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Abu Dhabi’s Mubadala humbled in Carlyle IPO

Abu Dhabi’s Mubadala humbled in Carlyle IPO

Alternative asset management firm Carlyle’s IPO filing, exposes Mubadala’s rocky involvement with the US company. At least the Abu Dhabi company will walk away with M&A expertise, says Una Galani.

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September 7, 2011 3:12 by



Carlyle’s IPO filing exposes Mubadala’s pain. The Abu Dhabi fund may have lost up to half the value of its $1.85 billion signature investment into the US private equity firm, despite clawing back some of the losses last year on its original 2007 punt. The final valuation will remain unclear until Carlyle prices its shares, but the outcome is unlikely to spare the emirate’s blushes.

Mubadala initially bought a 7.5 percent stake in Carlyle for $1.35 billion at the top of the cycle four years ago. Public valuations of the sector have since plummeted. And when Abu Dhabi invested a further $500 million into Carlyle last year, the emirate managed to extract a 10-year convertible bond with the same face value, paying an annual 7.25 percent coupon, as well as 2 percent equity interest — essentially thrown in for free.

But Carlyle might only be worth around $7.5 billion, according to a Breakingviews calculation based on the market capitalisation of rival Blackstone. Abu Dhabi would need to end up with about 25 percent of the entire Carlyle group to break even on its investment. Yet the IPO filing states that Mubadala will not be able to own more than 19.9 percent of the firm on a fully diluted basis.

Put another way, the $1.35 billion Mubadala paid for 9.5 percent of Carlyle implies a $14.2 billion value for the group. Assuming Mubadala’s $500 million bond converts into shares of the same value, Mubadala would only breakeven if Carlyle were worth $14.7 billion. To reach that, Carlyle’s performance fees, or “carry”, would need to be valued at a multiple of 8 — compared to the 3 at which Blackstone trades, according to a Breakingviews analysis.

Abu Dhabi’s bond will convert at a 7.5 percent discount to the final IPO price, and Mubadala may have benefited through some of its undisclosed direct investments in Carlyle’s funds. Yet it’s unlikely to be enough to recover the paper loss. The investment has also brought limited strategic benefits to the emirate compared to other bets, like the $8 billion joint venture Mubadala formed with General Electric in 2008.

While Abu Dhabi may walk away with some acquired M&A expertise and, potentially, a board seat, these come at a rich price.

CONTEXT NEWS

– Carlyle Group, the private equity firm, filed for an initial public offering on Sept. 6, putting it closer to joining rivals Blackstone, KKR and Apollo on public markets.

– Abu Dhabi’s Mubadala has invested $1.85 billion into Carlyle over four years, in two tranches. The Abu Dhabi fund bought an initial 7.5 percent stake in the private equity group for $1.35 billion in September 2007.

– In December 2010, Abu Dhabi paid a further $500 million. In exchange, Mubadala received a 10-year subordinated convertible bond of the same value and an additional 2 percent equity interest. Details of the investment were not revealed at the time.

– According to the terms, the $500 million bond pays an annual 7.25 percent coupon and converts at a 7.5 percent discount to IPO price if a listing takes place within five years.

– Mubadala will not be able to sell its…

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