Carlyle Group Inc. quarterly report, Q1 FY2023

The Carlyle Group Inc. 10-Q Summary

Business context and reporting period

The filing covers the unaudited quarter ended March 31, 2023, compared with the quarter ended March 31, 2022. Carlyle is a global investment firm operating through Global Private Equity, Global Credit, and Global Investment Solutions. The company earns management fees, incentive fees, carried interest and investment income, and consolidates certain investment funds and CLOs for U.S. GAAP purposes.

Total AUM was $381.2 billion, including $164.4 billion in Global Private Equity, $150.0 billion in Global Credit, and $66.8 billion in Global Investment Solutions.
Fee-earning AUM was approximately $271.3 billion, up from $211.1 billion a year earlier.
Perpetual Capital represented $65.2 billion of AUM and $61.7 billion of Fee-earning AUM.

Financial performance and key metrics

Metric	Q1 2023	Q1 2022	Change
Total revenues	$859.0 million	$1,581.8 million	(45.7%)
Fund management fees	$500.8 million	$450.5 million	+11.2%
Performance allocations	$160.8 million	$710.2 million	(77.4%)
Principal investment income	$11.7 million	$319.6 million	(96.3%)
Income before taxes	$159.6 million	$742.7 million	(78.5%)
Net income attributable to Carlyle	$100.7 million	$571.6 million	(82.4%)
Diluted EPS	$0.28	$1.57	Down $1.29
Distributable Earnings	$271.6 million	$302.8 million	(10.3%)
Fee Related Earnings	$193.4 million	$183.3 million	+5.5%

Net margin attributable to Carlyle was approximately 11.7% of revenue; income before tax margin was approximately 18.6%.
Total expenses were $703.0 million, down from $841.9 million. The decline primarily reflected $265.0 million lower performance allocation and incentive-fee compensation, partly offset by higher general and administrative expenses.
Cash-based compensation was $260.2 million, equity-based compensation was $54.4 million, and performance allocation and incentive-fee related compensation was $105.7 million.
Net cash used in operating activities was $112.5 million, including consolidated-fund activity; excluding consolidated funds, operating cash use was $24.4 million.
Net cash used in investing activities was $93.9 million, primarily reflecting $101.1 million of corporate treasury investment purchases.
Net cash used in financing activities was $136.5 million, including $118.4 million of dividends, $100.3 million of share repurchases, and a $68.8 million deferred consideration payment.
Cash, cash equivalents and restricted cash declined to $1,026.9 million from $1,361.5 million at December 31, 2022. Corporate treasury investments totaled $102.0 million.

Balance sheet, debt and liquidity

Total assets were $21.3 billion and total liabilities were $14.5 billion at March 31, 2023.
Corporate debt obligations had a carrying value of $2.3 billion, including $1.375 billion of senior notes, $500.0 million of subordinated notes, and $421.8 million of CLO borrowings.
No amounts were outstanding under the $1.0 billion senior revolving credit facility or the $250.0 million Global Credit revolving facility.
Management stated that available liquidity sources are expected to fund capital needs for at least the next twelve months. The company reported compliance with all debt covenants.
Carlyle and affiliated professionals had $4.2 billion of unfunded commitments to investment funds, of which approximately $3.5 billion was subscribed individually by senior professionals and other employees and the balance was funded directly by the company.
The company’s contractual obligations included $2.3 billion of corporate debt principal, $2.3 billion of estimated corporate debt interest, $4.2 billion of fund commitments, and $635.2 million of operating lease payments.

