Business context and reporting period
The filing is The Carlyle Group L.P.’s Form 10-K for the fiscal year ended December 31, 2015; it is not a quarterly filing, although fourth-quarter 2015 data is included. Carlyle is a global alternative asset manager operating through Corporate Private Equity, Global Market Strategies, Real Assets and Investment Solutions. The filing reports approximately $182.6 billion of AUM, $131.0 billion of fee-earning AUM, 1,700-plus employees and 36 offices at year-end.
The registrant is a Delaware limited partnership whose common units trade on Nasdaq under “CG.”
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenues | $3,006.2 million | $3,880.3 million | Down 23% |
| Fund management fees | $1,085.2 million | $1,166.3 million | Down 7% |
| Performance fees | $824.9 million | $1,674.4 million | Down 51% |
| Income before taxes | $402.2 million | $991.9 million | Down 59% |
| Net income | $400.1 million | $915.1 million | Down 56% |
| Net income attributable to Carlyle Group L.P. | $(18.4) million | $85.8 million | Turned to loss |
| Diluted earnings per common unit | $(0.30) | $1.23 | Turned negative |
| Economic Net Income | $396.6 million | $962.4 million | Down 59% |
| Fee Related Earnings | $198.8 million | $246.5 million | Down 19% |
| Distributable Earnings | $922.5 million | $973.2 million | Down 5% |
| Net cash provided by operating activities | $3,902.8 million | $2,645.7 million | Up 48%; includes consolidated funds |
| Cash and cash equivalents | $991.5 million | $1,242.0 million | Down $250.5 million |
| Corporate loans payable and senior notes | $1,145.1 million | $1,146.9 million | Substantially unchanged |
| Fee-earning AUM | $131.0 billion | $135.6 billion | Down 3% |
| Total AUM | $182.6 billion | $194.5 billion | Down 6% |
Reported consolidated margins were approximately 13.3% for net income and negative 0.6% for income attributable to common unitholders. These margins are affected by consolidation of funds and substantial non-controlling interests; management emphasizes ENI, FRE and DE as supplemental operating measures.
Cash available for general liquidity after amounts allocated to specific business purposes was approximately $808 million. The company had $750 million available under its revolving credit facility and stated that available liquidity should cover expected needs for at least the next 12 months. The credit facility had a $25 million term loan outstanding and matures in May 2020.
Material changes versus the prior comparable period
- Performance fees fell $849.5 million, primarily because carry-fund appreciation declined to 7% from 15% in 2014 and because 2014 benefited from stronger fund-level appreciation and catch-up economics.
- Corporate Private Equity performance fees declined to $698.2 million from $1.34 billion, while Global Market Strategies performance fees turned negative at $(41.0) million from $81.7 million. Real Assets performance fees increased to $49.3 million from $66.5 million on a consolidated basis? The filing’s consolidated segment table reports $49.3 million in 2015 versus $66.5 million in 2014; therefore, this was a decline, despite stronger real estate performance being offset by energy losses.
- Global Market Strategies AUM declined to $35.3 billion from $36.7 billion, principally because of hedge-fund redemptions. Fee-earning AUM declined 9% to $31.0 billion, including $4.3 billion of net hedge-fund redemptions and $0.7 billion of market depreciation.
- Investment Solutions fee-earning AUM declined 15% to $28.2 billion, driven by distributions, fee-basis step-downs and approximately $2.8 billion of foreign-exchange impact.
- Real Assets fee-earning AUM increased 9% to $30.9 billion, but total AUM declined 10% to $38.0 billion because of distributions, energy-related depreciation and foreign-exchange effects.
- General, administrative and other expenses increased $186.0 million, including higher amortization and impairment charges and higher litigation and contingency expenses. The company recorded approximately $220 million of impairment charges related to acquired intangible assets and goodwill.
- Accrued giveback obligations increased to $252.0 million from $104.4 million. Approximately $215 million related to Legacy Energy funds.
- Carlyle raised approximately $23 billion of gross commitments, or $16 billion net of redemptions, invested approximately $8.8 billion through carry funds and realized more than $18 billion of proceeds.
Fourth-quarter 2015, outlook, risks and unusual items
Fourth-quarter 2015 revenue was $715.8 million, net loss was $147.8 million and loss attributable to The Carlyle Group L.P. was $4.6 million. Quarterly results were highly volatile, with a significant loss in the third quarter and additional losses in the fourth quarter.
- Management cited heightened volatility tied to China, crude-oil prices and tightening credit markets. These conditions reduced valuations, increased financing costs and impaired energy-related investments.
- As of early 2016, hedge-fund partnerships had approximately $3.1 billion of outstanding redemption requests; Claren Road alone received approximately $1.9 billion of redemption notices in the third quarter of 2015.
- In February 2016, Carlyle announced a restructuring of Investment Solutions to emphasize private-market secondaries, co-investments and managed accounts, while discontinuing fund-of-hedge-funds and liquid-alternative initiatives and winding down DGAM. It expected $10 million to $15 million of 2016 separation and contract-termination costs.
- The company authorized a $200 million repurchase program for common units and/or Carlyle Holdings units in February 2016.
- The company expects to contribute approximately $700 million to new CLOs over the next five years to comply with U.S. risk-retention requirements effective December 24, 2016. Funding may come from Carlyle, senior professionals and limited-recourse borrowing.
- Urbplan, a consolidated Brazilian real-estate development company, had substantially all loans in covenant default or technical default. The loans were contractually non-recourse to Carlyle, but management expected potential 2016 funding by Carlyle and senior professionals not to exceed $30 million.
- Legal and regulatory matters include an SEC informal request concerning historical monitoring-fee acceleration practices, the Foy v. Austin Capital litigation, and the Carlyle Capital Corporation litigation seeking $1.0 billion. Management did not believe existing matters were probable to have a material effect, but acknowledged that outcomes could materially affect a particular period.
- The company’s tax receivable agreement requires corporate taxpayers to pay 85% of realized tax savings to certain Carlyle Holdings unitholders. The estimated early-termination payment was approximately $809 million using the stated year-end assumptions.
Important facts investors should verify
- Reconcile GAAP net loss attributable to common unitholders with ENI, FRE and DE, including the effect of non-controlling interests, consolidation and unusual charges.
- Assess the sustainability of management-fee revenue in light of hedge-fund redemptions, fee-basis step-downs, distributions and the DGAM wind-down.
- Review the composition and valuation sensitivity of accrued performance fees, particularly the $2.99 billion accrued balance, $252 million giveback obligation and substantial Level III assets.
- Confirm corporate liquidity separately from consolidated-fund cash, including the approximately $808 million unrestricted or otherwise available cash estimate, revolver availability and $2.9 billion of unfunded Carlyle fund commitments.
- Evaluate exposure to energy, credit and real-estate weakness, including Legacy Energy fund clawbacks, CEREP tax liabilities and Urbplan defaults and potential funding.
- Review the economic effect of the $200 million repurchase authorization, distributions, tax receivable agreement payments and future CLO risk-retention funding.
- Monitor the impact of the January 1, 2016 consolidation-accounting change, which management expected to reduce reported assets and liabilities by approximately $23 billion to $24 billion and $16 billion to $17 billion, respectively, without affecting net income attributable to Carlyle.