In Carlyle Group I.P.O., Shareholders Are Wary of Losing Favor The Carlyle Group, one of the world's largest private equity firms, is brimming with deal makers who have made billions for themselves and their fund investors. Yet they appear to be struggling to persuade people to buy into their most important deal yet - an initial public offering of the firm. Carlyle filed for an offering in September. Five months have passed, and the firm just added at least five more banks to its list of underwriters, according to Bloomberg News, apparently in an effort to help sell the offering. Carlyle's move may be a sign that potential investors are balking. That's surprising given that the firm initially filed to sell only $100 million of shares in the company. While this number may be revised higher, this is a very small I.P.O. So why is Carlyle apparently having such a hard time? For one, it is not alone. While the coming Facebook debut might suggest a robust I.PO. market, many other companies are struggling to get their offerings out of the dock. Since Oct. 1, 41 companies have delayed or withdrawn their I.P.O."s, according to Dealogic. Yet Carlyle has also sustained self-inflicted wounds. The firm sought to adopt an extremely aggressive provision in its charter that would have barred its public investors from suing in court over corporate misconduct and securities fraud. Carlyle sought to require that all future investor actions be arbitrated instead. All such proceedings would be confidential, and class-action lawsuits forbidden. If Carlyle succeeded in pushing through this provision, the net effect would be to eliminate the ability of its public owners to challenge wrongdoing by officers and directors. Carlyle backed down and withdrew the provision last month in the wake of public criticism and resistance from the Securities and Exchange Commission. But it has left potential investors wary. And investors already had reason to be gun-shy based on past experience with Carlyle's private equity competitors. Four big alternative asset managers have gone public in the last four years: the Fortress Investment Group, the Blackstone Group, Kohlberg Kravis Roberts & Company and Apollo Global Management. Of the four, only K.K.R. is now trading above its first-day I.P.O. opening price. The share price of Fortress, the first of these fund managers to go public, has collapsed. Fortress's market capitalization at its opening reached $12.4 billion, but the company is now worth only about $1.9 billion. Blackstone, which went public amid much hoopla in 2008, is also trading at about half its I.P.O. price. Apollo went public only last year and is down almost 25 percent from its I.P.O. price. This poor performance, to be sure, reflects the effects of the financial crisis, which hurt profits in their underlying funds. Yet shareholders bear the brunt of the downturn because of the structure of these public alternative asset managers. These firms make their money by charging management fees, but also by collecting carried interest. This is the roughly 20 percent take that private equity and hedge funds collect on profits earned from their funds. Carried interest profits are down significantly from the supersize profits that private equity earned before the financial crisis. The consequence is that the public investors in Blackstone or K.K.R. have been hit much harder than those who invested in the firms" funds. This is a fundamental problem of publicly traded private equity firms. In a typical company, directors have fiduciary duties to operate the firm to the benefit of shareholders. This is not the case in public private equity firms. These firms have structured themselves so that they are run by their managers, who do not have the normal duties to put shareholder interests first. As a result, managers may be more likely to look first and foremost after the investors in the funds operated by these firms. After that, they have themselves and their own compensation to look after. In particular, there will be pressure in the firms to pay compensation similar to what was paid when they were private, compensation that was among the highest on Wall Street. When push comes to shove, are these managers going to favor themselves and their fund investors or shareholders? The evidence thus far is mixed. While the firms appear to be earning money and paying dividends, if their fund performance were as bad as their stock performance, they would be out of business. And while Blackstone and Fortress initially promised that they would place a priority on dividends for public shareholders, Carlyle has not even bothered to make such a guarantee. Blackstone also cut its dividend to shareholders when its results weakened. Carlyle borrowed $500 million from Abu Dhabi's sovereign wealth fund, the Mubadala Development Company, to pay its managers a $398.5 million dividend, according to a recent report by Bloomberg. The company has negotiated an additional right with its creditors to distribute another $400 million to its managers prior to its I.P.O. This is debt that will be paid back by Carlyle in the future, reducing earnings for public shareholders. Investors" fear that their interests will not come first is exacerbated by the attitude of Carlyle and the other firms toward shareholder rights. Shareholders appear to be an afterthought. In the case of Carlyle, public investors have no say in Carlyle's management and no vote. The other firms take similar stances. If shareholders appear to be such a problem, why is Carlyle even going public? The answer can be found in a recent statement by a Carlyle co-founder, David M. Rubenstein: "When you create value, ultimately you want to liquefy and get the benefit of that." In other words, the impetus behind this I.P.O. is not to create value or raise capital to expand the company, but for Mr. Rubenstein and other insiders to cash out. Given all this, potential investors in Carlyle are apt to think that the Carlyle managers are more interested in selling their stakes at the right time than in creating long-term value for public investors. Here again, there is evidence. Both Fortress and Blackstone sold at the top of the market. Blackstone's co-founders, Peter G. Peterson and Stephen A. Schwarzman, pocketed almost $2.5 billion from selling part of their holdings in the offering. All of this is before potential investors even examine the business case for these companies. These businesses are opaque and difficult to understand. Carlyle's prospectus has 144 pages of financial statements alone. The halcyon days of private equity appear far distant. Private equity is becoming a tougher business as the low-hanging fruit - inefficient companies - becomes harder to find. These firms, meanwhile, are trying to transform themselves into broader platforms by providing more types of investments. While Blackstone appears to have been particularly successful so far in this endeavor, it is unclear whether the other firms will also transform themselves. Ultimately, the big holdup for public investors in a Carlyle I.P.O. may be their fear that the deal makers end up cutting the best deal for themselves, not shareholders.