The Carlyle Group L.P. — FY2014 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2014, with quarterly information for the fourth quarter. Carlyle is a global alternative asset manager operating through Corporate Private Equity, Global Market Strategies, Real Assets and Investment Solutions. The Partnership reported approximately $194.5 billion of AUM, $135.6 billion of fee-earning AUM, more than 1,650 employees and 40 offices at year-end.
Key financial metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenues | $3,880.3 million | $4,441.2 million | Down 13% |
| Fund management fees | $1,166.3 million | $984.6 million | Up 18% |
| Performance fees | $1,674.4 million | $2,375.3 million | Down 30% |
| Income before taxes | $991.9 million | $1,444.0 million | Down 31% |
| Net income | $915.1 million | $1,347.8 million | Down 32% |
| Net income attributable to Carlyle Group L.P. | $85.8 million | $104.1 million | Down 18% |
| Diluted earnings per common unit | $1.23 | $2.05 | Down 40% |
| Economic Net Income | $962.4 million | $1,285.2 million | Down 25% |
| Fee-Related Earnings | $246.5 million | $152.1 million | Up 62% |
| Distributable Earnings | $973.2 million | $837.2 million | Up 16% |
Approximate margins were 23.6% for consolidated net income, 2.2% for net income attributable to common unitholders, 31.8% for Economic Net Income relative to segment revenue, 8.2% for Fee-Related Earnings and 32.2% for Distributable Earnings. These measures are not directly comparable because segment and non-GAAP results exclude or adjust for consolidated funds and other items.
Net cash provided by operating activities was $2,645.7 million, compared with $2,994.3 million in 2013. Cash and cash equivalents were $1,242.0 million at year-end, although management identified approximately $720 million as available after amounts allocated to performance-fee compensation, non-controlling interests and potential givebacks. The Partnership also had $750 million available under its revolving credit facility.
Corporate debt included $500 million of 3.875% senior notes due 2023, $600 million of 5.625% senior notes due 2043, a $25 million term loan and a $15.2 million CLO-related term loan. Total carrying value of loans payable and senior notes was $1,146.9 million. Consolidated CLO debt of $16.1 billion is generally non-recourse to Carlyle and should be distinguished from corporate debt.
Material changes versus the prior comparable period
- Management fees increased by $181.7 million, primarily from newly raised funds, catch-up fees, acquisitions of Metropolitan and DGAM, and higher AUM at certain platforms.
- Performance fees declined by $700.9 million. FY2013 benefited from substantial catch-up allocations after certain funds crossed performance thresholds; FY2014 had less appreciation and insignificant hedge-fund incentive fees.
- Fee-earning AUM declined from $139.9 billion to $135.6 billion, despite more than $24 billion of new commitments, primarily because of distributions, changes in fee bases, foreign exchange effects and market depreciation.
- Total AUM increased from $188.8 billion to $194.5 billion, supported by market appreciation, new commitments and CLO growth.
- Distributable Earnings increased to $973.2 million, reflecting higher realized net performance fees and stronger fee-related earnings despite lower GAAP net income.
- Carlyle issued 13.8 million common units for net proceeds of $449.5 million and issued an additional $200 million of 5.625% senior notes due 2043.
- DGAM was acquired in February 2014, adding approximately $2.9 billion of fee-earning AUM. Carlyle also expanded its economic interests in NGP and increased its management-fee allocation from NGP entities to 55% in January 2015.
- Fourth-quarter 2014 GAAP results were weak: revenue was $839.1 million, net loss was $210.0 million and net loss attributable to the Partnership was $16.3 million. The quarter included negative other income and performance-fee volatility.
Guidance, outlook, commentary, risks and unusual items
Management did not provide conventional earnings guidance. For 2015, Carlyle expected fundraising to be concentrated in mid-sized funds while continuing to harvest older funds, which could make fee-earning AUM growth difficult. Beginning in 2015, the stated distribution intention was approximately 75% of quarterly Distributable Earnings per common unit, net of taxes and tax-receivable-agreement payments, subject to the general partner’s discretion and liquidity needs.
- Performance fees remain highly variable and depend on realizations, valuation changes, fund hurdles, preferred returns and potential givebacks. Accrued performance fees were $3.8 billion, with $104.4 million of accrued giveback obligations. Potential after-tax giveback exposure would be approximately $1.4 billion if all carry-fund investments were worthless.
- Energy-market weakness, including the late-2014 oil-price decline, adversely affected Real Assets performance. A majority of Legacy Energy funds were in a giveback position at year-end.
- GMS hedge-fund performance weakened materially; reported asset-weighted hedge-fund performance was negative 9.1% in 2014 versus positive 8.4% in 2013. Net redemption notifications of approximately $2.2 billion were expected to reduce January 1, 2015 hedge-fund AUM.
- Urbplan, a consolidated Brazilian real-estate development company, had approximately $243.6 million of loan principal outstanding, substantially all of which was in covenant or technical default. Management estimated approximately $100 million of additional capital could be required in 2015, although no contractual obligation required Carlyle to fund it.
- Carlyle recognized $66.2 million of acquired-intangible impairment charges in 2014 and reported substantial contingent consideration obligations, with a maximum potential cash obligation of approximately $720.4 million.
- Material contingencies included a potential €97.0 million French tax assessment related to CEREP I, litigation involving Carlyle Capital Corporation seeking $1.0 billion, and a settled antitrust matter that reduced CP IV performance fees by $19.3 million. Management did not believe existing matters were probable to have a material consolidated effect, but acknowledged that adverse outcomes could affect a particular period.
- Approximately 96% of Investment Solutions AUM excluding available commitments was classified as Level III, and 61% to 66% of AUM excluding available commitments in the other segments was Level III. Valuations therefore depend substantially on management judgments and unobservable inputs.
- The Partnership’s tax-receivable agreement requires payment of 85% of realized tax benefits to certain Carlyle Holdings unitholders. The filing estimated potential termination payments of approximately $1.16 billion under specified assumptions.
Most important facts for investors to verify
- Reconcile GAAP net income attributable to common unitholders with Economic Net Income, Fee-Related Earnings and Distributable Earnings; these measures produce materially different conclusions about 2014 performance.
- Assess the sustainability of management fees given the $4.4 billion decline in fee-earning AUM, fund harvesting, fee-basis step-downs and early-2015 hedge-fund redemptions.
- Review the concentration of accrued performance fees in CP V and CEP III and the related valuation, realization and giveback risk.
- Separate Carlyle’s corporate debt and liquidity from the much larger non-recourse debt of consolidated CLOs and other consolidated entities.
- Monitor Urbplan’s covenant defaults, expected capital needs, litigation exposure and potential claims against Carlyle despite contractual non-recourse provisions.
- Evaluate the impact of foreign exchange, energy prices, interest rates, regulatory changes and the high proportion of Level III assets on future valuations and performance fees.
- Review dilution from exchangeable Carlyle Holdings units, equity compensation, future grants and the Partnership’s limited unitholder voting rights.