Carlyle Group Inc. quarterly report, Q2 FY2022

The Carlyle Group Inc. — Q2 2022 Form 10-Q Summary

Business context and reporting period

Carlyle is a global investment firm operating through Global Private Equity, Global Credit and Global Investment Solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Carlyle reports both U.S. GAAP consolidated results and non-GAAP segment measures, including Distributable Earnings (DE) and Fee Related Earnings (FRE).

At June 30, 2022, total assets under management were $376.4 billion and fee-earning AUM was $259.6 billion, compared with $174.9 billion of fee-earning AUM at June 30, 2021. The increase primarily reflects the Fortitude strategic advisory relationship and the CBAM acquisition.

Financial performance and key metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenue	$1,049.0 million	$2,706.3 million	$2,630.8 million	$5,143.5 million
Income before taxes	$299.7 million	$1,252.7 million	$1,042.4 million	$2,417.0 million
Net income attributable to Carlyle	$245.4 million	$925.0 million	$817.0 million	$1,794.3 million
Diluted EPS	$0.67	$2.55	$2.24	$4.97
Distributable Earnings	$528.8 million	$395.4 million	$831.6 million	$610.3 million
Fee Related Earnings	$236.4 million	$143.2 million	$419.7 million	$272.2 million

Q2 2022 net income attributable to Carlyle represented an approximately 23.4% margin on GAAP revenue, versus approximately 34.2% in Q2 2021. Six-month attributable net margin was approximately 31.1%, versus 34.9% in the prior-year period. DE increased 33.8% year over year in Q2 and 36.3% for the six-month period; FRE increased 65.1% and 54.2%, respectively.

Fund management fees increased 38.6% in Q2 to $546.5 million and 28.6% year to date to $997.0 million, driven by newer funds, CBAM, Fortitude and higher advisory fees.
Performance allocations fell to $337.9 million in Q2 from $2.08 billion and to $1.05 billion year to date from $3.87 billion, reflecting lower portfolio appreciation and reversals in certain funds.
Principal investment income was $56.7 million in Q2 and $376.3 million year to date. The year-to-date result included strong NGP-related earnings but also a $176.9 million loss from dilution of Carlyle’s indirect Fortitude ownership.
Total compensation and benefits declined to $526.4 million in Q2 from $1.27 billion, primarily because performance-related compensation declined with performance allocations. Cash compensation increased 18.2% in Q2 and 14.8% year to date.
Effective tax rates were approximately 17% in Q2 and 19% year to date, compared with 24% in both prior-year periods.

Cash flow, balance sheet, debt and liquidity

Cash, cash equivalents and restricted cash were $1.31 billion at June 30, 2022, down from $2.48 billion at December 31, 2021. Management stated that approximately $1.2 billion remained after cash allocated to specific business purposes.
Consolidated operating cash flow was negative $558.5 million for the six months, versus positive $595.3 million in 2021. Excluding Consolidated Funds, operating cash flow was negative $113.7 million, versus positive $580.7 million.
Investing cash flow was negative $635.8 million, principally due to the $618.4 million cash component of the CBAM acquisition. Financing cash flow was positive $75.9 million, including CLO borrowings, offset by dividends, share repurchases and deferred consideration payments.
Debt obligations were $2.24 billion at June 30, 2022, including $1.88 billion of senior and subordinated notes and $386.0 million of CLO borrowings. Consolidated Fund loans payable were $5.76 billion and are generally non-recourse to Carlyle.
The amended senior revolving credit facility provides $1.0 billion of unsecured capacity, matures April 29, 2027 and had no borrowings outstanding. Carlyle also had a $250 million Global Credit revolving facility with no outstanding balance.
Carlyle reported compliance with its debt covenants. The senior facility requires at least $126.6 billion of management fee-earning assets and a total leverage ratio below 4.0 to 1.0.
Unfunded commitments to Carlyle funds totaled $4.21 billion, of which approximately $3.5 billion was subscribed by senior professionals and other individuals and the balance was funded directly by Carlyle.

