Business context and reporting period
The Carlyle Group L.P. filed its Form 10-K for the fiscal year ended December 31, 2012. The filing covers Carlyle’s alternative asset management businesses across Corporate Private Equity, Global Market Strategies, Real Assets and Solutions. Carlyle completed its initial public offering and reorganization in May 2012; therefore, historical 2012 results include predecessor-period operations and are not fully comparable to a full-year public-company period.
As of December 31, 2012, Carlyle reported approximately $170.2 billion of assets under management, $123.1 billion of fee-earning AUM, 113 funds and 67 fund-of-funds vehicles. The firm had more than 1,400 employees in 33 offices.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenues | $2,973.1 million | $2,845.3 million | Up 4% |
| Fund management fees | $977.6 million | $915.5 million | Up 7% |
| Total performance fees | $1,041.1 million | $1,121.6 million | Down 7% |
| Investment income | $36.4 million | $78.4 million | Down 54% |
| Total expenses | $2,291.2 million | $1,347.1 million | Up 70% |
| Net income | $2,399.5 million | $1,154.3 million | Up 108% |
| Net income attributable to Carlyle Holdings | $642.8 million | $1,356.9 million | Down 53% |
| Net income attributable to The Carlyle Group L.P. | $20.3 million | Not presented | Public-company period only |
| Economic Net Income | $735.6 million | $833.1 million | Down 12% |
| Fee Related Earnings | $169.5 million | $121.3 million | Up 40% |
| Distributable Earnings | $687.9 million | $864.4 million | Down 20% |
Reported GAAP net income was substantially affected by consolidation of certain funds. Net income attributable to non-controlling interests in consolidated entities was $1,756.7 million, largely reflecting earnings allocated to fund investors and other non-Carlyle owners. Consolidated fund assets and liabilities are generally non-recourse to Carlyle.
- Cash and cash equivalents attributable to Carlyle were $567.1 million at year-end, compared with $509.6 million in 2011.
- Net cash provided by operating activities was $2,028.4 million, compared with $2,678.0 million in 2011.
- Net cash used in investing activities was $126.1 million; net cash used in financing activities was $1,841.3 million.
- Loans payable were $886.3 million, consisting of a $500.0 million term loan and $386.3 million drawn on the revolving facility at December 31, 2012.
- Total assets were $31.6 billion and total liabilities were $18.0 billion, including consolidated-fund balances.
- Distributions paid during 2012 were $0.27 per common unit. A further $0.85 per common unit was declared in February 2013 for the fourth quarter of 2012.
Material changes versus the prior comparable period
- Fee-earning AUM increased to $123.1 billion from $111.0 billion, driven by acquisitions, new commitments and hedge-fund subscriptions, partly offset by fee-basis step-downs and fund distributions.
- Total AUM increased to $170.2 billion from $147.0 billion. The carry-fund portfolio increased in value by approximately 14% during 2012.
- Management fees increased primarily because of the full-year contribution from the 2011 acquisitions of ESG and AlpInvest, the October 2012 Vermillion acquisition and growth in Claren Road’s AUM.
- Performance fees declined as 2011 benefited from a catch-up allocation when Carlyle Partners V entered a carry position; 2012 reflected a more normalized rate.
- Compensation and benefits increased sharply, including $201.7 million of equity-based compensation associated with the IPO, reorganization and other awards. Pre-IPO compensation for senior Carlyle professionals had historically been recorded as distributions rather than compensation expense.
- Global Market Strategies AUM increased to approximately $32.5 billion from $24.5 billion, while Real Assets AUM increased to approximately $40.2 billion from $30.7 billion, primarily reflecting the Highland CLO transactions, Vermillion and NGP.
- Carlyle acquired a 55% interest in Vermillion and acquired an interest in NGP Management that initially provides a 47.5% allocation of management-fee-related revenues from specified NGP funds.
- The firm completed four new CLOs and acquired certain European CLO management contracts from Highland Capital Management.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2013 management fees from successor funds and new fundraising initiatives to produce a net increase versus 2012, although Corporate Private Equity management fees could be flat or decline slightly depending on fundraising timing and size.
- Management expected compensation and general and administrative expenses to increase in 2013 because of acquisitions, staffing growth and additional public-company infrastructure.
- Carlyle expected to accelerate fundraising in 2013, including through feeder funds; related intermediary and fundraising costs were expected to increase.
- In January 2013, Carlyle issued $500.0 million of 3.875% senior notes due 2023. Proceeds were used to repay the $386.3 million revolving-facility balance and prepay $75.0 million of term-loan principal.
- The filing reports a $69.2 million accrued giveback obligation at year-end. If all carry-fund investments were worthless, previously distributed carried interest subject to potential giveback would be approximately $1.2 billion after tax, although management considered that scenario remote.
- Material risks include volatile and realization-dependent performance fees, declines in fund valuations, illiquid and subjective Level III valuations, dependence on founders and key personnel, fundraising and fee pressure, leverage and refinancing risk, regulatory changes, litigation, tax uncertainty and conflicts of interest.
- Carlyle provided support related to a French tax assessment involving CEREP I. The filing states that the amount of any unrecoverable costs was not estimable; CEREP I had accrued approximately €50.0 million, or $66.0 million, for the contingency.
- The company disclosed ongoing litigation involving alleged anticompetitive “club” bids, New Mexico placement-agent allegations and Carlyle Capital Corporation matters. The filing states that the reasonably possible loss or range of loss could not be estimated.
- Management stated that disclosure controls were effective at a reasonable-assurance level, but the filing did not include management’s assessment or an auditor attestation on internal control over financial reporting because of the newly public company transition period.
Most important facts for an investor to verify
- Reconcile the different 2012 earnings presentations: historical GAAP net income attributable to The Carlyle Group L.P. was $20.3 million, while unaudited pro forma 2012 net income attributable to the Partnership was $45.5 million.
- Separate Carlyle operating-company liquidity from cash, debt and liabilities of consolidated funds, which are generally unavailable to Carlyle and non-recourse to it.
- Assess the sustainability of distributable earnings and fee-related earnings independently from unrealized performance fees and consolidated-fund gains.
- Review the effect of expiring investment periods, fee-basis step-downs, distributions and successor-fund fundraising on future fee-earning AUM.
- Evaluate potential giveback exposure, including the $69.2 million accrued obligation and the stated $1.2 billion downside scenario.
- Review the $2.4 billion of unfunded Carlyle fund commitments, including the portion expected to be funded by senior professionals rather than directly by the Partnership.
- Assess the contingent consideration and strategic-investment obligations, including potential payments related to Vermillion, NGP and prior acquisitions.
- Review the French and Italian tax contingencies, antitrust and CCC litigation, and the absence of an estimable loss range for certain matters.
- Confirm post-year-end debt actions, the new senior notes, distribution policy and continuing compliance with the senior credit facility covenants.