Rubenstein won’t easily snatch Schwarzman’s crown

September 6, 2011

By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It won’t be easy for David Rubenstein to snatch Steve Schwarzman’s private equity crown. Rubenstein’s firm, Carlyle Group, manages about $150 billion of assets, roughly the same as Blackstone. But Carlyle reaps considerably less of the steady fee income that comforts investors. That means its valuation when it goes public is likely to wind up well short of Blackstone’s.

Carlyle, whose funds own companies including BankUnited, Freescale Semiconductor, and Hertz, has been handing back money to investors in its nearly 90 funds at a healthy clip. In the first half of this year, it distributed $12 billion. That’s on top of $8 billion last year. Since raising its first private equity fund in 1990, Rubenstein’s shop boasts a gross internal rate of return on its funds of 31 percent.

But the sector as a whole has struggled to win over investors since Schwarzman blazed the trail to the public markets at the top of the cycle in 2007. Unitholders find succor in the steady management fees buyout firms charge on assets but have remained skeptical about the investment performance-linked income that differentiates private equity from traditional asset managers like, say, T Rowe Price.

Take Blackstone’s market capitalization of about $15 billion. Assume the firm’s management fees in the year to June, after subtracting more or less fixed costs, are worth a multiple of 18. That implies investors value its performance fees, or “carry,” net of variable compensation costs, at only a little more than three times. Apply the same basic methodology to Carlyle based on the initial public offering disclosures filed on Tuesday, and it would be worth only about $7.5 billion.

Carlyle’s greater weighting toward performance fees is good for investors in the funds it manages but not necessarily for owners of the management company. Of course, Blackstone may not be getting full credit for its carry — and Carlyle’s float sometime in 2012 could start changing how investors think about performance fees across the whole sector. Carlyle’s recent acquisition of Dutch fund-of-funds business, Alpinvest, also means its management fee income will increase.

Still, Rubenstein has his work cut out. Carlyle may be able to claim more consistent investment returns than some rivals. But for now at least its numbers make it seem a riskier prospect than Blackstone. That will leave it playing catch-up where valuation is concerned.

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