Business Context and Reporting Period
The Carlyle Group Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Carlyle is a global investment firm operating through Corporate Private Equity, Real Assets, Global Credit, and Investment Solutions. On January 1, 2020, the company converted from a Delaware limited partnership to a corporation, with Carlyle Holdings partnership units exchanged for common shares; this affects comparability with 2019 per-share and ownership results.
At September 30, 2020, Carlyle reported $230.0 billion of total AUM and $166.6 billion of fee-earning AUM. Fee-earning AUM increased 4.9% year over year, primarily from growth in Global Credit and Investment Solutions, partially offset by declines in Corporate Private Equity and Real Assets.
Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenues | $1,034.6 million | $768.6 million | $1,419.9 million | $2,916.7 million |
| Fund management fees | $363.8 million | $359.5 million | $1,091.5 million | $1,103.8 million |
| Performance allocations | $477.4 million | $112.4 million | $731.6 million | $709.1 million |
| Principal investment income (loss) | $106.7 million | $212.2 million | $(659.2) million | $856.0 million |
| Income before taxes | $415.1 million | $261.4 million | $(117.1) million | $1,273.7 million |
| Net income attributable to common stockholders | $295.5 million | $68.4 million | $(170.6) million | $353.6 million |
| Diluted EPS | $0.82 | $0.55 | $(0.49) | $2.93 |
| Distributable Earnings | $151.8 million | $160.7 million | $525.2 million | $474.9 million |
| Fee Related Earnings | $118.7 million | $108.8 million | $374.8 million | $344.8 million |
Q3 pretax margin was approximately 40.1%, versus 34.0% in the prior-year quarter; common-stockholder net margin was approximately 28.6%, versus 8.9%. The nine-month periods are not directly comparable because 2020 includes corporate income taxes following the conversion and a significant Fortitude-related investment loss.
- Q3 revenues increased 34.6%, driven mainly by higher performance allocations and stronger investment results. Nine-month revenues declined 51.3% because of the Fortitude-related loss and weaker principal investment income.
- Q3 performance allocations increased $365.0 million year over year, led by Corporate Private Equity. Q3 carry-fund appreciation was 5%; Corporate Private Equity appreciated 5%, Real Assets 2% overall, Global Credit carry funds 4%, and Investment Solutions 8%.
- Q3 total expenses increased 27.3% to $643.4 million, primarily because performance-related compensation increased $158.0 million. Nine-month expenses declined 8.4% to $1,498.1 million.
- Nine-month cash flow from operating activities was $(110.6) million including Consolidated Funds, compared with $924.0 million in 2019. Excluding Consolidated Funds, operating cash flow was $491.3 million, compared with $767.9 million.
- Cash, cash equivalents, and restricted cash totaled $938.8 million at September 30, 2020, including $377.8 million held at Consolidated Funds and unavailable for Carlyle’s general liquidity needs. Management identified approximately $845 million of remaining cash after allocations for specific purposes.
- Debt obligations were $1,987.1 million, compared with $1,976.3 million at December 31, 2019. Consolidated Funds had $5,263.7 million of loans payable, generally non-recourse to Carlyle.
- Carlyle had $775.0 million available under its senior revolving credit facility, no balance outstanding under that facility, and reported compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Q3 common-stockholder earnings increased to $295.5 million from $68.4 million, while nine-month earnings declined to a $170.6 million loss from $353.6 million of income.
- Fee Related Earnings increased 9.1% in Q3 and 8.7% for the nine months, indicating improvement in recurring fee-based profitability despite lower Corporate Private Equity and Real Assets fee earnings.
- Distributable Earnings declined 5.5% in Q3 but increased 10.6% for the nine months. Investment Solutions and Global Credit improved, while Real Assets declined materially.
- Corporate Private Equity fee-earning AUM fell to $57.6 billion from $61.2 billion year over year; Real Assets fell to $31.5 billion from $32.7 billion. Global Credit rose to $42.4 billion from $37.1 billion, and Investment Solutions rose to $35.0 billion from $27.7 billion.
