Business context and reporting period
The Carlyle Group L.P. is a global alternative asset manager operating through Corporate Private Equity, Global Market Strategies, Real Assets and Global Solutions. The unaudited Form 10-Q covers the quarter and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods. The financial statements consolidate certain advised funds and CLOs, which materially gross up assets, liabilities, revenues, expenses and cash flows but generally do not affect net income attributable to Carlyle.
- Total AUM was $180.4 billion and fee-earning AUM was $132.0 billion at June 30, 2013.
- Fee-earning AUM increased 18% from June 30, 2012, principally from fundraising, acquisitions, CLO collateral balances and hedge-fund subscriptions.
- The filing was signed August 12, 2013. Common units outstanding at August 7, 2013 were 49.0 million.
Key financial metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Total revenues | $769.3 million | $248.4 million | $1,914.3 million | $1,359.3 million |
| Fund management fees | $242.2 million | $239.9 million | $473.6 million | $474.3 million |
| Total performance fees | $259.1 million | $(220.4) million | $901.5 million | $420.4 million |
| Income before taxes | $285.9 million | $186.1 million | $738.3 million | $1,691.9 million |
| Net income | $269.3 million | $175.5 million | $696.8 million | $1,669.6 million |
| Net income attributable to Carlyle | $(3.3) million | $(10.3) million | $30.5 million | $(10.3) million |
| Distributable earnings | $163.0 million | $115.9 million | $334.0 million | $294.7 million |
| Fee-related earnings | $26.4 million | $35.5 million | $62.6 million | $69.5 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $1,376.5 million | $908.0 million |
Reported GAAP income-before-tax margins were approximately 37% for the quarter and 39% for the six months; these margins are heavily affected by consolidated-fund activity. Net income attributable to Carlyle remained negative in the second quarter because substantial earnings were allocated to non-controlling interests, including Carlyle Holdings and consolidated-fund investors.
Balance sheet, debt and liquidity
- Total assets were $33.8 billion at June 30, 2013, including $28.7 billion of consolidated-fund assets. Total liabilities were $20.0 billion.
- Carlyle operating cash and cash equivalents were $572.9 million; the additional $2.2 billion held at consolidated funds was generally unavailable for Carlyle’s general liquidity needs.
- Operating-entity debt consisted of $25.0 million of term debt and $900.0 million of senior notes, for total carrying value of approximately $923.2 million. The revolving facility had no outstanding balance and $750.0 million of capacity.
- During the first quarter, Carlyle issued $500.0 million of 3.875% notes due 2023 and $400.0 million of 5.625% notes due 2043, using proceeds primarily to repay the revolving facility and $475.0 million of term debt.
- Management stated that available liquidity, cash flows and credit facilities were sufficient to fund expected needs for at least the next 12 months. The company was in compliance with its debt covenants at June 30, 2013.
- Cash flow from operations included significant consolidated-fund activity and non-cash performance fees; therefore, it is not a direct measure of cash earnings available to Carlyle unitholders.
Material changes versus the prior comparable period
- Second-quarter revenue increased 210%, primarily because performance fees improved from a $220.4 million loss in 2012 to $259.1 million of revenue in 2013. Six-month revenue increased 41%.
- Second-quarter performance fees benefited from approximately 3% appreciation in the remaining value of carry-fund assets, compared with approximately 2% depreciation in the prior-year quarter. Corporate Private Equity generated $186.2 million of performance fees in the quarter versus a $217.6 million loss in 2012.
- Fund management fees were essentially flat for the six months and increased only 1% in the quarter. Management cited fee-basis changes from commitments to invested capital, expired investment periods and fee-rate step-downs, partly offset by acquisitions, fundraising and higher AUM.
- Fee-related earnings declined 26% for the quarter and 10% for the six months, reflecting lower fee revenues in certain segments and higher fundraising, professional and operating expenses.
- Distributable earnings increased 41% in the quarter and 13% for the six months, supported by higher realized performance fees and realized investment income.
- Equity-based compensation rose to $126.0 million in the quarter and $178.3 million for the six months. The quarter included $47.9 million related to differences between estimated and actual forfeitures on vested Carlyle Holdings units and $5.0 million from a forfeiture-rate estimate change.
- Four new CLOs formed during the first half increased consolidated-fund assets and related income, expenses and debt. These amounts are largely attributable to third-party investors and are non-recourse to Carlyle.
Guidance, outlook, commentary and risks
- The filing does not provide formal earnings guidance. Management expected fundraising to remain strong through the remainder of 2013, but noted a competitive environment and longer fundraising timelines.
- During the six months, Carlyle raised $11.7 billion of new commitments and realized $8.0 billion for carry-fund investors. Management stated that the investment pipeline was less robust than anticipated and that it no longer expected 2013 investment activity to exceed 2012 levels.
- Management expected 2013 Corporate Private Equity management fees to be roughly level with or slightly below 2012 because of investment-period expirations and the timing of successor funds.
- Performance fees depend heavily on unrealized fair values, market comparables and fund return hurdles. Accrued performance fees were $2.65 billion, while accrued giveback obligations were $49.6 million. Previously distributed carried interest subject to potential giveback could have been approximately $1.0 billion if fund investments were deemed worthless.
- Material contingencies include antitrust “club bid” litigation, CCC-related litigation seeking up to $1.0 billion, French and Italian tax assessments involving CEREP I, and a possible additional investment of $50 million or more in a real estate portfolio company.
- Most investment valuations are judgment-based; Level III assets totaled approximately $21.3 billion within consolidated-fund investments. Higher discount rates, default rates or market yields, and lower multiples, recovery rates or indicative prices could reduce valuations and performance fees.
- Subsequent events included acquisition of the remaining 40% of AlpInvest on August 1, 2013 for 2.9 million common units and approximately $6 million of cash; declaration of a $0.16 quarterly distribution; and an August 9 amendment extending the senior credit facility maturity to August 9, 2018 and eliminating term-loan amortization.
Important facts for investors to verify
- Reconcile GAAP results with management’s non-GAAP measures, particularly distributable earnings and fee-related earnings, and distinguish Carlyle’s share from consolidated-fund and other non-controlling interests.
- Assess the sustainability of performance fees, accrued carry and unrealized valuations, including potential reversals and giveback obligations.
- Review fee-earning AUM trends, fee-rate step-downs and investment-period expirations, especially in Corporate Private Equity and Real Assets.
- Confirm the effect of the AlpInvest transaction on ownership, unit dilution, segment earnings and future distributions.
- Evaluate operating-entity leverage and covenants separately from non-recourse CLO debt, and verify liquidity available after unfunded commitments, contingent consideration, tax-receivable payments and fund investments.
- Monitor the disclosed litigation, tax assessments, guarantees and potential portfolio-company capital requirement, for which ultimate losses may be uncertain.