Today’s News – Carlyle Group LP (CG) joins the portfolio as a Strong Buy; upcoming Vacation.
Vacation – I will be taking a week off shortly to attend to my family, May 22-28, and therefore not publishing a weekly update on May 28. I’ll be returning emails in the evenings on most days.
Carlyle Group LP (CG)
Today, I’m creating a fourth portfolio category within Cabot Undervalued Stocks Advisor: Special Situations. This will be a portfolio for capital gain opportunities that do not conveniently fit into the other three portfolios.
In 2018, two alternative asset management companies announced that they would convert from limited partnerships to corporations—Ares Management (ARES) and KKR & Co. (KKR)—with positive reactions to their share prices. At that time, their asset management peer Blackstone Group LP (BX) was already ensconced within the Growth & Income Portfolio.
As it became clear that Blackstone was considering converting to a corporation, providing additional potential capital appreciation to shareholders, I was encouraged to also add Apollo Global Management (APO) to the Growth & Income Portfolio. Both companies subsequently announced conversions to corporations in 2019, and their share prices responded well.
By no means do I believe that their capital appreciation potential has skidded to a halt. All of the aforementioned companies are now eligible for inclusion in institutional portfolios, pension funds, mutual funds, and stock market indexes that were not allowed to invest in limited partnership. That’s a lot of potential buying activity that could continue to increase their share prices for several years, until stock market treatment of alternative asset management stocks reaches a “new normal.”
There is one more major player within the alternative asset management peer group, and that’s Carlyle Group LP (CG). The company’s May 1 earnings conference call transcript brought this message from Co-CEO Kewsong Lee:
“I think it’s important to address our current thinking about Carlyle’s corporate structure. Over the past year, we’ve seen several firms in our peer group either announce or complete a conversion to a C corporation from their prior publicly-traded partnership status. At this point, we can say the following; we continue to seriously explore a conversion to a C corporation for Carlyle. The benefits we’ve seen from the conversions have not gone unnoticed. There are many complex operational moving parts in connection with the conversion and we intend to conclude our thinking with a decision in the not too distant future.”
When a CEO runs a publicly-traded company, it’s not enough for them to excel at running their business. They also have a tremendous obligation to their shareholders, which largely plays out by making decisions that can support and grow the stock price. All of Carlyle Group’s major competitors have made a corporate conversion decision that will likely continue to significantly and positively affect their stock prices. Despite the tremendously complicated task of corporate conversion, Carlyle’s CEOs must now follow suit, if at all possible. That’s because very few institutional investors will be motivated to buy CG shares in the future, when they can more easily buy shares in BX, for example, without portfolio restrictions and with fewer income tax complications.
Carlyle Group manages $221 billion, divided among real assets, corporate private equity, investment solutions and global credit. Investors can visit the company’s website to access the May 2019 Investor Presentation and the first-quarter 2019 earnings release.
As stated in the earnings release, Co-CEO Kewsong Lee plans to make “a decision [about corporate conversion] in the not-too-distant future.” It’s time for opportunistic investors to buy CG in anticipation of a potential near-term announcement that could boost the share price, both immediately and over a multi-year period. Strong Buy.