclose much of its doings. And for muckrakers, like Michael Moore in his successful film Fahrenheit 9/11, Carlyle offered the perfect symbol: a small elite pulling the levers of power, becoming obscenely rich while the rest of the United States stagnated.

No doubt Carlyle enjoys a cozy relationship with the corridors of power. With its main offices in Washington as opposed to New York, it has been positioned to invest in “the military-industrial complex,” and although that is only a portion of its overall business, it has been a lucrative one. Within the Pentagon’s bloated $700 billion budget, there are many mouths being fed, and Carlyle has done well. With its revolving set of well-connected directors both in the U.S. and abroad, it has had access to information and deal flow, and it has had more hits than misses.

None of that, however, raises it to the level of conspiracy and shadow. That nexus may be disturbing, but it is part of our current system. There are thousands of companies, large and small, that benefit from the massive spending of the U.S. government, and the Pentagon has now been joined by the homeland-security industry as a major source of pork. Carlyle is one of many, many others that profit from that.

It is impossible to imagine a system that spends trillions of dollars (say, the U.S. federal government) that doesn’t benefit someone. Military contracts from the early days of the republic have been embroiled in controversy. The Civil War era was rife with graft, and Harry Truman made his name in the Senate investigating companies for skimming a bit too much profit from World War II government contracts. Carlyle is not some new, dark development. It is the latest actor in a long drama.

What’s more, the example of its nearest competitors, such as the Blackstone Group and Fortress, should tell would-be investors that while these businesses yield profits for the partners and the individuals and institutions that invest in the fund, they tend to be lousy stocks. Going public is a way for these firms to generate excess capital to allow partners to cash out or the firm to expand. But because of complicated tax structures designed to shield much of the income, the profits don’t flow easily to equity holders, and the stocks have done poorly.

And as a further blow to the shadow gazers, if Carlyle really were part of a quasi-legal nexus, the last thing it would want to do is go public. That exposes it to intense scrutiny and significant disclosure requirement. Of course, any conspiracy theorist worth his salt would say that it is all smoke and mirrors, designed to give the appearance of transparency to a gullible and gulled public. It’s hard to argue against that, given that it rests on the lack of evidence and a surfeit of paranoia. All that we do know is that by filing to go public, Carlyle—like any company—exposes itself to a host of regulations and a glare of publicity, and if its business truly relied on the shadows, going public would be ill-advised at best.

Here, as elsewhere, the problem is what’s legal. Carlyle benefits from cozy relationships and a propitious tax code, and is part of a trend that has seen capital released from many of the bonds that tethered it to a national economy. Much of its business is now global, with the Abu Dhabi investment authority infusing it with billions. All of that is perfectly aboveboard. Were it in the context of a thriving domestic U.S. economy, we could say no harm, no foul. Instead, it is in the context of anything but.

Dark theories are a distraction from simple truths, namely that the past two decades have privileged capital to an extraordinary degree and disadvantaged any reliance on wages. The challenge, for Obama in his speech on Thursday and for the United States, is that you can’t put the genie back in the bottle. Hobbling Carlyle, for instance, wouldn’t magically help American workers. Indeed, the irony is that for something like CalPERS, the California teachers’ pension fund, Carlyle's doing well in its initial public offering would benefit workers, because CalPERS owns 5 percent of Carlyle. So you can’t shift the balance between capital and labor by hobbling capital, however appealing a target Carlyle and its brethren are. Its IPO announcement is ill timed in light of the current morass of U.S. employment, but as appealing as it is as a symbol to take down, it is just another company—large, successful, but not nearly the force that its detractors or its supporters might like to believe.