Carlyle investors should prepare for rocky ride

Stock Market Predictions

NEW YORK (Global Markets) - Carlyle is facing a tough market and if recent history is any guide, once it goes public, its shares will be volatile.

Investors have been shattered by recent economic turmoil, and that fate has been amplified in the share prices of publicly traded private equity firms. Shares of Blackstone Group (BX.N) have lost more than half of their value since their June 2007 IPO. Apollo Global Management (APO.N) is down about 37 percent since its March IPO.

Meanwhile, KKR (KKR.N), which transferred its listing to New York from Amsterdam in July 2010, is up by 15.5 percent. Charts of all three stocks show dramatic swings in share price.

There is no reason for Carlyle to be any different. Private equity returns are notoriously volatile and Carlyle is heavily exposed: 36 percent of its revenue comes directly from its corporate private equity business.

"Private equity companies are unique in that you either believe in the senior professionals and are along for the ride or you don't invest," said Richard Truesdell, a New York-based capital markets partner at law firm Davis Polk.

Northwestern University finance professor Yael Hochberg agreed: "This should eventually pay off, but not in the short term," she said.

Carlyle last week filed paperwork for an initial public offering of up to $100 million. It is expected to come to market in the first half of 2012 as an offering of roughly $1 billion.

TOUGH MARKET

Private equity firms' ability to realize gains is tied to the economy because economic conditions determine a firm's ability to do new deals and to exit old ones, said Steven Kaplan, a University of Chicago professor who specializes in private equity. "A KKR, a Blackstone, a Carlyle -- their stocks will be tied to the economy," he said.

Fears about Europe's sovereign debt crisis are easing but U.S. economic recovery remains disappointing. The Federal Reserve last month said it would keep interest rates ultra-low until at least the middle of 2013.

The VIX, which measures market volatility and is often used as a proxy for investors' level of worry, is over 30. Some bankers say that when the VIX climbs over 25 it can be hard to do IPOs, which is one of the major ways that firms exit their investments.

The IPO market shut down at the end of July and has yet to reopen. The spreads on leveraged loans have widened.

Carlyle declined to comment.

(Reporting by Clare Baldwin in New York, editing by Matthew Lewis)