The firm found some of its first investors in the Middle East, including the Saudi royal family and owners of the Saudi Binladin Group, the Jeddah-based construction company founded by Osama bin Laden's father, Mohammed. Carlyle returned the family's money after the Sept. 11, 2001, terrorist attacks.
The firm has weighed an IPO since at least 2007 when larger competitor Blackstone Group LP went public. As financial markets started to collapse, Carlyle instead agreed to sell a 7.5 percent stake to Mubadala, an investment vehicle owned by the Abu Dhabi government, for $1.35 billion in September 2007. Mubadala got a 10 percent discount and received protection against a drop in the value of its holdings.
Mubadala made the second investment in Carlyle in December 2010, buying $500 million in debt convertible into Carlyle stock at a 7.5 percent discount to the IPO price. Carlyle agreed to pay an interest rate of 7.25 percent and give Mubadala a 2 percent equity stake valued at about $200 million, an expense booked as an "upfront cost" to secure the debt financing, according to the firm's registration statement with the U.S. Securities and Exchange Commission.
Carlyle refinanced half of that debt in October, a month after filing to go public and securing a bigger credit line from its banks. Carlyle borrowed $265.5 million under the expanded credit agreement to retire $250 million face amount of the notes. Carlyle paid Mubadala a $10 million premium, a fee that is often assessed when bonds are retired ahead of time, and $5.5 million of accrued interest.
The private equity firm may repay the balance of Mubadala's debt before the IPO, according to a person familiar with Carlyle's plans who asked not to be identified because the matter is private. If it doesn't, Mubadala would be entitled to convert the debt into Carlyle stock at a 7.5 percent discount to the IPO price.
Private companies typically pay interest rates of about 13 percent to 14 percent when taking out so-called mezzanine loans that rank behind senior debt, such as bank loans, when it comes time to being repaid, according to James Hill, who heads the private equity practice of the law firm Benesch LLP in Cleveland.
While the interest Carlyle is paying is low in comparison, the equity stake makes it expensive for current owners. Carlyle has about 100 partners who own a piece of the company. The three founders own more than half.
"As long as Carlyle goes public, it is a pretty big win for" Mubadala, Hill said in an interview. "If they hadn't gone public, it wouldn't have been as big a win because you own two percent of a privately owned management company and who knows what that is worth over time."
The sale was subject to Calpers waiving pre-emptive rights that it received under a February 2001 agreement to invest in Carlyle, according to a Feb. 14 SEC filing. Calpers also had to consent to the deal between Carlyle and Mubadala, the filing shows.
Carlyle's previous IPO plans had been set back in 2007 when a publicly traded credit fund sponsored by the firm fell victim to the housing crisis. Carlyle, which unsuccessfully tried to rescue the fund, had obtained an $875 million credit line at that time from a banking consortium led by Citigroup.