Business Context and Reporting Period
The Carlyle Group L.P. filed an unaudited Form 10-Q for 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. It earns management fees, performance fees and investment income and consolidates certain sponsored funds and CLOs under U.S. GAAP.
Consolidated results include substantial non-controlling interests and gross-up effects from consolidated funds. The prior-year comparison is affected by the May 2012 reorganization and initial public offering: compensation for senior Carlyle professionals was treated as equity distributions before the IPO and as compensation expense thereafter.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1,145.0 million | $1,110.9 million | 3% increase |
| Fund management fees | $231.4 million | $234.4 million | 1% decrease |
| Performance fees | $642.4 million | $640.8 million | Essentially flat |
| Income before taxes | $452.4 million | $1,505.8 million | 70% decrease |
| Net income | $427.5 million | $1,494.1 million | 71% decrease |
| Net income attributable to Carlyle Group L.P. | $33.8 million | Prior-period per-partnership allocation not presented | Not directly comparable |
| Basic/diluted earnings per common unit | $0.78/$0.66 | Not presented | Prior period lacked comparable capital structure |
| Economic Net Income | $393.9 million | $392.1 million | Less than 1% increase |
| Fee Related Earnings | $36.2 million | $34.0 million | 6% increase |
| Distributable Earnings | $168.4 million | $178.8 million | 6% decrease |
| Net cash from operating activities | $1,454.8 million | $479.9 million | Increase, substantially affected by consolidated funds |
Net income attributable to the partnership represented approximately 3% of consolidated revenue. Consolidated net income was heavily affected by non-controlling interests and fund-level results. Consolidated expenses were $904.1 million, including $534.5 million of compensation and benefits, $111.4 million of general and administrative expenses, and $250.1 million of consolidated-fund interest and other expenses.
As of March 31, 2013, total assets were $32.7 billion, including $27.6 billion attributable to consolidated funds. Carlyle operating entities, excluding consolidated funds, had approximately $5.1 billion of assets, including $570.4 million of cash and cash equivalents and $910.5 million of investments.
Assets Under Management, Cash Flow, Debt and Liquidity
- Total AUM was $176.3 billion, including $122.9 billion of fee-earning AUM and $46.2 billion of available capital.
- Carlyle raised $4.9 billion of new capital commitments and realized $4.1 billion of proceeds for carry-fund investors during the quarter.
- Cash and cash equivalents were $570.4 million at March 31, 2013, compared with $567.1 million at December 31, 2012.
- Carlyle operating-entity debt was $925.0 million: $25.0 million under the term loan and $900.0 million of senior notes. No revolving credit facility balance remained outstanding.
- The company issued $500.0 million of 3.875% senior notes due 2023 and $400.0 million of 5.625% senior notes due 2043. Proceeds were used to repay $386.3 million under the revolving facility and prepay $475.0 million of term-loan principal.
- The senior credit facility included a $750.0 million revolving facility available at quarter-end. Management stated that cash, operating cash flow and available credit were sufficient to fund expected needs for at least the next 12 months.
- Consolidated CLO debt was $14.9 billion at borrowing outstanding, but is generally non-recourse to Carlyle and collateralized by CLO assets.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue increased modestly, but GAAP net income declined sharply because Q1 2012 included substantially larger consolidated-fund investment gains, particularly unrealized gains.
- Net investment gains of consolidated funds fell to $211.5 million from $872.1 million. The 2013 amount included $386.9 million of losses on CLO liabilities.
- Compensation and benefits increased to $534.5 million from $195.2 million, primarily reflecting post-IPO accounting for senior professional compensation, $52.3 million of equity-based compensation, and higher performance-fee-related compensation.
- On a more comparable management basis, ENI was broadly stable, while Distributable Earnings declined due primarily to lower realized investment income and lower realized net performance fees.
- Global Market Strategies ENI increased to $104.0 million from $38.1 million, aided by the Vermillion acquisition and stronger performance fees.
- Real Assets ENI declined to $41.8 million from $101.0 million due to lower performance fees and an $8.5 million investment loss, including a realized real estate investment loss.
- Fee-earning AUM increased to $122.9 billion from $117.0 billion year over year, while total AUM increased to $176.3 billion from $170.2 billion at the beginning of 2013.
Guidance, Outlook, Risks and Unusual Items
- Management expected fundraising to continue at a strong pace in 2013, although the fundraising environment was competitive and fund raising could take longer. Management generally expected successor funds and new initiatives to produce a net increase in management fees versus 2012, while Corporate Private Equity management fees could be flat or slightly lower depending on fund timing and size.
- Management identified low interest rates, liquid capital markets and higher risk-asset prices as supportive of investment activity, while fiscal uncertainty, European economic weakness, political instability, valuation risk and financing-market changes remained risks.
- Performance fees are materially dependent on fair-value marks, investment realizations and fund-specific hurdles. Accrued performance fees were $2.6 billion, including $389.6 million of unrealized performance fees in Q1 revenue, and may reverse in future periods.
- Accrued giveback obligations were $46.3 million. If all fund investments were deemed worthless, potential giveback exposure on realized and distributed carried interest was estimated at $1.1 billion, although management viewed that scenario as remote.
- Carlyle had $2.3 billion of unfunded commitments to its funds; approximately $2.1 billion was subscribed individually by senior professionals and other professionals, with the balance funded directly by Carlyle.
- Contingent cash obligations related to acquisitions and the NGP investment had a maximum potential amount of approximately $989.2 million, against $273.7 million of recognized cash-related liabilities, excluding contingent equity consideration.
- Carlyle was contesting French and Italian tax assessments related to CEREP I. The Italian assessment could total approximately €59.0 million if unchallenged, and the French assessment was approximately €97.0 million. The ultimate unrecoverable cost to Carlyle was not estimable.
- Significant litigation remained pending, including the club-bid antitrust class action and claims related to Carlyle Capital Corporation. Management stated that material losses were not probable but could not estimate reasonably possible loss ranges.
Investor Verification Items
- Reconcile GAAP net income and partnership-attributable earnings with ENI, Fee Related Earnings and Distributable Earnings, recognizing that these non-GAAP measures exclude consolidated-fund results and selected unusual items.
- Assess the sustainability of performance fees, particularly the concentration in Corporate Private Equity funds CP IV and CP V and the reliance on unrealized valuations.
- Verify post-IPO compensation, equity-based compensation and non-controlling-interest effects when comparing 2013 with 2012.
- Monitor fee-earning AUM changes as funds move from commitment-based to invested-capital fee bases and as investment periods expire.
- Review debt-service obligations, credit-facility covenants, contingent consideration, tax receivable agreement payments and the non-recourse nature of consolidated-fund liabilities.
- Evaluate potential givebacks, tax contingencies and pending litigation, including the CEREP I assessments and Carlyle Capital Corporation claims.