Carlyle Group Inc. 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2021. Carlyle is a global investment manager operating through Global Private Equity, Global Credit, and Investment Solutions. The company earns recurring management fees, incentive fees, performance allocations and investment income. Carlyle completed its conversion from a Delaware limited partnership to a corporation on January 1, 2020; therefore, the prior-year comparison includes the first quarter after conversion.
| Operating metric | March 31, 2021 | Comparable information |
|---|---|---|
| Total AUM | $259.8 billion | Up from $245.8 billion at December 31, 2020 |
| Fee-earning AUM | $173.1 billion | $158.2 billion at March 31, 2020 |
| Capital raised during quarter | $7.8 billion | Management target: at least $130 billion raised by end of 2024 |
Financial results and key metrics
| Dollars in millions, except per-share data | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Fund management fees | $381.0 | $355.9 | 7.1% increase |
| Incentive fees | $9.5 | $8.9 | Increase |
| Performance allocations | $1,786.1 | $(937.6) | Improved by $2,723.7 |
| Principal investment income | $179.1 | $(253.3) | Improved by $432.4 |
| Total revenues | $2,437.2 | $(745.7) | Improved by $3,182.9 |
| Total expenses | $1,285.2 | $(69.8) | Increased by $1,355.0 |
| Income before taxes | $1,164.3 | $(789.0) | Improved by $1,953.3 |
| Net income attributable to Carlyle | $869.3 | $(612.0) | Improved by $1,481.3 |
| Diluted EPS | $2.41 | $(1.76) | Returned to profitability |
| Distributable Earnings | $214.9 | $175.0 | 24.8% increase |
| Fee Related Earnings | $129.0 | $128.8 | Essentially flat |
| Net cash from operating activities | $69.5 | $(245.9) | Improved by $315.4 |
Reported pretax margin was approximately 47.8% and net income attributable to Carlyle represented approximately 35.7% of total revenues. These margins are heavily affected by mark-to-market performance allocations and principal investment gains and are not directly comparable with a conventional operating company.
- Portfolio appreciation was 13% during the quarter, including 15% for corporate private equity, 4% for real estate, 7% for natural resources, 8% for Global Credit carry funds, and 14% for Investment Solutions funds.
- Accrued performance allocations increased to $6.5 billion from $5.0 billion at December 31, 2020. Net accrued performance revenues attributable to Carlyle were $3.2 billion.
- Global Private Equity generated $178.2 million of Distributable Earnings, Global Credit generated $23.1 million, and Investment Solutions generated $13.6 million.
- Cash and cash equivalents were $880.4 million at March 31, 2021; approximately $801 million remained after amounts allocated for specific business purposes.
- Debt obligations were $1.94 billion, including $1.63 billion of senior notes and $325.7 million of CLO borrowings. No amounts were outstanding under the $775 million senior revolving credit facility or the $250 million Global Credit revolving facility.
- Total assets were $17.0 billion and total equity was $3.7 billion at quarter-end. Consolidated-fund assets and liabilities were $6.2 billion and $6.0 billion, respectively, and are generally non-recourse to Carlyle.
Material changes versus the prior comparable period
- Results shifted from a Q1 2020 loss to substantial profitability, primarily because Q1 2020 reflected pandemic-related investment valuation declines while Q1 2021 benefited from broad portfolio appreciation, IPO activity and stronger exit markets.
- Performance allocations changed from a $937.6 million loss to $1.786 billion of income. The largest contributions came from Global Private Equity, particularly Carlyle Partners VI and Carlyle Europe Partners IV.
- Management fees increased 7.1%, supported by newly raised funds entering investment periods and higher transaction and portfolio advisory fees. Fee-earning AUM increased approximately 9.4% year over year.
- Compensation and benefits increased to $1.13 billion from a benefit of $209.1 million, principally because performance allocation-related compensation moved to $866.6 million from a $442.5 million credit.
- Distributable Earnings increased, but Fee Related Earnings remained essentially unchanged at $129.0 million, reflecting stronger fee revenues offset by compensation and other expense changes.
- Operating cash flow excluding consolidated-fund activity declined to $50.6 million from $146.6 million, despite higher earnings, primarily because of working-capital movements and cash timing.
- Carlyle repurchased approximately 0.3 million shares for $10.0 million. The repurchase program had $190.0 million of remaining capacity at March 31, 2021.
Guidance, outlook, management commentary, risks and unusual items
- Management expected continued strong deployment and exit activity during 2021, supported by favorable equity and mergers and acquisitions markets. It cited healthcare, technology and consumer opportunities while noting potential weakness in traditional energy.
- Management expected higher realized proceeds and realized performance revenues during the balance of 2021, but emphasized that timing depends on market conditions and transaction execution. No formal quarterly earnings guidance was provided.
- Carlyle announced a goal of raising at least $130 billion by the end of 2024 and raised $7.8 billion during Q1 2021.
- Performance allocations are substantially unrealized and based on estimated fair values. They can reverse if portfolio values decline. Approximately 43% of net accrued performance revenues were generated by Carlyle Partners VI, whose remaining fair value was more than 60% publicly traded, increasing exposure to public-market volatility.
- Potential giveback obligations were $20.6 million at quarter-end. If all fund investments became worthless, potential realized and distributed carried-interest givebacks could be approximately $0.5 billion after tax, of which approximately $0.3 billion would be attributable to current and former senior professionals.
- Unfunded commitments to Carlyle funds totaled $3.3 billion, of which approximately $2.8 billion was subscribed individually by senior professionals and other personnel.
- Carlyle paid $49.9 million in March 2021 related to a Carlyle Aviation Partners earn-out. Maximum contingent cash obligations associated with the Aviation acquisition and Fortitude investment were $195.1 million, compared with $108.4 million recognized on the balance sheet.
- On April 1, 2021, Carlyle sold its interest in Metropolitan Real Estate. The expected gain was not material, but the related New York sublease was expected to produce a lease impairment charge of approximately $25 million to $30 million in Q2 2021.
- The Board declared a quarterly dividend of $0.25 per share, payable May 19, 2021. Dividend payments remain discretionary and subject to legal, regulatory, financing and business constraints.
- Legal and regulatory matters included approximately $35 million of accrued liabilities. Management did not believe existing matters were likely to materially affect the financial statements, but acknowledged that outcomes could exceed recorded accruals.
- Key risks include investment valuation uncertainty, market and foreign-exchange volatility, concentration in public and individual portfolio investments, fundraising and deployment levels, credit risk, regulatory and tax changes, litigation, and the effects of COVID-19 and economic conditions.
Important facts for investors to verify
- Reconcile GAAP earnings with Distributable Earnings and Fee Related Earnings, particularly the effect of unrealized performance allocations and related compensation.
- Monitor whether the $6.5 billion of accrued performance allocations convert into realized proceeds and distributable cash or reverse with changes in portfolio valuations.
- Assess concentration in Carlyle Partners VI and the increasing public-market exposure of carry-fund portfolios.
- Review liquidity after deducting restricted or allocated cash, funding the $3.3 billion of commitments, servicing debt, paying dividends and meeting contingent obligations.
- Track fund-raising, fee-earning AUM, management-fee step-downs, realizations and CLO runoff, including the effect of the Metropolitan Real Estate sale.
- Evaluate the $20.6 million recorded giveback obligation and the substantially larger potential clawback exposure under severe portfolio deterioration.
- Confirm the timing and amount of the expected $25 million to $30 million lease impairment charge and any further Aviation or Fortitude contingent payments.