The Carlyle Group L.P. — Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2014, compared with the quarter ended March 31, 2013. Carlyle is a global alternative asset manager operating through Corporate Private Equity, Global Market Strategies, Real Assets and Solutions. U.S. GAAP results consolidate certain investment funds, CLOs and Urbplan, which materially increases reported assets, liabilities, revenue and cash flows but generally does not affect income attributable to Carlyle’s common unitholders.
- Total AUM was $198.9 billion, up from $188.8 billion at December 31, 2013.
- Fee-earning AUM was $142.1 billion, up from $122.9 billion at March 31, 2013.
- Common units outstanding were 64.1 million at March 31, 2014.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $1,147.4 million | $1,145.0 million | Flat |
| Fund management fees | $260.3 million | $231.4 million | Up 12% |
| Performance fees | $620.5 million | $642.4 million | Down 3% |
| Income before taxes | $472.4 million | $452.4 million | Up 4% |
| Net income | $456.4 million | $427.5 million | Up 7% |
| Net income attributable to Carlyle Group L.P. | $24.6 million | $33.8 million | Down 27% |
| Basic earnings per common unit | $0.46 | $0.78 | Down 41% |
| Diluted earnings per common unit | $0.41 | $0.66 | Down 38% |
| Distributable earnings | $183.3 million | $171.0 million | Up 7% |
| Fee-related earnings | $37.2 million | $38.8 million | Down 4% |
| Net cash provided by operating activities | $989.8 million | $1,454.8 million | Down 32% |
GAAP net income margin was approximately 39.8%, but only $24.6 million of net income was attributable to Carlyle Group L.P. because $324.5 million was attributable to non-controlling interests. The filing does not present a single consolidated operating margin that excludes consolidated funds.
Reported expenses increased to $1,099.0 million from $904.1 million, driven principally by higher compensation, new consolidated-fund activity, Urbplan expenses and higher non-operating expense. Compensation and benefits increased 14% to $609.1 million. Net performance fees were $306.6 million on a segment basis, compared with $354.7 million in the prior-year quarter.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1.034 billion, compared with $966.6 million at December 31, 2013. Cash held at consolidated funds was an additional $2.150 billion but was not available for Carlyle’s general liquidity needs.
- Total assets were $36.35 billion and total liabilities were $21.76 billion. Consolidated funds accounted for approximately $29.5 billion of assets.
- Carlyle operating debt included $42.4 million of loans payable, $499.8 million of 3.875% senior notes due 2023 and $607.0 million carrying value of 5.625% senior notes due 2043.
- The company issued an additional $200 million of 5.625% senior notes due 2043 and received $210.8 million of net proceeds.
- No borrowings were outstanding under the $750 million revolving credit facility at March 31, 2014. Management stated that available liquidity, including cash flow and the credit facility, was sufficient for at least the next 12 months.
- Carlyle had $3.05 billion of unfunded commitments to its funds, of which approximately $2.8 billion was subscribed individually by senior professionals and other personnel.
Material changes versus the prior comparable period
- Management fees increased because of newly raised funds, catch-up fees, higher AUM at selected platforms and the Metropolitan and DGAM acquisitions. These increases were partly offset by fee-basis step-downs, fund distributions, CLO liquidations and lower Vermillion AUM.
- Performance fees declined modestly overall, with stronger Corporate Private Equity and Solutions results offset by weaker Global Market Strategies and Real Assets results. Performance fee reversals increased to $71.1 million from $3.4 million.
- Segment Economic Net Income declined to $321.9 million from $393.9 million, while Distributable Earnings increased to $183.3 million from $171.0 million. Corporate Private Equity ENI increased to $258.4 million, but Global Market Strategies fell to $56.2 million and Real Assets turned negative at $(16.5) million.
- Equity-based compensation increased to $74.2 million from $52.3 million. In February 2014, Carlyle granted approximately 5.6 million deferred restricted common units with an estimated grant-date value of approximately $172 million.
