Business Context and Reporting Period
The Carlyle Group Inc. is a global investment firm operating through Global Private Equity, Global Credit and Global Investment Solutions. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023. Carlyle reported $425.5 billion of total AUM and $304.2 billion of fee-earning AUM at quarter-end. Fee-earning AUM increased from $271.4 billion a year earlier but declined from $307.4 billion at December 31, 2023.
U.S. GAAP results consolidate certain funds, primarily CLOs. This increases reported assets, liabilities, revenues and expenses, while generally having no material effect on net income attributable to Carlyle because the economic interests of other investors are reported as non-controlling interests.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Fund management fees | $523.6 million | $500.8 million | +5% |
| Incentive fees | $26.2 million | $19.8 million | +32% |
| Performance allocations | $(157.0) million | $160.8 million | Down $317.8 million |
| Principal investment income | $73.1 million | $11.7 million | Up $61.4 million |
| Total revenue | $688.4 million | $859.0 million | −20% |
| Total expenses | $560.7 million | $703.0 million | −20% |
| Income before taxes | $120.7 million | $159.6 million | −24% |
| Net income | $98.8 million | $125.3 million | −21% |
| Net income attributable to Carlyle | $65.6 million | $100.7 million | −35% |
| Diluted EPS | $0.18 | $0.28 | −36% |
| Distributable Earnings | $431.3 million | $271.6 million | +59% |
| Fee Related Earnings | $266.3 million | $193.4 million | +38% |
GAAP net income attributable to Carlyle represented approximately 9.5% of total revenue, compared with approximately 11.7% in the prior-year quarter. Distributable Earnings and Fee Related Earnings are non-GAAP measures and exclude, among other items, unrealized performance allocations, equity-based compensation and certain non-recurring charges.
- Global Private Equity generated $313.1 million of Distributable Earnings and $161.1 million of Fee Related Earnings.
- Global Credit generated $82.1 million of Distributable Earnings and $71.2 million of Fee Related Earnings.
- Global Investment Solutions generated $36.1 million of Distributable Earnings and $34.0 million of Fee Related Earnings.
- Total AUM by segment was $159.2 billion in Global Private Equity, $186.4 billion in Global Credit and $79.9 billion in Global Investment Solutions.
Cash Flow, Balance Sheet and Capital Structure
- Net cash provided by operating activities was $71.1 million, compared with $112.5 million used in the prior-year quarter. Excluding Consolidated Funds, operating cash flow was $114.2 million versus $24.4 million used in Q1 2023.
- Net cash used in investing activities was $14.2 million, primarily reflecting fixed-asset purchases.
- Net cash used in financing activities was $216.7 million, including $126.7 million of dividends and $150.0 million of share repurchases and equity-award tax settlements.
- Cash, cash equivalents and restricted cash ended at $1.28 billion, down from $1.44 billion at December 31, 2023. Management stated that approximately $1.2 billion remained after amounts allocated for specific business purposes, excluding ordinary-course payables and reserves.
- Total debt obligations were $2.26 billion on a carrying-value basis, including $1.38 billion of senior notes, $500 million of subordinated notes and $404.2 million of CLO borrowings. The $1.0 billion senior revolving credit facility was undrawn and matures in April 2027.
- Loans payable of Consolidated Funds were $6.54 billion and are generally collateralized by CLO assets and non-recourse to Carlyle.
- Total assets were $20.85 billion and total liabilities were $15.11 billion at March 31, 2024. Consolidated Funds accounted for a significant portion of these balances and are not generally available to fund Carlyle’s corporate liquidity needs.
Material Changes Versus the Prior Comparable Period
- Performance allocations shifted from $160.8 million of revenue to a $157.0 million loss, principally because of reversals in Global Private Equity, including Carlyle Europe Partners V and Carlyle Partners VII. Global Credit and Global Investment Solutions generated higher performance allocations.
- Principal investment income increased to $73.1 million from $11.7 million, aided by improved results from Carlyle FRL and NGP-related investments, as well as higher income from certain Global Credit products.
- Fee-related earnings improved materially because management fees increased, cash-based compensation declined and general and administrative expenses were lower. Fund management fees benefited from newly activated funds and higher transaction and portfolio advisory fees.
