Carlyle Group Inc. annual report, FY2022

Carlyle Group Inc. — FY2022 Form 10-K Summary

Business context and reporting period

The filing is Carlyle’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed February 9, 2023. Carlyle is a global alternative asset manager operating through Global Private Equity, Global Credit and Global Investment Solutions. The filing provides full-year results; it does not present a standalone Q4 income statement.

  • Total AUM increased 24% to $372.7 billion from $301.0 billion.
  • Fee-earning AUM increased 38% to $266.6 billion from $193.4 billion; perpetual capital was $58.2 billion.
  • The firm raised $29.9 billion of new capital and invested $34.8 billion through carry funds.

Financial performance and key metrics

MetricFY2022FY2021Change
Total revenue$4.44 billion$8.78 billionDown 49%
Fund management fees$2.03 billion$1.67 billionUp 22%
Performance allocations$1.33 billion$6.08 billionDown 78%
Income before taxes$1.57 billion$4.03 billionDown 61%
Net income attributable to common stockholders$1.23 billion$2.97 billionDown 59%
Diluted EPS$3.35$8.20Down 59%
Distributable Earnings$1.91 billion$2.24 billionDown 15%
Fee Related Earnings$834.4 million$598.1 millionUp 39%
Effective tax rate18.3%24.4%Improved

The decline in GAAP revenue and earnings was primarily caused by substantially lower performance allocations as market appreciation slowed. Carry-fund appreciation was 11% in 2022 versus 41% in 2021. Management fees grew due to new fund fee activation, the CBAM acquisition, Abingworth and the Fortitude strategic advisory agreement.

  • Global Private Equity DE was $1.51 billion, down from $2.02 billion; FRE was $540.6 million, up from $402.3 million.
  • Global Credit DE was $315.5 million, up from $119.7 million; FRE was $224.5 million, up from $111.6 million.
  • Global Investment Solutions DE was $87.9 million, down from $102.1 million; FRE was $69.3 million, down from $84.2 million.
  • Net accrued performance revenues attributable to Carlyle were approximately $4.0 billion at year-end, including $7.1 billion of gross accrued performance allocations before compensation, taxes, non-controlling interests and giveback obligations.

Cash flow, liquidity and debt

  • GAAP net cash used in operating activities was $379.3 million, compared with $1.79 billion of cash provided in 2021. Excluding Consolidated Funds activity, operating cash flow was $860.7 million versus $2.14 billion.
  • Net cash used in investing activities was $828.8 million, principally reflecting $618.4 million for CBAM-related assets and intangibles, $150.2 million for Abingworth and $40.6 million of fixed-asset purchases.
  • Cash and cash equivalents were $1.36 billion; corporate treasury investments were $20.0 million. Management identified approximately $1.3 billion of cash, cash equivalents and treasury investments available after specified allocations, subject to ordinary-course needs and reserves.
  • The senior revolving credit facility had $1.0 billion of capacity, no balance outstanding and a maturity of April 2027. Carlyle reported compliance with its covenants.
  • Debt obligations were $2.27 billion carrying value, including $1.375 billion of senior notes, $500 million of subordinated notes and $421.7 million of CLO borrowings.
  • Unfunded commitments to Carlyle funds totaled $3.95 billion; approximately $3.2 billion was subscribed individually by senior professionals and other personnel, with the balance funded directly by Carlyle.
  • The 2022 dividend was $1.30 per share, or approximately $472.5 million. In February 2023, the anticipated annual dividend was increased to $1.40 per share.
  • Carlyle repurchased approximately 5.0 million shares for $185.6 million during 2022; $214.3 million remained under the authorization at year-end.

Material changes, outlook and unusual items

  • CBAM: Carlyle acquired CLO and private-credit management contracts for $812.9 million, including $618.4 million cash and approximately 4.2 million shares, adding approximately $15 billion of AUM.
  • Fortitude: Carlyle entered a strategic advisory agreement that added approximately $48 billion of fee-earning AUM. The Fortitude capital raise diluted Carlyle’s indirect ownership from 19.9% to 13.5% and generated a $176.9 million GAAP loss. A further dilution-related loss of approximately $121 million was expected when remaining capital was called, subject to change.
  • Abingworth: Carlyle acquired the life-sciences manager for $186.2 million, including $25 million of stock, with up to $130 million of future incentive payments.
  • The company recorded a $4.0 million impairment on Carlyle Aviation Partners contractual rights related to aircraft leased in Russia and a $7.5 million reserve for advances to a portfolio company.
  • Management expected a slow start to 2023, with lower transaction fees, realized performance fees and realized investment income over the next quarter or two. Larger private-equity transactions were expected to remain slower, while demand for private credit was expected to remain robust.
  • Management expected higher defaults in 2023 as inflation, higher financing costs and recession risks pressure borrowers. Fundraising was expected to remain competitive, particularly for corporate private equity strategies.
  • Harvey M. Schwartz was appointed CEO effective February 15, 2023, following the departure of Kewsong Lee. The appointment included $180 million of inducement equity awards, which is expected to increase future equity-compensation expense.

Principal risks and contingencies

  • Results and cash flow are highly variable because performance allocations depend on investment valuations, realizations and fund-level return hurdles.
  • Higher interest rates, inflation, recession risk, constrained debt markets, lower M&A activity and geopolitical tensions could reduce portfolio valuations, fundraising, realizations and carried interest.
  • Valuation risk is significant: approximately $258.4 billion of investment fair value was classified as Level III, requiring substantial judgment and unobservable inputs.
  • Potential giveback obligations were accrued at $40.9 million, of which approximately $22.0 million was attributable to Carlyle. Previously distributed carried interest subject to potential giveback could reach approximately $1.5 billion if all fund investments were deemed worthless, a scenario management considers remote.
  • The company reported approximately $35 million of liabilities for litigation-related contingencies, regulatory inquiries and other matters. The SEC is investigating preservation of certain electronic business communications; Carlyle stated that it intends to cooperate.
  • Other risks include regulatory changes affecting private funds, ESG and climate disclosures, cybersecurity and data privacy, LIBOR transition, tax changes, employee retention, conflicts of interest, Fortitude-related regulatory and ownership risks, and possible litigation involving portfolio companies.

Most important facts for investors to verify

  • Reconcile GAAP earnings with Distributable Earnings and Fee Related Earnings, and assess how much future performance revenue depends on unrealized valuations.
  • Review the sustainability of the $2.03 billion management-fee base, including fee activation, fee-rate changes, step-downs and the contribution from Fortitude and CBAM.
  • Evaluate the realizability of the $4.0 billion net accrued performance-revenue balance and the related $40.9 million accrued giveback obligation.
  • Assess liquidity after funding the $3.95 billion of unfunded commitments, acquisitions, contingent payments, dividends, repurchases and debt service.
  • Track Fortitude’s remaining capital call, expected ownership dilution and the potential additional approximately $121 million GAAP loss.
  • Review the effects of the new CEO’s $180 million equity award and February 2023 grants of 9.9 million restricted stock units on dilution and future compensation expense.
  • Confirm the outcome and potential exposure from the SEC communications-preservation inquiry, Authentix litigation and the tax receivable agreement matter.
  • Consider the sensitivity of performance allocations to portfolio values: management estimated that a 10% decrease in remaining fair value would reduce performance-allocation revenue by approximately $2.47 billion before related compensation effects.