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Investors Punish Carlyle Group

by David C. Erroll
Eyes On Wall Street |

The market for initial public offerings has been heating up since early this year. But with so much investor interest in newly minted issues, one has to wonder why Carlyle Group, the private equity investment partnership with a well-heeled Rolodex that includes the Bush family, France's Sarkozy family, and Britain's John Major, would have to scale back its asking price.

But that is just what happened. Rather than price Carlyle Group's IPO between $23 and $25 - figures that company executives had for months called conservative - underwriters closed the transaction at $22 per share on the evening of May 2, 2012. One reason that should not be overlooked is the blind faith in management that Carlyle Group demands on the part of its shareholders.

While the last year has seen an erosion in shareholder rights in many corporations, Carlyle Group's governance structure is truly draconian. Shareholders will have no ability to elect members of the governing board and there is no plan for annual shareholder meetings. Carlyle Group board members will bear almost no fiduciary duty to the company, with the board allowed to act in its sole discretion and without even the fig leaf of a "good faith" requirement.

Carlyle Group was forced under intense pressure from investors and the SEC to scrap its most contentious proposal - a term that would have forbidden shareholder class actions and forced all disputes into confidential arbitration. But the reduced IPO price realized by the Company may be an even more effective message that companies that fail to provide for meaningful governance will be punished by the markets.