Carlyle Group L.P. 2012 Q2 SEC Filing Summary
Business context and reporting period
The filing is an unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Carlyle is a global alternative asset manager operating through Corporate Private Equity, Global Market Strategies, Real Assets, and Fund of Funds Solutions. The May 2012 reorganization and initial public offering materially changed the legal structure, ownership, compensation accounting, and tax profile. Historical periods reflect the predecessor Carlyle Group, so comparisons are affected by the IPO and reorganization.
- IPO completed May 8, 2012: 30.5 million common units priced at $22.00 per unit; net proceeds were approximately $615.8 million.
- CalPERS exchanged 12.7 million Carlyle Holdings units for common units, increasing public common units outstanding to 43.2 million and Carlyle’s ownership of Carlyle Holdings to approximately 14%.
- Fee-earning AUM was $112.0 billion and total AUM was $156.2 billion at June 30, 2012.
Financial performance and key metrics
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Total revenue | $248.4 million | $1,359.3 million |
| Fund management fees | $239.9 million | $474.3 million |
| Performance fees | $(220.4) million | $420.4 million |
| Net income | $175.5 million | $1,669.6 million |
| Net income attributable to Carlyle Group L.P. | $(10.3) million | The filing does not present a comparable standalone six-month attributable amount clearly because of the IPO-period ownership structure |
| Basic and diluted loss per common unit | $(0.26) | Not presented on a comparable historical basis |
| Net cash provided by operating activities | Not presented quarterly | $908.0 million, including Consolidated Funds |
| Cash and cash equivalents | $449.5 million at June 30, 2012 |
Reported GAAP net income includes substantial Consolidated Funds activity that is largely attributable to non-controlling interests and is generally non-recourse to Carlyle. For management’s deconsolidated non-GAAP measures, second-quarter Economic Net Income was $(57.2) million, Fee Related Earnings were $35.5 million, and Distributable Earnings were $115.3 million. Six-month figures were $334.9 million, $69.5 million, and $294.1 million, respectively.
- Total assets were $29.6 billion, including $25.6 billion of Consolidated Funds assets. Total liabilities were $16.3 billion.
- Corporate debt was $500.0 million of term debt at June 30, 2012; no revolving credit facility borrowings were outstanding.
- The new senior credit facility includes a $500.0 million term loan and a $750.0 million revolver, both maturing September 30, 2016. The company reported compliance with all debt covenants.
- Consolidated CLO debt was $13.9 billion outstanding, but CLO liabilities are generally non-recourse to Carlyle and secured by CLO assets.
- Accrued performance fees were $2.12 billion, offset by $133.4 million of accrued giveback obligations and $844.2 million of accrued performance-fee compensation.
Material changes versus prior comparable periods
- Second-quarter revenue declined 67% from $755.8 million in 2011, principally because performance fees fell from $345.7 million to $(220.4) million. Six-month revenue declined 34% from $2.07 billion to $1.36 billion.
- Management fees increased 9% in the quarter and 6% for the first six months, benefiting from the ESG and AlpInvest acquisitions and higher assets in certain strategies.
- Second-quarter performance fees were negatively affected by valuation declines and reversals, particularly in Corporate Private Equity and Real Assets. Corporate Private Equity performance fees were $(217.6) million for the quarter versus $270.1 million in 2011.
- Consolidated Funds generated net investment gains of $386.6 million in the quarter and $1.26 billion for the six months, versus losses of $92.7 million and $277.0 million, respectively, in the prior periods. These gains were primarily allocated to non-controlling interests.
- Compensation and benefits increased to $178.5 million in the quarter from $142.7 million, including $94.2 million of equity-based compensation associated with the reorganization and IPO. The filing expects compensation and general and administrative expenses to increase as Carlyle expands infrastructure and public-company capabilities.
- Operating cash flow declined from $1.31 billion to $908.0 million for the six months. Cash decreased by $60.1 million to $449.5 million after financing outflows, debt repayments, distributions, and IPO-related activity.
- Fee-earning AUM increased 39% year over year, but declined during the quarter because of distributions, investment-period expirations, and foreign-exchange effects. Real Assets fee-earning AUM declined 14% from March 31, 2012 to $19.5 billion.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal earnings guidance. Management expects fundraising, investment deployment, realizations, and fee-earning AUM to drive future results. Carlyle raised $6.0 billion of new capital commitments during the first six months and reported approximately $40.0 billion of available capital for investment. Management expects future distributions to include a quarterly target of $0.16 per common unit, subject to the discretion of the general partner; a prorated $0.11 distribution was declared for the first public-company quarter.
- Performance fees are highly volatile, depend on fair-value estimates and fund-specific return hurdles, and may be reversed. Realized carry may be subject to future givebacks.
- If all fund investments were deemed worthless at June 30, 2012, previously distributed carry subject to potential giveback would be approximately $1.0 billion after tax, although management viewed this scenario as remote.
- Carlyle had $2.15 billion of unfunded commitments to its funds, of which approximately $2.05 billion was subscribed individually by senior professionals and other personnel.
- The tax receivable agreement requires corporate taxpayers to pay eligible Carlyle Holdings unitholders 85% of realized cash tax savings from applicable basis increases. The recorded obligation related to the CalPERS exchange was $18.3 million, while future payments could be substantial.
- Carlyle provided a July 2012 guarantee for a €45.7 million French tax assessment related to CEREP I. Potential unrecoverable costs were not estimable.
- Material legal and regulatory matters include CCC-related litigation, the Foy matter, a DOJ antitrust investigation, and private litigation concerning club bids. The filing states that potential losses generally cannot be estimated and that management does not believe existing matters are probable to materially affect the financial statements.
- Approximately 87% of assets measured at fair value were classified as Level III or otherwise based on significant judgment within the consolidated investment portfolio, increasing valuation sensitivity.
Most important facts for investors to verify
- Separate sustainable fee-related earnings and distributable earnings from volatile, unrealized performance fees and Consolidated Funds gains.
- Reconcile GAAP results to Carlyle’s deconsolidated non-GAAP measures and understand the effect of IPO-period ownership and non-controlling interests.
- Monitor fee-earning AUM after investment-period expirations, distributions, foreign-exchange movements, and new fundraising.
- Review the $500 million term loan, covenant requiring at least $53 billion of management-fee-earning assets, and remaining revolver capacity.
- Assess the potential cash burden from $2.15 billion of unfunded commitments, the tax receivable agreement, giveback obligations, and contingent acquisition consideration.
- Evaluate the reliability of Level III valuations and the concentration of accrued performance fees in Corporate Private Equity funds.
- Track the French tax assessment, CCC litigation, antitrust matters, and any changes to guarantees or loss estimates.