- Carlyle completed a $449.5 million net common-unit offering. Proceeds were used partly to acquire 4.5 million newly issued Carlyle Holdings units and partly to acquire 9.3 million units from other Carlyle Holdings limited partners.
- Carlyle acquired DGAM on February 3, 2014 for approximately $31.1 million of initial consideration, adding approximately $2.9 billion of fee-earning AUM.
- General and administrative expense included a $24.6 million impairment of acquired intangible assets.
Guidance, outlook, commentary and risks
Management did not provide formal quantitative earnings guidance. Carlyle expects to cause Carlyle Holdings to make distributions supporting a quarterly distribution of $0.16 per common unit for each of the first three quarters of 2014 and at least $0.16 for the fourth quarter, subject to the general partner’s discretion, liquidity needs, investment requirements, legal restrictions and financing covenants.
Management described a generally favorable market environment, including moderate economic growth, stable or rising risk-asset prices and low interest rates. During the quarter, Carlyle realized proceeds of more than $3 billion from 124 investments and 35 funds and invested or committed more than $4 billion in new and existing carry-fund investments. The filing cautions that these trends may not continue.
- Performance fees are substantially dependent on unrealized fair-value appreciation and may reverse. Accrued performance fees were $3.8 billion, while accrued giveback obligations were $35.7 million. Previously distributed carried interest potentially subject to giveback was approximately $1.0 billion if fund investments were deemed worthless.
- Approximately 80% of AUM fair value was classified as Level III or otherwise based on significant judgment, making valuations sensitive to multiples, market yields, discount rates, default rates, recovery rates and other assumptions.
- Urbplan, a Brazilian real estate development company consolidated by Carlyle, had approximately $278.3 million of loan principal outstanding, substantially all of which was in technical default or out of compliance with debt covenants. Lenders were discussing cures or renegotiations, and no acceleration notices were outstanding. Carlyle and its professionals expected to provide additional funding; total funding through April 15, 2014 was $107.5 million against an earlier estimated additional requirement of approximately $200 million.
- Urbplan had approximately $170.2 million of future land-development costs and may require additional impairment, funding or restructuring. Its debt was contractually non-recourse to Carlyle, but third parties could assert claims against Carlyle in certain circumstances.
- Contingent cash obligations related to acquisitions and NGP could total up to $1.05 billion, including estimated NGP option payments of approximately $96.4 million. Carlyle also expected to exercise one NGP option for approximately $35 million in May 2014.
- Carlyle faces litigation and investigations, including antitrust claims involving consortium bidding, New Mexico placement-agent allegations and claims related to the 2008 Carlyle Capital Corporation insolvency. Management could not estimate potential losses and stated that an adverse outcome could materially affect a particular period.
- A French tax assessment relating to CEREP I seeks approximately €97 million. CEREP I had accrued €75 million, or approximately $103.3 million, for the contingency, and Carlyle had provided credit support and escrow.
Most important facts for investors to verify
- Reconcile GAAP net income with income attributable to Carlyle common unitholders, non-controlling interests and distributable earnings.
- Assess the sustainability and realization timing of the $3.8 billion accrued performance fees and the risk of future reversals or givebacks.
- Review the concentration of performance fees in Corporate Private Equity funds, particularly CP V and CEP III.
- Monitor fee-earning AUM, fee-basis step-downs, fundraising, distributions and the effect of the Metropolitan and DGAM acquisitions.
- Evaluate Urbplan’s funding requirements, covenant defaults, lender negotiations, potential impairments and possible third-party claims.
- Verify debt covenant compliance, the $750 million undrawn revolving facility, senior-note obligations and the tax receivable agreement payments.
- Review the valuation sensitivity of Level III assets and the assumptions underlying private-equity, real-estate, CLO and contingent-consideration valuations.
- Track litigation, the CEREP I French tax matter and the maximum contingent acquisition and NGP obligations.