Carlyle Group Inc. annual report, FY2019

Carlyle Group Inc. 2019 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 31, 2019, when Carlyle operated as The Carlyle Group L.P., a global alternative asset manager. Carlyle advised funds across Corporate Private Equity, Real Assets, Global Credit and Investment Solutions. A conversion from a Delaware limited partnership to The Carlyle Group Inc., a Delaware corporation, became effective January 1, 2020; therefore, the 2019 financial statements reflect the pre-conversion partnership structure.

Total AUM was $224.4 billion at year-end, up from $216.5 billion.
Fee-earning AUM was $161.1 billion, up from $159.6 billion; more than 98% was in long-term vehicles not subject to quarterly redemption.
Carlyle raised $19.3 billion of new capital in 2019 and $110 billion cumulatively during its 2016–2019 fundraising plan, exceeding the $100 billion target.
The firm had more than 1,775 employees, including 671 investment professionals, in 32 offices.

Financial results and key metrics

Metric	2019	2018	Change
Total revenues	$3,377.0 million	$2,427.2 million	+39%
Fund management fees	$1,476.2 million	$1,272.0 million	+16%
Performance allocations	$799.1 million	$622.9 million	+28%
Principal investment income	$769.3 million	$186.3 million	+313%
Total expenses	$2,119.7 million	$2,071.5 million	+2%
Income before taxes	$1,233.4 million	$360.2 million	+242%
Net income	$1,184.4 million	$328.9 million	+260%
Net income attributable to common unitholders	$345.3 million	$92.9 million	+272%
Diluted earnings per common unit	$2.82	$0.82	+244%
Distributable Earnings	$646.6 million	$673.9 million	-4%
Fee Related Earnings	$452.8 million	$350.4 million	+29%
Net cash provided by operating activities	$358.6 million	$(343.5) million	Improved

GAAP results were strongly affected by unrealized investment income, particularly Carlyle’s investment in Fortitude Re. Fortitude-related earnings were $722.9 million in 2019, including $582.0 million of unrealized gains from embedded derivatives. Excluding certain unrealized items, recurring fee-related profitability improved, while Distributable Earnings declined because realized performance revenues were lower.

Carry fund appreciation was 9% for 2019. Corporate Private Equity funds appreciated 8%, Real Assets funds 3%, Global Credit carry funds 1% and Investment Solutions funds 15%. Realized proceeds from carry funds were approximately $19.9 billion, compared with $20 billion cited in the operating highlights.

Material changes versus the prior comparable period

Management fees rose primarily from newly activated funds and increased fee-earning capital, partially offset by fee-basis step-downs and realizations in older funds.
Performance allocations increased from 2018, but realized net performance revenues fell to $164.1 million from $319.7 million, reflecting slower exits and the lifecycle transition from older harvesting funds to newer funds.
Fee Related Earnings increased 29%, supported by higher recurring fee revenues and lower equity-based compensation and certain fundraising costs.
Distributable Earnings decreased 4% because lower realized performance revenues and realized principal investment income offset higher Fee Related Earnings.
Cash and cash equivalents increased to $793.4 million from $629.6 million. Management estimated approximately $691 million remained after amounts allocated for specific purposes, excluding ordinary-course payables and reserves.
Debt obligations increased to $1.98 billion from $1.55 billion, principally following issuance of $425 million of 3.500% senior notes due 2029. The proceeds were used to redeem the $400 million Series A Preferred Units, including redemption-related amounts.
The senior revolving credit facility was increased to $775 million and extended to February 2024; no amount was outstanding at year-end. A separate Global Credit facility had $35.8 million outstanding, repaid in January 2020.
Consolidated assets and liabilities include certain funds and CLOs. Consolidated variable-interest entities contributed approximately $5.2 billion of assets and $5.0 billion of liabilities, generally non-recourse to Carlyle.

Guidance, outlook, commentary and unusual items

Management expected 2020 fundraising to be similar to 2019. Fundraising for the next large buyout and real estate vintages was expected to begin in late 2021 or early 2022, with interim fundraising expected to produce modest Fee-earning AUM growth.
Management expected Global Credit and Investment Solutions growth to be partly offset by pressure in Corporate Private Equity and Real Assets as exits could temporarily outpace new fundraising.
Management expected exit activity and net realized performance revenues to begin rebounding in 2020.
Carlyle signed an agreement for a Carlyle-affiliated fund to acquire an additional 51.6% interest in Fortitude Holdings from AIG. After closing, expected in mid-2020 and subject to approvals and conditions, Carlyle and its fund investors would own 71.5%, including Carlyle’s existing 19.9% interest.
The Fortitude transaction may result in Carlyle recording its interest at fund net asset value, which management expected to be lower than the existing carrying value primarily because of unrealized derivative gains.
The filing identified the emerging coronavirus outbreak, slowing global growth, trade tensions, market volatility, high asset valuations, credit conditions and geopolitical events as risks to fundraising, valuations, exits, financing and portfolio-company performance.
Accrued performance allocations were $3.86 billion, while net accrued performance revenues attributable to Carlyle Holdings were $1.72 billion after compensation, taxes, giveback obligations and other adjustments. These amounts remain sensitive to fund valuations and are not equivalent to realized cash.
Accrued giveback obligations were $22.2 million. If all fund investments became worthless, potential realized and distributed carried-interest giveback was estimated at approximately $0.4 billion after tax, although management viewed that scenario as remote.
Legal and regulatory contingencies totaled approximately $35 million at year-end. The CCC litigation appeal remained pending, although prior courts had ruled in Carlyle’s favor. Management did not believe existing matters were probable to materially affect the financial statements beyond accrued amounts.
The company adopted lease accounting in 2019, recording $203.8 million of lease right-of-use assets and $288.2 million of lease liabilities. The filing also notes that post-conversion corporate taxes are expected to be higher, with Distributable Earnings subject to an estimated effective corporate tax rate in the mid-to-high teens for several years and low-twenties over the long term.

Most important facts for investors to verify

Separate recurring fee earnings from volatile, unrealized Fortitude Re income and unrealized carried interest.
Track realized performance revenues and exit proceeds, not only accrued performance allocations.
Review the effect of the January 2020 corporate conversion on taxes, dividends, ownership, non-controlling interests and comparability of future results.
Assess liquidity after restricted or purpose-specific cash, unfunded fund commitments of $3.86 billion and deferred conversion-related payments of approximately $344 million.
Review debt maturities, credit-facility covenants, variable-rate exposure and the transition away from LIBOR.
Evaluate Fortitude Re closing conditions, insurance-regulatory requirements, valuation adjustments and contingent payments.
Consider the subjectivity of Level III valuations: approximately 94% of Investment Solutions, 96% of Corporate Private Equity, 91% of Real Assets and 95% of Global Credit remaining fair value was classified as Level III.
Monitor fundraising, Fee-earning AUM, realizations, fund performance, fee concessions and the potential for carried-interest givebacks.