Carlyle will convert to C-corp, offers single class shares – updated

The Carlyle Group is the latest listed private equity firm to switch its ownership structure from a publicly traded partnership to a full C-corporation.

The move is expected to improve liquidity in the firm, which has $222.7 billion of assets under management as of June 2019. The conversion is expected take effect on 1 January 2020.

Carlyle joins the other firms to make the switch after the passage of the 2017 US tax law that lowered the highest corporate tax from 35 percent to 21 percent. Over the last year,  Apollo Global Management, Blackstone, KKR and Ares Management have announced their decisions to convert to C-corps.

On the firm’s Q1 earnings call, chief executive Kewsong Lee said that “the benefits we see from the conversion have not gone unnoticed”, and that Carlyle would make its decision “in the not-too-distant future”.

The move will institute a one-share one-vote structure for all private and public unitholders, with a fixed annual dividend initially set at $1 (paid quarterly) for all shares for 2020. This sets the firm apart from KKR, Blackstone and Apollo, which offered dual class shares in their respective C-corp switches.

“The path we’ve chosen is differentiated and positions us in the best way to drive long-term value,” Carlyle co-chief executives Kewsong Lee and Glenn Youngkin said in a statement. Along with attracting new investors, conversion provides a fixed dividend that enables improved capital allocation and shareholder alignment, the pair said.

“This move towards more transparency and more alignment just fits in with all the things investors in our funds are absolutely looking for,” Youngkin said on the firm’s second quarter earnings call on Wednesday.

With the move, Carlyle expects to get into the more than $3 trillion passive index universe and expects to realise more than $700 million in potential passive investment demand for Carlyle Group shares via various benchmarks.

The firm’s founders hold approximately 136 million units, or 40 percent of total outstanding units, and other Carlyle non-founder partners and employees, both current and former, hold around 90 million or 26 percent of the total outstanding units.

On conversion, governance changes include pro rata voting rights for common unitholders (approximately 30 percent currently), while senior employees’ shares will be voted as a block (about 60 percent at conversion date).

The fixed dividend will also provide capital for Carlyle to “invest in growth”, according to a slide presentation. This includes developing and expanding into growth areas, including credit, pursuing scaleable acquisitions, and expanding its footprint.

Carlyle has $83.9 billion in private equity assets under management, and raised $8.3 billion in the 12 months ending 30 June – almost 75 percent less than the $32.8 billion raised in the prior period.

Carlyle deployed $4.2 billion in new and follow-on private equity investments in the second quarter, and had announced an additional $1.5 billion in equity commitments which are expected to close in future periods, according to a presentation.

The private equity portfolio generated a net internal rate of return of 18 percent and a return on invested capital of 2x for the 12-month period ending 30 June.

Carlyle raised $3.5 billion in new capital across strategies in the second quarter, effectively passing its four-year $100 billion fundraising goal. It also expected to raise $20 billion overall in 2019, chief financial officer Curtis Buser said on the earnings call.

This story has been updated with more details on Carlyle’s private equity activity after the firm’s Q2 earnings call on Wednesday.