Q. You tout the managerial-discipline, incentive-alignment and cost-saving benefits of taking companies out of the public equity markets. Yet you’re going public with your own company. Aren’t you just obviously destroying value to top-tick the market???
A. No, no, it’s not like that, see …
Q. TOP. TICK. THE. MARKET.
A. You got me. Never mind.
If this line of thinking resonates with you – and, like, I guess, right? – then you should get a certain amount of joy out of this:
Carlyle Group LP, the Washington- based buyout company that’s preparing to go public, is seeking to bar its future shareholders from filing individual and class- action lawsuits.
The firm revised its governing documents last week to say that investors who purchase company shares must settle any subsequent claims against Carlyle through arbitration in Wilmington, Delaware. That could limit the ability of stockholders to win big awards for securities-law violations such as fraud, several attorneys said.
Bloomberg, and Steven Davidoff at DealBook, have some fun with the question: can they do that? (Answer: maybe not!) Also with the question: isn’t that kind of mean? Davidoff writes:
Carlyle’s shareholder-unfriendly acts are in line with arguments made against shareholder governance. Academics and practitioners who support Carlyle’s view argue that shareholder empowerment does not create value, since shareholders have divergent interests and incentives and are too short term in outlook to effectively govern a public company. Instead, companies should be run by boards of directors who are incentivized to focus on the company’s long-term interest. And shareholder litigation is simply the domain of plaintiffs’ lawyers and abusive class-action “strike suits.”
But he basically comes down on the side of “nah, Carlyle are a bunch of dicks.”
I don’t know! I’m kind of with Carlyle here. Like, for one thing, shareholder litigation really is simply the domain of plaintiffs’ lawyers and abusive class-action “strike suits.” (You can disagree, but not in the M&A context, where 99% of the lawsuits are worthless nuisances. One imagines Carlyle gets a lot of those.) Why would you want to deal with that if you don’t have to? More broadly, if you’re all about optimizing businesses, why not optimize legal structure to avoid pointless nuisances if you can get away with it, even at the cost of some hurt feelings and bad press.
But more than just freeing themselves from nuisance, Carlyle are showing admirable – though, I mean, sure, also Monty-Burns-esque hands-rubbingly evil – conviction in the private equity model. You can read Carlyle’s message here – basically “fuck off, public shareholders” – as sort of an image problem at a time pas when that other private equity guy is running around creating image problems left and right. But you can also read it as a nice bit of intellectual consistency, which might help Carlyle make its case to public company managements that things really are better when you don’t have pesky shareholders running around suing you all the damn time.
There are more direct practical advantages too. We’ve mentioned this IPO before and there are some neat things about it. Carlyle, versus other public PE firms, is pretty undiversified: 67% of its 2011 revenues (as of Q3) come from corporate private equity, with the rest mostly from real estate and infrastructure private equity and a thing called “global market strategies” (hedge funds, credit, etc.). It gets a lot of its money from good old-fashioned carry, and wants you to like it for that instead of ignoring it like you were otherwise planning to do. Like, they sort of advertise themselves as a private equity firm, y’know? If you want a financial conglomero-nonsense that makes money from something other than buying and selling companies, look elsewhere.
This might I guess make me sad if I were a shareholder into filing irritating hopeless resolutions. But it might make me happy if I was, say, an LP in their funds. The Carlyle S-1 says:
[W]e have fiduciary and contractual obligations to the investors in our investment funds and we expect to regularly take actions with respect to the purchase or sale of investments in our investment funds, the structuring of investment transactions for those funds or otherwise that are in the best interests of the limited partner investors in those funds but that might at the same time adversely affect our near-term results of operations or cash flow.
Well, hey, the Blackstone S-1 says that too. (Indeed many of the shareholder-unfriendly features of the Carlyle partnership agreement are pretty standard-issue for public PE firms; the arbitration clause is what breaks new ground.) But the math is I think pretty simple: the more thoroughly a PE firm brushes away any obligations to its shareholders,* the more it can give its undivided loyalty to the LPs in its funds.** Carlyle has set itself up so that it has fiduciary duties to its fund LPs, not so much to its public shareholders. Similarly, while the shareholders are forced into arbitration, that is as far as I know not market in LP investor agreements. The arbitration provision, if it’s enforceable, makes it harder for shareholders to complain that Carlyle is being long-term greedy for its LPs, which makes it easier for Carlyle to treat its LPs nicely. That brings it LPs! The LPs bring it money! The money goes to shareholders! Or, I mean, it doesn’t, and then they can’t sue and are just hosed, but nobody’s perfect. The rest of that chain is bulletproof.
Carlyle Group Form S-1/A [EDGAR]
* I mean, “public limited partners in the management company” or whatever. Y’know, shareholders.
** I mean, undivided except for the regular-way conflicts of “we want more money for ourselves,” but I’m going to assume that those are a constant and the LPs and shareholders get to divide the residual.