Carlyle Group L.P. — Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2016. Carlyle is a global alternative asset manager operating through Corporate Private Equity, Global Market Strategies, Real Assets, and Investment Solutions. The filing identifies the registrant as The Carlyle Group L.P., not Carlyle Group Inc.
At March 31, 2016, total AUM was $178.1 billion and fee-earning AUM was $130.3 billion. Fee-earning AUM increased from $129.4 billion at March 31, 2015, but declined from $131.0 billion at December 31, 2015.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $483.1 million | $1,136.8 million | Down 58% |
| Fund management fees | $289.5 million | $269.5 million | Up 7% |
| Performance fees | $145.2 million | $573.0 million | Down 75% |
| Income before taxes | $15.3 million | $615.3 million | Down 98% |
| Net income | $7.9 million | $604.8 million | Down 99% |
| Net income attributable to Carlyle | $8.4 million | $39.5 million | Down 79% |
| Basic earnings per common unit | $0.10 | $0.58 | Down 83% |
| Diluted earnings per common unit | $0.01 | $0.54 | Down 98% |
| Economic Net Income | $88.5 million | $272.7 million | Down 68% |
| Fee Related Earnings | $51.0 million | $51.2 million | Essentially flat |
| Distributable Earnings | $128.6 million | $147.6 million | Down 13% |
| Operating cash flow | $19.7 million | $1,475.0 million | Down materially |
GAAP net income margin was approximately 1.6% in Q1 2016 versus approximately 53.2% in Q1 2015. The decline primarily reflected lower performance fees and lower gains from consolidated funds. Segment fee-related earnings, a measure of recurring operating profitability, remained broadly stable.
Cash and cash equivalents were $911.2 million at March 31, 2016, compared with $991.5 million at year-end 2015. Management stated that approximately $773 million remained after amounts allocated to specific purposes. Carlyle had $750 million available under its revolving credit facility and stated that liquidity sources were expected to cover needs for at least the next twelve months.
Debt obligations were $1.26 billion, including $500 million of 3.875% senior notes due 2023, $600 million of 5.625% senior notes due 2043, a $120 million NGP-related promissory note due 2022, and term loans. Carlyle reported compliance with its own debt covenants. Consolidated CLO debt of $2.48 billion was generally non-recourse to Carlyle.
Material changes versus the prior comparable period
- Performance fees fell $427.8 million, reflecting substantially lower fund appreciation. Carry fund appreciation was 1% in Q1 2016 versus 6% in Q1 2015.
- Management fees increased $20.0 million, supported by newly activated fee-earning capital and higher transaction and portfolio advisory fees, partly offset by lower hedge-fund and Investment Solutions AUM and fee-basis step-downs.
- Performance-fee-related compensation declined $247.2 million, and total compensation and benefits declined 47% to $311.2 million.
- Fee Related Earnings were stable at $51.0 million, indicating resilience in recurring fee revenue despite weaker performance fees.
- Distributable Earnings declined to $128.6 million from $147.6 million, primarily because of lower realized net performance fees, partly offset by improved realized investment income.
- Corporate Private Equity Distributable Earnings declined to $104.5 million from $193.9 million; Real Assets improved to $19.5 million from a loss of $61.7 million; Global Market Strategies declined to $0.8 million from $8.5 million; and Investment Solutions declined to $3.8 million from $6.9 million.
- Effective January 1, 2016, Carlyle adopted revised consolidation guidance and deconsolidated most previously consolidated funds. Assets declined by approximately $23.2 billion and liabilities by approximately $16.1 billion; prior-period results were not restated. The change had no impact on net income attributable to Carlyle.
- Operating cash flow fell to $19.7 million from $1.48 billion, reflecting lower earnings, lower investment activity by consolidated funds, and working-capital movements.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide formal quantitative earnings guidance. Carlyle described financial markets as improved but still volatile, with wide credit spreads and elevated potential default risk, particularly in energy credits. Management stated that the firm invested $3.9 billion during the quarter and had approximately $43 billion of carry-fund dry powder and $57 billion firmwide.
Hedge-fund performance was weak, with reported hedge-fund AUM declining and aggregate redemption requests of approximately $1.5 billion at the beginning of the second quarter. Carlyle also began winding down DGAM’s fund-of-hedge-funds and liquid-alternative initiatives, recording $7.7 million of restructuring costs and estimating an additional $3.3 million of wind-down costs.
Accrued performance fees were $3.06 billion, while accrued giveback obligations were $266.5 million. Previously distributed carried interest could be subject to future repayment; the filing estimates potential giveback of approximately $2.0 billion on an after-tax basis if all carry-fund investments were deemed worthless, although management considers that scenario remote.
Urbplan, a consolidated Brazilian real estate VIE, had approximately $122.5 million of loan principal outstanding and was in technical default or covenant noncompliance on substantially all of its loans. The loans are contractually non-recourse to Carlyle, but Carlyle funded $11.8 million during the quarter and did not expect full-year 2016 funding to exceed $25 million.
Other notable matters include $2.86 billion of unfunded commitments to Carlyle funds, approximately $700 million of expected contributions to new CLOs over the next five years to comply with U.S. risk-retention rules, $62 million of accrued litigation and regulatory contingencies, and ongoing SEC inquiries into historical monitoring-fee acceleration practices, relationships with a third-party adviser, and a former-employee complaint.
The board authorized a $200 million unit-repurchase program. Carlyle repurchased and retired 400,519 units for $6.1 million during the quarter. A quarterly distribution of $0.26 per common unit was declared in April 2016, payable May 25, 2016.
Most important facts for investors to verify
- Confirm the effect of the January 1, 2016 consolidation changes when comparing balance-sheet and cash-flow figures with 2015.
- Assess the sustainability of recurring Fee Related Earnings versus the volatility of realized and unrealized performance fees.
- Monitor hedge-fund redemptions, DGAM wind-down costs, and the decline in Global Market Strategies fee-earning AUM.
- Review accrued giveback obligations, potential carried-interest clawbacks, and the concentration of accrued performance fees in a limited number of funds.
- Evaluate Urbplan’s loan defaults, potential additional funding, litigation exposure, and the practical limitations of contractual non-recourse provisions.
- Review the $2.86 billion of unfunded fund commitments and the expected capital required for CLO risk retention.
- Reconcile GAAP earnings with Economic Net Income, Fee Related Earnings, and Distributable Earnings, which are non-GAAP measures and exclude or adjust for significant items.
- Confirm the status and potential financial impact of SEC inquiries, the Carlyle Capital litigation, the French tax matter, and other legal contingencies.