The Carlyle Group L.P. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual Form 10-K, not a standalone Q4 filing, although it includes unaudited fourth-quarter data. Carlyle is a global alternative asset manager operating across Corporate Private Equity, Real Assets, Global Credit and Investment Solutions.
Business context and scale
- AUM was $216.5 billion, up from $195.1 billion at year-end 2017; fee-earning AUM was $159.6 billion, up from $124.6 billion.
- Carlyle raised more than $33 billion of new commitments in 2018 and approximately $90 billion since 2016 toward its four-year $100 billion fundraising target.
- Carry funds invested approximately $22.4 billion and realized approximately $24.0 billion during 2018. The carry portfolio appreciated approximately 9% for the year but declined 2% in Q4.
- The company had more than 1,650 employees, including 637 investment professionals, across 31 offices.
Financial results and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenues | $2,427.2 million | $3,676.2 million | Down 34% |
| Fund management fees | $1,272.0 million | $1,026.9 million | Up 24% |
| Investment income | $809.2 million | $2,290.6 million | Down $1,481.4 million |
| Total expenses | $2,071.5 million | $2,632.3 million | Down 21% |
| Income before taxes | $360.2 million | $1,132.3 million | Down 68% |
| Net income | $328.9 million | $1,007.4 million | Down 67% |
| Net income attributable to common unitholders | $92.9 million | $238.1 million | Down 61% |
| Basic earnings per common unit | $0.89 | $2.58 | Down 65% |
| Distributable Earnings | $673.9 million | $670.0 million | Up 1% |
| Fee Related Earnings | $350.4 million | $192.0 million | Up 83% |
GAAP results were pressured by substantially lower performance allocations, which fell to $622.9 million from $2.06 billion in 2017. In contrast, recurring fee revenues and non-GAAP earnings improved materially. Fee Related Earnings margin, calculated as FRE divided by total segment revenues, was approximately 16% in 2018 versus approximately 9% in 2017.
Cash flow, debt and liquidity
- Net cash used in operating activities was $343.5 million, compared with $7.1 million used in 2017. Cash flow included investment purchases, including $393.8 million for Fortitude Re, and consolidated-fund activity.
- Cash and cash equivalents were $629.6 million; corporate treasury investments were $51.7 million. Management stated that approximately $567 million remained after amounts allocated for specific purposes, before ordinary-course payables and reserves.
- Debt obligations were $1.55 billion, compared with $1.57 billion at year-end 2017. The company issued $350 million of 5.650% senior notes due 2048, repurchased $250 million of 3.875% senior notes due 2023 and prepaid $108.8 million owed to Barclays Natural Resource Investments.
- As of December 31, the senior credit facility had a $25 million term loan and a $750 million revolving facility with no revolver borrowings. In February 2019, Carlyle repaid the term loan, increased the revolver to $775 million and extended maturity to February 2024.
- At year-end, Carlyle reported compliance with its debt covenants. The amended facility requires at least $75 billion of management fee-earning assets and a total leverage ratio below 3.0 times.
Material changes versus the prior period
- Management fees increased due primarily to newly activated fee-earning AUM from newer buyout funds, while performance allocations declined sharply from unusually high 2017 levels.
- Fee-earning AUM increased 28% to $159.6 billion, supported by fundraising, new CLO activity and the acquisition of Carlyle Aviation Partners.
- Carlyle acquired Apollo Aviation Group in December 2018 for $74.5 million in cash and renamed it Carlyle Aviation Partners. The transaction added approximately $5.8 billion of AUM and included earn-out consideration of up to $150 million.
- Carlyle acquired a 19.9% interest in Fortitude Re in November 2018. The investment generated $57.9 million of income for the post-closing period, including $46.2 million of unrealized gains related to embedded derivatives.
- Corporate Private Equity Distributable Earnings declined to $350.4 million from $487.9 million, primarily because of lower realized performance revenues. Real Assets increased to $207.1 million from $24.8 million, helped by the absence of the 2017 Urbplan loss. Global Credit declined to $77.5 million from $126.9 million, while Investment Solutions increased to $38.9 million from $30.4 million.
- The company adopted new revenue-recognition guidance in 2018, reclassifying carried interest from performance fees to investment income and presenting certain reimbursed costs gross.
Guidance, outlook, risks and unusual items
- Management expected 2019 net realized performance revenues to be generally comparable to 2018, with growth thereafter depending on market conditions. Carlyle expected to exceed its $100 billion fundraising target during 2019, while also anticipating a slower fundraising pace due to product mix.
- Management cited slowing global growth, volatile markets, widening credit spreads, high asset prices, intense competition and elevated industry dry powder as risks to investment pace and realizations.
- Performance allocations are sensitive to valuation changes. Accrued performance allocations were $3.48 billion at year-end, while accrued giveback obligations were $63.2 million. Previously distributed carried interest subject to potential giveback was approximately $0.5 billion if all fund investments were assumed worthless.
- Approximately 95% of the reported investment fair value in Corporate Private Equity, 90% in Real Assets, 97% in Global Credit and 96% in Investment Solutions was classified as Level III, highlighting reliance on management estimates and illiquid valuations.
- Material contingencies included pending SEC inquiries regarding historical monitoring-fee practices and relationships with a third-party investment adviser, the appeal of the CCC litigation, a French tax dispute involving a potential €117.5 million refund, and approximately $35 million of accrued litigation and regulatory liabilities.
- The company received approximately $32 million of insurance proceeds in 2018 relating to prior petroleum-commodity settlement matters and had recognized approximately $209 million of related insurance proceeds cumulatively.
- Common-unit distributions for the 2018 distribution year totaled $1.34 per unit. Distributions remain discretionary and may be reduced or suspended based on cash needs, contractual restrictions, taxes, capital commitments and giveback obligations.
Most important facts for investors to verify
- Reconcile GAAP earnings with Distributable Earnings and Fee Related Earnings, particularly the effect of unrealized performance allocations, compensation, acquisitions and other adjustments.
- Assess the sustainability of management-fee growth as newer funds mature, fee rates step down and investment-period commitments convert to invested-capital fee bases.
- Monitor realized exits, accrued carry, valuation changes and potential giveback obligations, rather than relying only on accrued performance allocations.
- Review liquidity excluding cash held for specific purposes and assets of consolidated CLOs, which are generally non-recourse and unavailable for corporate liquidity.
- Evaluate contingent consideration of up to $245 million related to Carlyle Aviation Partners and Fortitude Re, as well as tax receivable agreement obligations and possible termination payments.
- Follow the SEC inquiries, CCC appeal, French tax appeal and other legal or regulatory matters; the filing states that outcomes could exceed recorded accruals despite management’s assessment that material losses are not probable.
- Consider the concentration of Level III assets, market sensitivity of performance revenues, foreign-exchange exposure and the effect of Q4 2018 market volatility on future valuations and realizations.