Companies whose initial public offerings (IPOs) take the form of limited partnerships (LPs), rather than corporations, may pose special risks to investors. LP owners do not have the same legal rights as corporate shareholders, and standards of director independence and fiduciary duty do not protect investors’ interests to the same degree. The governance disadvantages of LPs may not be reflected in IPO prices, but could lead to price declines if they are subsequently recognized by the market.

The Carlyle Controversy

U.S. alternative asset manager Carlyle Group stirred controversy recently when it announced it would go public as a limited partnership with very limited rights for public investors. Most strikingly, the company’s IPO documents initially contained a provision that would have forced investors who wanted to sue the company for any reason to resolve their disputes through private arbitration. Investors would have been barred from using the courts even for securities class actions alleging stock price manipulation and fraud. However, the mandatory arbitration provision did not pass muster with the Securities and Exchange Commission (SEC), which required its removal in order for the offering to proceed. Without that provision, Carlyle’s governance looks a lot like that of Fortress, Blackstone, KKR, Kinder Morgan Energy Partners, and other companies that have gone public in the last few years as LPs rather than corporations. So can Carlyle’s would-be investors set their minds at ease?

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