The Carlyle Group Inc. 2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020, with comparative results for 2019 and 2018. Carlyle is a global alternative asset manager operating through Global Private Equity, Global Credit, and Investment Solutions. At year-end, Carlyle reported $245.8 billion of assets under management (AUM), $170.1 billion of fee-earning AUM, 1,825 employees, and 29 offices.
Effective January 1, 2020, Carlyle converted from a Delaware limited partnership into a Delaware corporation. Each common unit converted into one common share, non-controlling interests in Carlyle Holdings were eliminated, and the company adopted an intended annual dividend of $1.00 per share.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $2,934.6 million | $3,377.0 million | Down 13% |
| Fund management fees | $1,486.0 million | $1,476.2 million | Up 1% |
| Performance allocations | $1,635.9 million | $799.1 million | Up 105% |
| Principal investment income | $(540.7) million | $769.3 million | Down $1,310.0 million |
| Income before taxes | $580.0 million | $1,233.4 million | Down 53% |
| Net income attributable to common stockholders | $348.2 million | $345.3 million | Approximately flat |
| Diluted earnings per share | $0.97 | $2.82 | Down 66% |
| Distributable Earnings | $762.1 million | $646.6 million | Up 18% |
| Fee Related Earnings | $519.7 million | $452.8 million | Up 15% |
| Cash and cash equivalents | $987.6 million | $793.4 million | Up $194.2 million |
| Debt obligations | $1,970.9 million | $1,976.3 million | Approximately flat |
Reported margins were affected by the mix of realized and unrealized investment income, performance compensation, the corporate conversion, and the Fortitude accounting change. Based on total revenue and income before taxes, the pretax margin was approximately 19.8% in 2020 versus approximately 36.5% in 2019. The filing does not present a single GAAP net margin measure in the highlighted discussion.
Cash flow, liquidity, and capital structure
- GAAP net cash used in operating activities was $169.2 million, compared with $358.6 million of operating cash flow in 2019. Excluding Consolidated Funds, operating cash flow was $716.8 million, compared with $591.3 million in 2019.
- Net cash used in investing activities was $61.2 million, principally for fixed assets.
- Net cash provided by financing activities was $370.3 million, including borrowings and repayments under credit facilities, $351.3 million of common dividends, $68.8 million of deferred consideration payments, and $26.4 million of share repurchases.
- The senior revolving credit facility provides $775.0 million of capacity and matures February 11, 2024. No amount was outstanding at year-end. The company also had a $250.0 million Global Credit revolving facility with no year-end balance.
- Senior notes had aggregate principal outstanding of $1.625 billion, with maturities in 2023, 2029, 2043, and 2048. CLO borrowings were $356.1 million.
- Management stated that cash on hand, operating cash flow, accumulated earnings, and available revolving capacity should be sufficient to fund needs for at least the next twelve months. Approximately $880 million of cash remained after amounts allocated for specific purposes, although this excludes ordinary-course payables and reserves.
- Unfunded commitments to Carlyle funds totaled $3.5 billion, of which approximately $3.0 billion was subscribed individually by senior Carlyle professionals and other professionals, with the balance funded directly by the company.
Material changes versus the prior comparable period
- Total AUM increased 9% to $245.8 billion, while fee-earning AUM increased 6% to $170.1 billion. Fee-earning AUM was supported by $22.5 billion of inflows and $4.2 billion of favorable foreign exchange activity, partly offset by $17.1 billion of outflows.
- Global Private Equity AUM rose to $131.8 billion, but fee-earning AUM declined 3% to $91.6 billion, primarily due to realizations and fee-basis stepdowns.
- Global Credit AUM increased 13% to $55.9 billion and fee-earning AUM increased 11% to $42.1 billion, driven by CLO issuance, credit fundraising, insurance-related capital, and direct lending activity.
- Investment Solutions AUM increased 29% to $58.1 billion and fee-earning AUM increased 28% to $36.4 billion, primarily reflecting AlpInvest fundraising and foreign exchange gains.
- Performance allocations more than doubled, principally due to appreciation and realizations in Global Private Equity, particularly Carlyle Partners VI. Net accrued performance revenues attributable to Carlyle were $2.3 billion at year-end, up 36% from 2019.
