21 September 2007

Abu Dhabi Buys Into Carlyle

The Carlyle Group has just sold 7.5% of its equity to an arm of the Abu Dhabi government.

Specifically, the buyer is the Mubadala Development Co., which paid $1.35 billion for the stake. Oddly, the two parties announced that this deal values the whole of The Carlyle Group at $20 billion.

Really? If 7.5% of an enterprise's equity is worth paying $1.35 billion, then a straightforward calculation suggests the parties implicitly value the whole enterprise at $18 billion. Is my math wrong, or is theirs?

My math is right, backed up by my trusty Texas Instruments toy. Their calculation isn't so straightforward, though. They've announced that Mubadala is getting a 10% "liquidity discount" off what would otherwise have been the fair market value for their purchase. A liquidity discount? As in "Carlyle needs the money NOW"???

Carlyle is a very prominent private equity firm -- it owns Dunkin' Donuts, Nielson, and a maker of automobile seats, Britax. This spring, around the time of the Blackstone frenzy, there was talk that Carlyle, too, would go public. But the great market volatility of the summer seems to have put the kibosh on that, so it's evidently selling itself piecemeal.

Actually, there's a lot else that might have had the effect of putting on ice Carlyle's hopes for an IPO this year. There's the continuing debate in Congress about the taxation of carried interest. That debate seems to have been stoked by Blackstone and the honchos at Carlyle simply may not wish to be similarly provocative.

So, yes, Carlyle does need the money NOW. They can't wait until markets calm down and/or the political heat goes away to have their IPO and raise their hypothetical $20 billion. And the 10% liquidity discount is a disturbing sign of how bad the credit crunch has become.

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.