Carlyle Group Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly filing for the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Carlyle operates through Global Private Equity, Global Credit and Investment Solutions. At June 30, 2021, total AUM was $275.9 billion and fee-earning AUM was $174.9 billion. The filing was signed July 29, 2021.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $2,706.3 million, versus $1,131.0 million | $5,143.5 million, versus $385.3 million |
| Net income attributable to Carlyle | $925.0 million, versus $145.9 million | $1,794.3 million, versus a $466.1 million loss |
| Diluted EPS | $2.55, versus $0.41 | $4.97, versus a $1.34 loss |
| Income before taxes | $1,252.7 million | $2,417.0 million |
| GAAP net margin attributable to Carlyle | Approximately 34.2% | Approximately 34.9% |
| Distributable Earnings | $395.4 million, versus $198.4 million | $610.3 million, versus $373.4 million |
| Fee Related Earnings | $143.2 million, versus $127.3 million | $272.2 million, versus $256.1 million |
| Net cash provided by operating activities | $595.3 million, versus $76.9 million used in the prior-year period; excluding Consolidated Funds, $580.7 million versus $61.8 million |
Fund management fees increased 6.1% to $394.4 million in the quarter and 6.6% to $775.4 million year to date. Investment income was $2,218.4 million in the quarter and $4,183.6 million year to date, including performance allocations of $2,080.7 million and $3,866.8 million, respectively. Performance allocations were substantially driven by portfolio appreciation and remain subject to future reversals.
Carry funds appreciated 11% in the quarter and 25% year to date. Global Private Equity, Global Credit and Investment Solutions reported Q2 Distributable Earnings of $337.6 million, $29.6 million and $28.2 million, respectively. Q2 Fee Related Earnings were $93.5 million, $24.9 million and $24.8 million, respectively.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1,586.2 million, compared with $987.6 million at December 31, 2020. Management estimated approximately $1.4 billion remained after amounts allocated to specific purposes.
- Total assets were $19.6 billion and total liabilities were $15.0 billion at June 30, 2021. Investments, including accrued performance allocations, were $10.6 billion.
- Debt obligations were $2.3 billion, including $500 million of 4.625% subordinated notes due 2061 issued during the period. Consolidated Fund loans payable were $5.4 billion and generally non-recourse to Carlyle.
- The $775 million senior revolving credit facility and $250 million Global Credit revolving facility had no borrowings outstanding. The senior facility had $775 million of available capacity and matures February 11, 2024.
- Carlyle stated that available liquidity sources should be sufficient to fund capital needs for at least the next twelve months. The company was in compliance with applicable debt covenants.
- Capital commitments totaled $3.3 billion, of which approximately $2.8 billion was subscribed by senior professionals and other personnel and the balance was funded directly by Carlyle.
Material changes versus the prior comparable period
- Q2 revenue increased 139.3%, primarily because performance allocations rose to $2.1 billion from $1.2 billion and principal investment income improved to $137.7 million from a $512.6 million loss.
- First-half revenue increased from $385.3 million to $5.1 billion, largely reflecting the recovery from pandemic-related portfolio depreciation in the first half of 2020 and significantly higher performance allocations.
- Compensation and benefits increased to $1.3 billion in Q2 and $2.4 billion year to date, primarily due to performance allocation-related compensation. Accrued performance allocation and incentive-fee compensation reached $4.0 billion at June 30, 2021.
- Net accrued performance revenues attributable to Carlyle were approximately $4.0 billion, up 72% from December 31, 2020. Approximately 40% was generated by Carlyle Partners VI, which had more than 65% of remaining fair value in publicly traded portfolio companies.
- Total AUM increased 12% from December 31, 2020, while fee-earning AUM increased 9% from December 31, 2020. The April 1, 2021 sale of Metropolitan Real Estate reduced Investment Solutions AUM and fee-earning AUM.
- Carlyle paid $177.4 million of dividends and repurchased approximately 0.6 million shares for $25.0 million during the first six months. Repurchase capacity remaining was $175.0 million.
Guidance, outlook, commentary and unusual items
- Management reiterated its objective of raising at least $130 billion by the end of 2024. Carlyle raised $10.4 billion in the second quarter and $18.2 billion year to date.
- Management reported $8.1 billion of new or follow-on investments during Q2 and more than $26 billion deployed over the preceding twelve months. An additional $6.0 billion of announced or signed transactions was expected to close in subsequent quarters.
- Management expected announced exits to generate at least $500 million of net realized performance revenues in the second half of 2021; this is an expectation, not a guarantee.
- Risks include volatility in public and private asset valuations, concentration of accrued performance revenues in certain funds, potential reversals or givebacks of carried interest, fundraising and deployment uncertainty, inflation, interest-rate and foreign-exchange movements, regulatory and tax changes, credit losses, litigation and public-health conditions.
- A $26.8 million lease right-of-use asset impairment was recorded following the Metropolitan Real Estate sale and related New York sublease. The company also recorded a $5.0 million gain on the MRE sale.
- Legal and regulatory contingency liabilities totaled approximately $35 million. Management did not believe existing matters were likely to have a material effect, but noted that adverse outcomes could exceed recorded accruals.
- A June 2021 guarantee supports up to $2.0 billion of revolving credit facilities for a Global Private Equity fund that is fundraising. No amounts had been funded and management considered material funding remote.
- The Board declared a $0.25 per-share dividend payable August 17, 2021. Dividend payments remain discretionary and subject to legal, contractual and financial constraints.
Most important facts for an investor to verify
- Whether the unusually high performance allocations and $4.0 billion of net accrued performance revenues convert into realized cash earnings without significant reversals.
- The concentration and valuation sensitivity of Carlyle Partners VI and publicly traded portfolio investments.
- The composition and availability of the reported $1.4 billion of unallocated cash after performance-related, regulatory and other reserves.
- The funding requirements and timing of the $3.3 billion of unfunded commitments, contingent payments and the $2.0 billion fund-level credit guarantee.
- The sustainability of Fee Related Earnings, management-fee growth and fundraising relative to compensation, fee step-downs and realizations.
- The distinction between Carlyle’s GAAP results and non-GAAP Distributable Earnings and Fee Related Earnings, particularly because Consolidated Funds substantially gross up assets, liabilities and cash flows without providing equivalent economic liquidity to Carlyle.