Did Carlyle Group Backstop IPO with Debt to Pay-off Founders?

Carlyle Group Founders: William Conway, Daniel D’Aniello and David Rubenstein.

In a story sure to give presidential contender Mitt Romney more heartburn on the campaign trail, Bloomberg News is reporting that Carlyle Group LP loaded up with debt nine months before it filed its IPO in a play to pay its founders.

Of course the bond deals are standard operating procedure in the private equity sector even if they have the “appearance of impropriety” given the political season. However, by financing the dividend side of the deal with debt, “Carlyle’s founders can receive the full amount without facing an immediate tax bill, and without having to sell shares in the IPO.”

Bloomberg’s reportage also highlights how the deal mirrors so-called “dividend recapitalization” relied on by private equity managers to extract cash from the companies they acquire. Of course this leaves Carlyle’s future shareholders responsible for servicing the debt.

But Matthew Pieniazek, an adviser to banks that are involved in the contemplated IPO reportedly wondered why Carlyle made such a play. “IPOs are not guaranteed. They were willing to give up some of the upside for the certainty of a distribution,” he said.

In short this dividend recap is a play to create a payment distribution to the founders while circumventing taxes, but the downside is that these high rollers are leaving that debt load for future shareholders to pay. Bloomberg also notes that this is not the first time Carlyle has used this strategy. The private equity firm relied borrowed money in the past to pay its investors dividends before taking holdings public.

In fact, dividend recaps were used when “Dunkin’ Brands Group Inc. borrowed $1.25 billion in 2010 to pay $500 million to owners Carlyle, Bain Capital LLC and Thomas H. Lee Partners LP. Dunkin’ went public last year in a $486 million share sale.”

And here’s where the heartburn comes in for Mr. Romney since he was a onetime high roller at Bain Capital even though he left the firm long before the Dunkin dip.

At the end of the day, however, these devices have long been used by private equity players in the high stakes M&A game and without these maneuvers, liquidity would not be available since the capital markets are far too restrictive to inure players against inherent risks if a deal goes bust. It may look rather nefarious from the outside looking in, but successful merger transactions and initial public offerings often turn out for the betterment of all.

After all, look how well tech wizards like Google and FaceBook are doing today when these types of dividend plays were used to get them off the ground in their salad days.

Kyle Colona is a New York based freelance writer and a Feature Writer for the Compliance Exchange and Wall Street Job Report. He has an extensive background in legal and regulatory affairs in the financial services sector and his work has appeared in a variety of print and on-line publications.

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