Material changes versus the prior comparable period

GAAP revenue and net income declined sharply because 2021 benefited from substantially higher unrealized performance allocations and portfolio appreciation.
Recurring fee economics improved: fee-earning AUM rose 48.4% year over year, while fund management fees increased 38.6% in Q2. Q2 DE and FRE increased despite lower GAAP earnings.
Carlyle acquired CBAM’s CLO management contracts on March 21, 2022 for $812.9 million, including $618.4 million of cash and 4.2 million newly issued shares. The transaction added approximately $15 billion of AUM and $14 billion of fee-earning AUM.
Fortitude called $1.1 billion of a $2.0 billion third-party capital raise. Carlyle’s indirect Fortitude ownership declined from 19.9% to 13.5% and is expected to decline to 10.5% after the remaining capital is called.
Intangible assets increased to $784.4 million from $34.9 million, primarily because of the CBAM transaction. The company recorded a $4.0 million impairment related to aircraft under lease in Russia.
Carlyle repurchased approximately 2.4 million shares for $105.3 million during the first six months and had $294.7 million of remaining authorization at June 30, 2022.
The quarterly dividend increased from $0.25 per share in 2021 to $0.325 per share beginning with the first-quarter 2022 dividend.

Guidance, outlook, commentary and risks

Management did not provide formal numerical full-year earnings guidance in the filing. It expects the business to remain supported by recurring management fees, continued fundraising and investment deployment, but noted that fundraising may take longer and fund sizes may be lower because of market volatility, investor liquidity needs and increased industry competition.

Management reported $9.8 billion of new capital raised in Q2, $6.7 billion of new or follow-on investments and more than $4.8 billion of signed transactions expected to close in subsequent periods.
Carry funds appreciated 3% in Q2 and 9% year to date, but publicly traded investments, representing 7% of carry-fund fair value, depreciated 20% during Q2.
Net accrued performance revenues attributable to Carlyle were approximately $4.29 billion at June 30, 2022. These amounts depend on investment valuations and may reverse before realization.
Management expects an additional Fortitude dilution loss of approximately $116 million when the remaining capital is called, subject to changes in timing and carrying value.
Key risks include rising interest rates, inflation, recession, the Russia-Ukraine conflict, energy shortages, China’s COVID-related disruptions, foreign-exchange movements, slower transaction activity, valuation uncertainty, fundraising and deployment risk, credit losses and regulatory changes affecting private funds.
Potential giveback obligations were $40.9 million at June 30, 2022, with approximately $1.3 billion of realized and distributed carried interest potentially subject to giveback in an extreme scenario that management considers remote. Legal and regulatory contingency accruals totaled approximately $35.1 million.
The planned acquisition of Abingworth, a life sciences investment firm with more than $2 billion of AUM, was expected to close in Q3 2022. Consideration includes $187.5 million of base purchase price and up to $130 million of contingent incentive payments.

Important facts for investors to verify

Reconcile GAAP earnings with DE and FRE, particularly the exclusion of unrealized performance allocations, equity compensation, acquisition costs and other non-recurring items.
Assess the sustainability and composition of the $259.6 billion of fee-earning AUM, including the $48 billion associated with Fortitude and the AUM acquired from CBAM.
Monitor Fortitude’s remaining capital call, the expected additional dilution loss and the recurring management-fee economics under the advisory agreement.
Review cash availability after restricted or earmarked cash, the negative operating cash flow excluding Consolidated Funds and the $4.21 billion of unfunded commitments.
Evaluate valuation sensitivity in the $8.05 billion of accrued performance allocations and the potential for reversals, givebacks and delayed realizations.
Track debt maturities, floating-rate CLO borrowings, covenant requirements and the distinction between Carlyle’s obligations and non-recourse Consolidated Fund liabilities.
Confirm the closing and final consideration for Abingworth, subsequent dividend payments and the use of remaining share-repurchase authorization.