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Industry shrugs off Carlyle's pre-IPO payout

Multiple industry sources agree Carlyle owners did nothing unusual in using the proceeds from a $500m loan primarily to pay themselves, but some have questioned Carlyle’s public description of the borrowings in 2010.

Carlyle’s use of borrowed money to distribute proceeds amongst its owners is not an uncommon – nor particularly sensational – event in the private equity world, according to multiple industry sources, including a number of private equity lawyers.  

Last week Carlyle was caught in the headlines when an amended S-1 IPO filing revealed its owners, which include founders David Rubenstein, Daniel D’Aniello and William Conway Jr, received a $398.5 million payout. The distribution was financed by a $500 million loan Carlyle took out from Abu Dhabi-backed investment group Mubadala, a partial owner of Carlyle, in 2010.

The pre-IPO payout was first reported by Bloomberg, which suggested Carlyle owners took some money off the table to protect against the “vagaries of a public offering”. 

David
Rubenstein

Several sources defended Carlyle’s actions, saying the private partnership, expected to float sometime this year, deserved to set any capital structure it wanted. 

“As long as the public knows what the terms are before they buy into Carlyle, they can set the table whichever way they please,” said one Washington DC-based private equity lawyer. 

However, a few sources criticised the firm for taking on debt that will need to be repaid by future shareholders. The move was likened to a “dividend recapitalisation”, in which leverage is added to a portfolio company’s capital structure to finance a dividend payout to its private equity owners. 

At the time of the loan, Carlyle said in a statement the money would be used “among other things… to expand product lines and offerings to Carlyle’s investors” without disclosing any further financial details. Some industry sources said the statement represented a poor choice of words on the part of Carlyle. 

As long as the public knows what the terms are before they buy into Carlyle, they can set the table whichever way they please

Carlyle declined comment, but a source close to the firm said the language was clear the loan would be used for purposes as Carlyle saw fit. 

The updated regulatory filing with the US Securities and Exchange Commission revealed Carlyle repaid its Mubadala loan by borrowing money from its revolving credit facility, which was increased to $750 million last September from $150 million. Carlyle first repaid half the loan last October, and paid the remaining half earlier this month, according to the filing.  

If not repaid, Mubadala had the option of converting the notes to equity, in effect diluting the stakes of other Carlyle equity holders, a source close to the firm said. Moreover, by using capital from its bank loan agreement to repay Mubadala, Carlyle was able to reduce its debt service costs, the source said. 

The Mubadala debt paid interest at an annual rate of 7.25 per cent and was convertible into Carlyle shares at a 7.5 per cent discount to the IPO price, according to the filing. 

Carlyle intends to use some of the proceeds from its IPO to repay part of its revolving credit facility borrowings, the filing said.