Carlyle Group Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2020. Carlyle is a global investment firm operating through Corporate Private Equity, Real Assets, Global Credit and Investment Solutions. On January 1, 2020, the former partnership converted into The Carlyle Group Inc.; all Carlyle Holdings partnership units were exchanged for common stock. Accordingly, 2020 results reflect a corporation, while 2019 comparables reflect a partnership and are not fully comparable for tax and ownership purposes.
- Total AUM was $216.9 billion and fee-earning AUM was $158.2 billion at March 31, 2020.
- Approximately 98% of fee-earning AUM was in closed-end funds, and approximately 90% of fee revenue came from traditional closed-end, long-dated funds.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $(745.7) million | $1,087.0 million | Down $1,832.7 million |
| Fund management fees | $355.9 million | $353.4 million | Up 0.7% |
| Investment income (loss) | $(1,190.9) million | $650.9 million | Down $1,841.8 million |
| Loss before taxes | $(789.0) million | $470.3 million | Unfavorable $1,259.3 million |
| Net income (loss) | $(709.0) million | $446.3 million | Down $1,155.3 million |
| Net loss attributable to common stockholders | $(612.0) million | $137.0 million | Down $749.0 million |
| Basic and diluted EPS | $(1.76) | $1.25 basic; $1.18 diluted | Unfavorable |
| Distributable Earnings | $175.0 million | $100.8 million | Up 73.4% |
| Fee Related Earnings | $128.8 million | $103.3 million | Up 24.7% |
GAAP profitability was dominated by unrealized valuation losses. Performance allocations were $(937.6) million versus $349.1 million in the prior-year quarter, and principal investment income was $(253.3) million versus $301.8 million. Total carry-fund appreciation was approximately negative 7% in Q1 2020 versus positive 3% in Q1 2019. The filing indicates that GAAP revenue and margins are not meaningful measures for this quarter because investment valuation losses and related compensation reversals overwhelmed recurring fee revenue.
- Segment revenue was $581.1 million, up from $450.9 million; segment expenses were $406.1 million, up from $350.1 million.
- Approximate segment Distributable Earnings margin was 30.1% ($175.0 million divided by $581.1 million), versus 22.4% in Q1 2019.
- Approximate Fee Related Earnings margin was 22.2% ($128.8 million divided by $581.1 million), versus 22.9% in Q1 2019.
- Management fees were relatively stable, but transaction and advisory fees declined to $4.4 million from $8.8 million.
Cash flow, balance sheet, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $1,008.5 million at March 31, 2020, compared with $828.0 million at year-end 2019.
- Operating cash flow was $(245.9) million, compared with $341.0 million in Q1 2019, including Consolidated Fund activity. Excluding Consolidated Funds, operating cash flow was $146.6 million versus $191.3 million.
- Cash flow from financing activities was $456.6 million, including a $250.0 million draw under the senior revolving credit facility, $87.4 million of dividends, $68.8 million of deferred consideration payments and $26.4 million of share repurchases.
- Total debt obligations were $2.19 billion, including $250.0 million outstanding under the senior credit facility, $321.8 million of CLO borrowings and $1.625 billion of senior notes. The senior facility had $525.0 million of remaining capacity and matures in February 2024.
- Loans payable of Consolidated Funds were $4.20 billion and generally are non-recourse to Carlyle. Consolidated Funds held approximately $4.6 billion of assets.
- Management reported approximately $949 million of cash available after amounts allocated to specific purposes and described immediate liquidity of approximately $1.5 billion, including cash and available revolver capacity.
- The company was in compliance with its debt covenants at March 31, 2020, including a minimum management fee-earning asset requirement and a maximum total leverage ratio.
Material changes versus the prior comparable period
- COVID-19 market disruption caused substantial portfolio depreciation: Corporate Private Equity funds declined 8%, Real Assets declined 12% overall, Global Credit carry funds declined 21%, and Investment Solutions funds increased 1%, although certain Investment Solutions valuations were based on December 31, 2019 underlying fund information.
- Net accrued performance revenues declined to approximately $1.2 billion from $1.7 billion at December 31, 2019. Accrued performance allocations declined to $2.75 billion from $3.86 billion.
- Total AUM declined from $224.4 billion at year-end 2019 to $216.9 billion, primarily from market depreciation and foreign exchange. Fee-earning AUM declined from $161.1 billion to $158.2 billion.
- Fortitude Re generated a $111.9 million loss for Carlyle versus $256.3 million of income in Q1 2019, driven substantially by fair-value losses on embedded derivatives.
- The January 1 conversion materially changed the tax profile: Carlyle became subject to corporate income taxes, recorded an estimated $90.3 million conversion-related tax expense in the income statement and recorded $53.6 million of related tax effects directly in equity.
- The company recognized a $29.9 million reduction to general and administrative expense related to recovery of costs in the Carlyle Capital Corporation litigation settlement.
Guidance, outlook, management commentary and risks
- No formal earnings guidance was provided. Management expects COVID-19 to reduce Distributable Earnings and Fee Related Earnings and is actively managing expenses.
- Investment and exit activity is expected to slow for several quarters, with realized performance revenues likely below Q1 levels. Fundraising was strong in Q1, with $7.5 billion raised, but management expects fundraising to slow in the second half of 2020, potentially limiting growth in fee-earning AUM and management fees.
- Carlyle expects increased investment opportunities in Global Credit but noted that CLO rating downgrades may defer subordinated management fees. The filing reports approximately $4.1 million of deferred subordinated fees in Global Credit commentary; the financial statements separately refer to approximately $3.5 million after consolidated-CLO effects.
- Key risks include further portfolio valuation declines, delayed exits, reduced fundraising, lower transaction and advisory fees, CLO defaults and fee deferrals, portfolio-company insolvencies, capital-call failures by fund investors, liquidity pressure, cybersecurity and remote-work risks, regulatory investigations and litigation.
- Unfunded commitments totaled $3.9 billion, of which approximately $3.4 billion was subscribed individually by senior Carlyle professionals, advisors and other professionals. Carlyle also provided a $130.0 million guarantee for a Real Assets fund facility; no amounts had been funded.
- Potential giveback obligations were $22.4 million at March 31, 2020, with approximately $8.1 million attributable to Carlyle after amounts attributable to professionals and other parties.
Most important facts for investors to verify
- Whether subsequent-quarter market valuations further reduce accrued performance revenues and create additional carried-interest giveback exposure.
- The sustainability of recurring management fees, Fee Related Earnings and the $0.25-per-share quarterly dividend under prolonged COVID-19 disruption.
- Actual CLO rating migrations, defaults, subordinated-fee deferrals and recovery of deferred fees.
- The timing and valuation impact of the planned Fortitude Re transaction, including the potential $100 million purchase-price adjustment and up to $95 million of deferred consideration.
- Funding requirements and cash ownership for the $3.9 billion of unfunded commitments, contingent obligations and operating liabilities.
- The comparability of 2020 GAAP results with 2019 results after the corporate conversion and changes in ownership and tax presentation.