The Carlyle Group: IPO Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Ways of valuing the organization:

There are two methods for valuing the organization, one is based on Earning Net income (ENI) and the other is based on distributable income, the difference between the two is summarized below:

ENI is composed of management fee plus the performance fees and also the addition of investment income however; it also involves the elimination of consolidated funds that belongs to fund investors, to which the Carlyle and Unit holders has no claim.
On the other hand, distributable income is based on the removal of any unrealized components of ENI and is a sum of management fee, realized performance fees and realized investment income.

However, both methods with results relevant for valuation would be the distributable income as it helps to ascertain the amount of cash earnings available for distribution as dividends to unit holder. Hence these cash earnings would be of value to the existing and potential investors, who would be willing to view the type of return that could be expected from investing in the organization, that’s why distributed income is the best method for valuation.

Quantitative analysis:

The two methods are utilized in arriving at a valuation for the organization, which is as follows:

Price to distributable earnings is based on the fact that it values the cash earning component of net income, which is available for distribution to unit holders. It is stressed that both management and performance fees variable deserves a different multiple as it’s a fact that management fee is certain due to which it deserves to be valued at a higher multiple between 14x and 16x. Similarly, performance fees is based on the outcome of the fair value for the liquidated investment that is a highly uncertain variable due to which it deserves a lower multiple of below 14x. Consequently this implies that there is a high discount rate for realized performance income while the lower discount rate for the management fee income. Similarly, the valuation reflects the risk profile and growth of both sources of income.

The calculations for the implied performance income multiple is determined as follows:

Calculation of Implied Performance Fee (PF) Multiple

MGT Fee% MGT Fee Multiple PF% PF Multiple P/DE, 2012

Appollo 14% 15 86% 5.6 6.9x

Blackstone 69% 15 31% 9.5 13.3x

KKR 60% 15 40% 12.3 13.9x

Average 9.1

Carlyle 15% 15 85%

As analyzed above, the average of Peer companies is taken in arriving at a multiple of 9x for the performance income valuation.

Moreover; the 15x multiple is used for the management fee income as it deserves a higher multiple.

The result of the calculations is shown below:

Based on above calculations, it gives a value of 1479 million for the MGT Fee value based on the multiple of 15x while the value of 5087.5 for PF Value based on 9x multiple.

Although it is still appropriate to value, the management fee using the multiple approach however; the DCF (Discounted Cash flow) method seems to be the best method for valuing the performance fees income, first it values the earning of carried interest on existing investment that is yet to be received and secondly, it values the future carried interest expected to be received on future investments.................................

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