Material changes versus the prior comparable period

Management fees increased $50.3 million, driven by newly fee-paying funds, catch-up fees, and the CBAM and Abingworth acquisitions.
Investment income decreased $857.3 million. The prior-year period benefited from substantially higher unrealized performance allocations and principal investment gains.
Carry fund appreciation was 2% in Q1 2023 versus 5% in Q1 2022. Global Private Equity appreciated 1%, Global Credit carry funds 3%, and Global Investment Solutions 5%.
Global Private Equity Distributable Earnings declined to $182.8 million from $244.1 million, while Global Credit increased to $68.9 million from $35.6 million. Global Investment Solutions declined to $19.9 million from $23.1 million.
Global Credit Fee-earning AUM increased to $125.3 billion from $67.3 billion a year earlier, primarily reflecting the Fortitude strategic advisory relationship and other investment activity.
Equity-based compensation increased by $14.7 million, partly because of significant restricted stock and inducement awards granted in February 2023 in connection with the appointment of a new chief executive officer.
General and administrative expenses increased $52.9 million, mainly due to higher intangible-asset amortization, foreign-exchange losses, travel and conference expenses, and technology and office costs.
The company repurchased approximately 3.0 million shares for $100.3 million. The repurchase authorization was replenished and increased to $500 million effective March 31, 2023.

Guidance, outlook, commentary, risks and unusual items

Management expects 2023 Fee Related Earnings to be modestly lower than in 2022 because of lower expected buyout fundraising, a slower transaction environment, and market uncertainty.
The company raised $6.8 billion of new capital in Q1 2023 but expects fundraising to remain competitive, with potential declines in buyout fund sizes and delayed or reduced catch-up management fees.
Management expects realized performance fees, transaction fees and realized investment income to remain lower in the near term. It also expects slower deployment and realization activity.
No new CLOs were issued during the quarter, and direct-lending gross originations were $0.4 billion. Management expects private-credit demand to remain robust as traditional credit becomes less available.
Management expects credit defaults to increase in 2023 as inflation, higher financing costs and recession risks pressure borrowers. Higher rates and margin contraction may reduce portfolio valuations.
Accrued performance allocations were $7.1 billion, while net accrued performance revenues attributable to Carlyle were approximately $4.0 billion. These balances depend on investment valuations and may fluctuate materially.
Potential giveback obligations were $40.9 million, with $22.0 million attributable to Carlyle after amounts attributable to current and former professionals and other limited partners. Potential after-tax giveback exposure could reach approximately $1.5 billion if all fund investments became worthless, although management views that scenario as remote.
The company paid $68.6 million to settle the Carlyle Aviation Partners earn-out and expects to pay an additional $2.4 million in 2024 and 2025. Abingworth has potential future earn-out payments of up to $130.0 million, with no amount accrued at March 31, 2023.
Legal and regulatory matters include the Authentix litigation, a tax receivable agreement lawsuit, and an SEC inquiry concerning preservation of electronic business communications. Recorded liabilities for litigation, regulatory inquiries and other matters totaled approximately $35 million.
Additional risks include banking-sector stress, interest-rate and foreign-exchange volatility, reduced transaction and IPO activity, valuation uncertainty for Level III investments, regulatory changes affecting private funds, and geopolitical and macroeconomic uncertainty.
The company declared a quarterly dividend of $0.35 per share payable May 23, 2023, up from the prior $0.325 per-share quarterly dividend.

Most important facts for investors to verify

Whether management fees and Fee-earning AUM remain resilient as fundraising slows and funds move from commitment-based to invested-capital fee bases.
The sustainability and realization timing of approximately $4.0 billion of net accrued performance revenues, including the sensitivity to portfolio valuations and potential givebacks.
Whether the company’s forecast of modestly lower 2023 Fee Related Earnings is conservative given lower deal volumes, financing costs and fundraising conditions.
The liquidity impact of $4.2 billion of unfunded fund commitments, corporate debt service, dividends, repurchases, earn-outs and other contractual obligations.
The effect of higher interest rates, credit defaults, valuation markdowns and slower realizations on carried interest and investment income.
The ultimate outcome and potential financial exposure from the SEC inquiry, Authentix litigation, tax receivable agreement litigation and other regulatory matters.
The recurring impact of elevated equity-based compensation following the February 2023 awards and the new CEO inducement grants.