- Principal investment income swung to a $540.7 million loss from $769.3 million of income in 2019. The primary driver was a $620.7 million loss related to changing the accounting for Carlyle’s Fortitude investment after contributing its 19.9% stake to Carlyle FRL.
- Income taxes rose to $197.2 million from $49.0 million. The 2020 effective tax rate was 34.0%, including approximately $85.9 million of tax expense from the conversion to a corporation. Excluding the conversion impact, management stated the effective rate would have been approximately 19%.
- Cash-based compensation increased modestly, while performance allocation and incentive-fee compensation increased to $779.1 million from $436.7 million. General and administrative expense declined to $349.3 million from $494.4 million, partly due to lower travel, professional, and other costs and a $29.9 million CCC litigation cost recovery.
- The company reorganized its reporting segments by combining Corporate Private Equity and Real Assets into Global Private Equity, with retrospective application to prior periods.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide formal earnings guidance in the filing. It expected increased market activity and opportunities for large buyouts to support strong deployment in 2021, particularly in healthcare, technology, and consumer sectors. Management also expected continued exit activity, but noted that near-term realizations would depend on valuation multiples, capital-market access, vaccine progress, and broader macroeconomic conditions.
- COVID-19 adversely affected portfolio companies, particularly in energy, travel, aviation, hospitality, entertainment, retail, healthcare, and infrastructure. Remote work created continuing operational, cybersecurity, employee, tax, and business-continuity risks.
- Natural resources funds depreciated 16% in 2020, while corporate private equity appreciated 19%, real estate appreciated 8%, Global Credit carry funds depreciated 2%, and Investment Solutions appreciated 10%.
- Public securities represented 15% of the Global Private Equity and Global Credit carry fund portfolio at year-end, compared with 6% at year-end 2019, increasing sensitivity to public-market volatility.
- Accrued giveback obligations were $18.7 million, including approximately $8.1 million attributable to Carlyle. If all carry fund investments were worthless, potential after-tax giveback exposure was approximately $0.5 billion, although management characterized that scenario as remote.
- Fortitude Re remains subject to insurance regulation, reserve and capital requirements, and potential conflicts of interest. Fortitude Holdings and AIG-affiliated ceding companies had committed approximately $4.7 billion to Carlyle strategies at year-end.
- Consolidated variable-interest entities had $6.3 billion of assets and $6.1 billion of liabilities. These assets are generally unavailable for Carlyle’s liquidity needs and the liabilities are generally non-recourse to Carlyle.
- The filing identifies valuation uncertainty as a critical accounting risk: approximately $153.3 billion of investments were classified as Level III for AUM valuation purposes, requiring significant judgment and unobservable inputs.
- Other material risks include leverage, fundraising and fee pressure, key-person departures, competition, regulatory and litigation exposure, Brexit, LIBOR transition, tax reform, foreign exchange, energy prices, climate policy, and cybersecurity.
- Legal and regulatory contingencies totaled approximately $35 million at year-end. Management stated that existing matters were not expected to materially affect the financial statements, but acknowledged that adverse outcomes could materially affect a particular period.
Most important facts an investor should verify
- Reconcile GAAP earnings with Distributable Earnings and Fee Related Earnings, particularly the treatment of unrealized performance allocations, Fortitude-related investment losses, taxes, and compensation.
- Assess the sustainability of the $2.3 billion of net accrued performance revenues and the concentration of accrued performance allocations in Carlyle Partners VI.
- Review the quality, liquidity, and valuation sensitivity of the large Level III investment portfolio and the effect of public-market exposure on future carried interest.
- Confirm actual available corporate cash after restricted, regulatory, compensation, and other designated amounts, rather than relying only on the $987.6 million reported cash balance.
- Evaluate the $3.5 billion of unfunded fund commitments, the $1.6 billion of net corporate investments after CLO borrowings, and the timing of debt and deferred consideration obligations.
- Monitor Fortitude Re’s financial performance, regulatory capital, reserve developments, asset-management commitments, and potential conflict-of-interest implications.
- Verify the effect of the corporate conversion on future effective tax rates, dividends, cash available for distribution, and comparability with pre-2020 results.
- Review COVID-19, energy, aviation, credit, CLO, LIBOR-transition, litigation, cybersecurity, and regulatory developments because they could materially change future earnings and liquidity.