The Carlyle Group: Value Investor's Dream

03/31/2017 2:50 am EST


Todd Shaver

Founder and Editor-in-Chief,

One of the world’s largest private investment firms, The Carlyle Group LP (CG) owns 250 companies and boasts more than $160 billion in assets under management, observes Todd Shaver, growth and income expert and editor of

Activities include management-led  buyouts, minority equity investments, real estate, venture capital, and leveraged finance opportunities.

There are two reasons that Carlyle’s shares have been a major disappointment in recent years, but all that is about to change, making Carlyle Group’s stock a value investor’s dream.

First, the business model is very complex. Carlyle executes complex transactions with long investment-cycles. It can take 7+ years for Carlyle to raise money, invest it, exit the investment, and finally give back the money to investors with a return.

Wall Street does not like the lack of visibility here, or anywhere for that matter. But all that is changing. Each passing quarter that Carlyle pays the dividend, proves the business is printing profits month in and month out.

The company paid out a dividend of $1.69 in 2013, $2.01 in 2014, $2.19 in 2015, and $1.81 in 2016. This is an absurd greater-than-10% yield at current levels.

Second, with the post-election focus on comprehensive tax reform, the topic has been raised as to whether Carlyle Group should be contemplating converting to a C Corp from a publicly traded partnerships (PTPs).

Alternative Asset Managers pass through certain qualifying income untaxed at the corporate level (e.g., carried interest, investment income, interest/dividends).

Accordingly, shareholders receive a K-1 and have to file taxes on that income on their own. This creates a whole mess of operational challenges.

One in particular is that a retail investor buying Carlyle stock have to pay taxes on the Carlyle dividend stream even if they own the stock in their IRA. As a result, many mutual funds can’t buy the stock.

The bottom line is this, if Carlyle does switch to a C Corp structure, then we will see earnings dilution of 10-20%. On the other hand,  there will be a large increase in the number of investors who can now buy the stock. What a catalyst!

Carlyle Group is a value investor’s dream. It’s a top investment franchise. It employs the who’s who of business. Year in and year out we are seeing evidence of reliable profits in the dividend stream.

People love to hate it because it’s a complex business. But there is a smart crowd buying the stock here as the value looks particularly compelling, especially with potential catalysts on the horizon.

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