- Equity-based compensation increased to $108.3 million from $54.4 million. Carlyle granted 13.2 million performance-based restricted stock units to senior professionals in February 2024; the awards had an aggregate grant-date fair value of approximately $347 million.
- Fee-earning AUM declined sequentially by approximately 1% to $304.2 billion. Global Private Equity fee-earning AUM declined 3% from year-end, Global Credit declined 1%, and Global Investment Solutions increased 3%.
- Carlyle invested $5.0 billion and generated $5.9 billion of realized proceeds from carry funds in Q1 2024, compared with $3.8 billion and $4.5 billion, respectively, in Q1 2023.
- The Board reset the share repurchase authorization to $1.4 billion effective February 6, 2024. Carlyle repurchased approximately 2.9 million shares for $130.6 million and retired an additional 0.5 million shares through equity-award net settlement.
Guidance, Outlook, Commentary and Risks
- Management reported $5.3 billion of new capital inflows during the quarter toward a previously announced $40 billion 2024 capital-inflow target. The filing does not provide updated full-year earnings guidance.
- Management expects operating cash flows, existing cash, accumulated earnings and available borrowing capacity to fund capital needs for at least the next twelve months.
- Management described the fundraising environment as challenging because of muted realizations, investor liquidity pressures, higher subscription-line costs, geopolitical uncertainty and lower expected buyout fund sizes. These conditions may reduce future management fees in Global Private Equity.
- Higher interest rates are pressuring borrower debt-service capacity and contributed to increased defaults during 2023 and Q1 2024, although Carlyle stated that its global CLO default rate remains below the industry average.
- Global M&A activity showed some improvement but remained well below historical levels, while IPO activity and sponsor exits remained weak. These conditions may affect realizations, fundraising and performance fees.
- Unfunded commitments totaled $4.2 billion, of which approximately $3.6 billion was subscribed individually by senior Carlyle professionals, advisors and other professionals. The Company’s direct share was approximately $0.6 billion.
- Carlyle had a $44.0 million accrued giveback obligation. In a remote scenario in which all fund investments became worthless, the filing states that potential realized and distributed carried-interest givebacks could be approximately $1.5 billion on an after-tax basis, with approximately $0.6 billion attributable to current and former senior professionals.
- Legal and regulatory matters include the Authentix litigation, the tax receivable agreement litigation, and an SEC investigation concerning preservation of electronic business communications. Carlyle had approximately $45 million accrued for litigation-related contingencies, regulatory examinations and inquiries, and other matters.
- The company stated that no existing matter is expected to have a material effect on the financial statements beyond recorded accruals, but acknowledged that adverse outcomes could materially affect results in a particular period.
- Management identified valuation uncertainty, private-market liquidity, foreign exchange, credit risk, regulatory changes, concentration risk, economic and geopolitical conditions, and potential impairment of acquired intangible assets or goodwill as material risks.
Important Facts for Investors to Verify
- Reconcile the sharp divergence between GAAP results, including the $157.0 million performance-allocation loss, and non-GAAP Distributable Earnings of $431.3 million.
- Monitor whether performance-allocation reversals in Global Private Equity continue and whether accrued performance allocations of $5.57 billion convert into realized cash earnings.
- Assess the quality and durability of fee-earning AUM, including the sequential decline to $304.2 billion and the contribution from Fortitude-related assets.
- Review cash available for corporate purposes separately from the $426.0 million of cash held at Consolidated Funds, which is generally unavailable to Carlyle.
- Evaluate the $2.26 billion of corporate debt, CLO financing, interest-rate exposure and covenant requirements, including the minimum management fee-earning asset covenant.
- Track fundraising against the $40 billion 2024 target, realization activity, investor distributions and the potential effect of smaller buyout fund sizes on future management fees.
- Review the legal and regulatory matters, particularly the SEC electronic-communications investigation and the Authentix and tax receivable agreement litigation.
- Consider the dilution and future expense implications of the 2024 restricted-stock-unit grants and the remaining $896.7 million of unrecognized equity-based compensation expense.