Shares of Carlyle Group LP (CG.O) ended trading almost flat on Thursday, in line with a low-key ceremony to mark its $671 million stock market debut and one day after the private equity firm had to discount its original IPO price range.
Shares closed at $22.05 after opening at $22, the level at which Carlyle priced its IPO after discounting it. Given that shares of all of its major peers ended their first day of trading below their opening price, it was a triumph of sorts in an otherwise underwhelming offering.
Investors are eyeing Carlyle's IPO to gauge how the stocks of financial institutions are valued. Alternative asset managers are the most intricate of investment firms, with the complexity of their internal workings weighing on their valuations.
Carlyle shares opened flat and then climbed as much as 2 percent as they began their debut on the Nasdaq. They hovered above $22 for most of the day but momentarily fell as low as $21.85, below the IPO price, in afternoon trading.
"All year we've seen really the only companies that have done well in this market are high-growth technology companies, consumer names that target the high end and companies with particularly profitable business models," said Jim Krapfel, an equity analyst with Morningstar.
"With Carlyle, it doesn't fit into any of these three buckets and has issues related to its industry such as opaque business models, limited financial disclosures, risks to higher taxation, greater regulatory oversight and a limited partnership structure that places minority shareholders at a distinct disadvantage."
Financial firms have struggled with their IPO debuts so far this year, posting an average first-day return of just 4.9 percent, compared with an average pop of 13 percent across all industries, according to IPO research firm Renaissance Capital.
On Wednesday, shares of EverBank Financial Corp (EVER.N) priced at $10, below the expected range of $11 to $12. The Florida-based lender had also cut its range from $12 to $14, as well as the number of shares on offer to 19.2 million from 25.2 million.
"Financial stocks have the overhang of Europe as well as mortgage and interest rate pressures and it's difficult for these companies to go into the market at a big premium," said Josef Schuster, founder of Chicago-based financial services firm IPOX Schuster LLC. "They're tied to the global business cycle which is quite weak."
Investors point to TPG Capital LP, which has $48 billion of assets under management and has diversified beyond buyouts, as the next major private equity firm likely to go public.
David Bonderman, TPG's co-founding partner, said earlier this year that TPG had no immediate plans for an IPO. But he left the door open by noting that moves by TPG's competitors to go public gave them an advantage in having more capital available to seed new funds and launch more product offerings.
PRIDE IN MARKET PERFORMANCE
Carlyle's 30.5 million share initial public offering was priced at $22 on Wednesday, below its expected price range of $23 to $25 per unit, giving it a market value of about $6.7 billion.
The discount did not directly affect Carlyle's owners as they did not sell shares in the IPO. Carlyle sold about 10 percent of itself by issuing new shares, diluting the owners' stakes. Still, the value of their firm proved lower than they had hoped.
Some large institutional investors were leery about investing in Carlyle because of the poor after-market performance of its peers, according to people close to the deal. Others stayed away from the deal because it would have forced their investors to fill out a burdensome partnership tax form known as a K-1. This further reduced the size of the investor pool on the large deal.
It was important to Carlyle's management team that its own IPO performs well, as the firm prides itself on the after-market performance of its portfolio companies, the sources said.
Carlyle's order book was oversubscribed several times over, said one source, with the top 20 financial institutions - many of them mutual funds - accounting for 75 percent of the deal.
Carlyle, which has taken many of its portfolio companies public since its founding in 1987, had marketed the original price range of its IPO as conservative. Its decision to scale back the price further on Wednesday contrasts sharply with the excitement over Blackstone Group LP's (BX.N)'s $4.1 billion IPO five years ago.
But the performance of alternative-asset management stocks has been lackluster since Blackstone started trading.
Blackstone's shares have tumbled 56 percent since its 2007 trading debut, while Apollo Global Management LLC (APO.N) has declined 32 percent. Oaktree Capital Group LLC (OAK.N), which went public in April, has fallen 6 percent.
Investors often complain that the balance sheets of these firms are too hard to value and that their earnings can rely excessively on carried interest, their cut of their funds' investment profits - which is often both cyclical and volatile.
RUBENSTEIN'S DASHED HOPES
Shares of Blackstone, KKR & Co LP (KKR.N) and Apollo all closed down on their first trading day from their opening price. By finishing trading up, even by just 0.2 percent, Carlyle's shares outperformed.
To be sure, this was achieved in an adverse market that saw the S&P 500 Index .INX drop 0.8 percent on Thursday and the S&P Asset Management and Custody Banks Index .GSPAMCB drop by 1.4 percent.
But it wasn't enough for Carlyle co-founder David Rubenstein to save face. He had told investors during the company's road show that by valuing the firm conservatively, he hoped Carlyle's stock would rise after the firm went public, unlike the selloffs that followed the recent IPOs of its peers.
"Our principal focus in the offering was to attract a large number of highly respected institutional investors who support our emphasis on cash earnings and who will support our efforts to grow the firm over the long term. We think we have accomplished that objective," Rubenstein said in a statement after the market close on Thursday.
Rubenstein, together with the other two Carlyle founders -William Conway and Daniel D'Aniello - stayed behind the cameras on Thursday at the trading opening ceremony at Nasdaq in New York, as representatives from a charity of their choice rang the bell.
Carlyle invited Junior Achievement, the world's largest organization dedicated to teaching financial literacy, work readiness and entrepreneurship to young people, to do the honors.
Unlike Blackstone, KKR and Apollo, Carlyle spurned the New York Stock Exchange for Nasdaq. Carlyle Chief Financial Officer Adena Friedman joined the firm early last year from Nasdaq, where she had worked since 1993, serving in various positions until she became CFO of Nasdaq in August 2009.