Carlyle Group Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
The filing is an unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. Carlyle is a global investment firm operating through Global Private Equity, Global Credit, and Global Investment Solutions. At quarter-end, total assets under management were $293.1 billion and fee-earning AUM was $176.4 billion, excluding $29.8 billion of pending fee-earning AUM for which fees had not yet been activated.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenues | $1,639.5 million | $1,034.6 million | $6,783.0 million | $1,419.9 million |
| Fund management fees | $407.5 million | $363.8 million | $1,182.9 million | $1,091.5 million |
| Investment income | $1,134.9 million | $584.1 million | $5,318.5 million | $72.4 million |
| Net income attributable to Carlyle | $532.8 million | $295.5 million | $2,327.1 million | $(170.6) million |
| Diluted EPS | $1.46 | $0.82 | $6.42 | $(0.49) |
| Distributable Earnings | $730.6 million | $151.8 million | $1,340.9 million | $525.2 million |
| Fee Related Earnings | $151.4 million | $118.7 million | $423.6 million | $374.8 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $1,302.4 million | $(110.6) million |
Q3 net income margin was approximately 33.4%; net income attributable to Carlyle represented approximately 32.5% of revenue. For the nine-month period, the corresponding margins were approximately 35.1% and 34.3%, respectively.
- Performance allocations were $974.5 million in Q3 and $4.84 billion for the first nine months, compared with $477.4 million and $731.6 million, respectively, in the prior-year periods.
- Total compensation and benefits increased to $762.5 million in Q3 and $3.16 billion for nine months, including $495.2 million and $2.36 billion of performance allocation and incentive-fee-related compensation.
- Cash, cash equivalents, and restricted cash were $2.41 billion at September 30, 2021, including $2.40 billion of cash and cash equivalents. Management stated that approximately $2.2 billion remained after amounts allocated for specific purposes.
- Debt obligations were $2.37 billion, excluding $5.96 billion of loans payable attributable to consolidated funds. The company also had $70.0 million outstanding under a Global Credit revolving facility, repaid in October 2021.
- The company issued $500.0 million principal amount of 4.625% subordinated notes due 2061 during 2021. The senior revolving credit facility had $775.0 million of available capacity at quarter-end.
- Operating cash flow excluding consolidated-fund activity was $1.48 billion for the first nine months, compared with $491.3 million in the prior-year period.
- The quarterly common dividend was $0.25 per share. The company paid $266.7 million of dividends and repurchased approximately 1.9 million shares for $84.5 million during the first nine months.
Material changes versus the prior comparable period
- Q3 revenue increased 58.5%, primarily from higher performance allocations, while nine-month revenue increased 377.7%, reflecting the sharp recovery in investment income from the 2020 comparison period.
- Net income attributable to Carlyle rose 80.3% in Q3 and changed from a $170.6 million nine-month loss in 2020 to $2.33 billion of income in 2021.
- Fee management revenue increased 12.0% in Q3 and 8.4% for nine months, supported by newly raised funds, fee activation, and higher transaction and portfolio advisory fees.
- Distributable Earnings increased to $730.6 million in Q3 and $1.34 billion for nine months. Fee Related Earnings increased more modestly to $151.4 million and $423.6 million, respectively, demonstrating that much of the earnings increase was driven by realized performance revenues rather than recurring fee earnings.
- Fee-earning AUM increased 5.9% year over year to $176.4 billion. Total AUM increased from $245.8 billion at December 31, 2020 to $293.1 billion at September 30, 2021.
- Carry funds appreciated 7% in Q3 and 33% year to date. Carlyle raised $21.7 billion in the quarter and $39.9 billion year to date, supporting its stated goal of raising at least $130 billion by the end of 2024.
- Accrued performance allocations increased to $8.10 billion from $4.97 billion at December 31, 2020, while accrued performance allocation and incentive-fee-related compensation increased to $4.06 billion from $2.53 billion.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal quantitative earnings guidance. Management expects substantial capital deployment through the remainder of 2021 and into 2022, particularly in healthcare, technology, and consumer sectors. Management also expected much of the $29.8 billion of pending fee-earning AUM to become fee-paying during the fourth quarter.
- Management reported at least $450 million of anticipated net realized performance revenues from announced exit transactions expected to close over the following two quarters, including Atotech and Pharmaceutical Product Development in Carlyle Partners VI.
- Management highlighted COVID-19 Delta variant effects, supply-chain disruption, inflation, labor shortages, rising energy and shipping costs, potential interest-rate changes, China-related regulatory and real-estate risks, and market volatility.
- Performance allocations are based partly on unrealized fair values and may reverse. Publicly traded investments represented 16% of traditional carry-fund fair value, and approximately 34% of net accrued performance revenues came from Carlyle Partners VI, which had nearly 65% of remaining fair value in publicly traded companies.
- The company recorded a $26.8 million lease impairment charge related to subleasing office space following the sale of Metropolitan Real Estate, a $14.7 million foreign-currency translation loss related to the Brazilian management-entity sale, and a $4.7 million loss and transaction costs on that sale.
- Unfunded commitments totaled $4.40 billion, of which approximately $3.9 billion was subscribed by senior professionals, advisors, and other professionals; the balance was funded directly by Carlyle.
- The accrued giveback obligation was $24.7 million. If all fund investments were deemed worthless, management estimated potential realized and distributed carried-interest givebacks of approximately $1.0 billion after tax, with approximately $0.5 billion attributable to current and former senior professionals.
- Legal and regulatory contingency liabilities totaled approximately $35 million. Management did not believe existing matters were probable of materially affecting the financial statements, but noted that adverse outcomes could exceed recorded accruals.
Most important facts for investors to verify
- Whether the unusually high performance allocations and realized proceeds are sustainable or primarily reflect favorable market valuations and fund exits.
- The conversion of $29.8 billion of pending fee-earning AUM into active fee-earning AUM and the resulting effect on recurring management-fee revenue.
- The concentration of accrued performance revenues in Carlyle Partners VI and the sensitivity of that balance to public-market declines.
- The distinction between GAAP earnings, Distributable Earnings, and Fee Related Earnings, particularly because 2021 GAAP and DE benefited materially from realized and unrealized investment performance.
- Actual funding requirements for the $4.4 billion of unfunded commitments, acquisition-related contingent payments, tax receivable agreement obligations, and potential givebacks.
- Debt maturities, covenant compliance, the November 2021 redemption of the remaining $250 million of 3.875% senior notes, and the repayment of the $70 million Global Credit revolver.
- The effect of inflation, higher interest rates, supply-chain disruption, regulatory changes, China exposure, foreign exchange, and future litigation or regulatory proceedings.