- The June 2020 contribution of Carlyle’s Fortitude Holdings interest to Carlyle FRL produced a $620.7 million principal investment loss in Q2 and contributed to a $703.9 million nine-month Fortitude-related loss. Carlyle’s September 30 investment in Carlyle FRL was $542.3 million, compared with a $465.4 million cost basis.
- General and administrative expense benefited from lower travel and professional costs and a $29.9 million recovery related to the Carlyle Capital Corporation litigation during the nine months.
Outlook, Risks, Contingencies, and Unusual Items
Management did not provide formal earnings guidance in the filing. Management stated that fundraising remained resilient, with $17.8 billion raised in 2020 through September 30, and that carry funds invested $3.7 billion during Q3 and $9.6 billion year to date. Management expects deployment activity could increase into 2021, but near-term exits and fundraising remain dependent on market conditions.
- COVID-19, further infection waves, uneven economic recovery, reduced travel and hospitality activity, energy weakness, and potential credit deterioration could reduce portfolio values, fundraising, realizations, management fees, and performance allocations.
- Publicly traded investments represented 14% of traditional carry-fund fair value, compared with 6% at year-end 2019. Management cautioned that this increases public-market correlation and potential volatility in accrued performance revenues.
- Accrued performance allocations were $4.2 billion, offset by $2.2 billion of accrued performance-allocation and incentive-fee compensation and $17.5 million of accrued giveback obligations. Net accrued performance revenues attributable to Carlyle were approximately $2.0 billion.
- If all carry-fund investments were deemed worthless, potential after-tax giveback obligations would be approximately $0.4 billion, although management considers that scenario remote. The company’s net accrued giveback obligation was $8.1 million after amounts attributable to professionals and other investors.
- Carlyle had $3.5 billion of unfunded commitments, of which approximately $3.0 billion was subscribed individually by senior professionals and others, with the balance funded directly by the company.
- A Real Assets fund credit facility guaranteed by Carlyle had $83.5 million outstanding and was scheduled to expire in December 2020; repayment was expected from a capital call to fund investors.
- Maximum contingent cash obligations related to the Carlyle Aviation Partners acquisition and Fortitude investment were $245.0 million, versus $140.8 million recognized on the balance sheet.
- Legal and regulatory matters carried approximately $35 million of recorded liabilities. Management did not believe existing matters were probable to have a material effect, but acknowledged that adverse outcomes could exceed recorded accruals.
- The conversion resulted in an estimated $90.3 million tax expense in the nine months and a $53.6 million reduction to equity. The nine-month effective tax rate was negative 47%, making reported GAAP earnings unusually sensitive to conversion-related tax accounting.
- The Board declared a $0.25 per share quarterly dividend payable November 17, 2020. The filing states that dividends remain discretionary and subject to legal, contractual, financial, and regulatory constraints.
Investor Verification Checklist
- Reconcile GAAP earnings with Distributable Earnings and Fee Related Earnings, particularly the treatment of unrealized performance allocations, Fortitude-related gains and losses, consolidation, and conversion-related tax effects.
- Assess the sustainability and cash realization timing of the $4.2 billion accrued performance allocations and approximately $2.0 billion of net accrued performance revenues.
- Verify current fee-earning AUM trends, fund fee-basis step-downs, fundraising activity, and the effect of CLO collateral runoff on recurring management fees.
- Monitor Fortitude Re and Carlyle FRL valuation, remaining purchase-price obligations, and any future contingent payments.
- Evaluate liquidity after excluding Consolidated Fund cash, including the $845 million of identified available cash, $1.99 billion of debt obligations, unfunded commitments, dividends, and deferred consideration payments.
- Review COVID-19, energy, aviation, credit-market, public-equity, foreign-exchange, litigation, and regulatory risks against current portfolio valuations and realizations.