Business Context and Reporting Period
The filing is The Carlyle Group L.P.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Carlyle is a global alternative asset manager operating through Corporate Private Equity, Global Market Strategies, Real Assets, and Investment Solutions. The company manages private equity, credit, real estate, infrastructure, energy, hedge fund, fund-of-funds, CLO, and other investment vehicles. The filing consolidates certain funds and a Brazilian real estate VIE, which materially gross up reported assets, liabilities, revenues, expenses, and cash flows without a corresponding economic effect on income attributable to Carlyle.
At September 30, 2015, total AUM was $187.7 billion and fee-earning AUM was $128.1 billion. Common units outstanding were 80.2 million.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenues | $297.5 million, versus $755.0 million | $2,290.4 million, versus $3,041.2 million |
| Net income attributable to Carlyle | $(83.9) million, versus $25.4 million | $(13.8) million, versus $69.5 million |
| Basic earnings per common unit | $(1.05), versus $0.38 | $(0.19), versus $1.11 |
| Economic Net Income | $(128.4) million, versus $180.8 million | $323.9 million, versus $781.9 million |
| Fee-related earnings | $57.3 million, versus $61.9 million | $155.8 million, versus $179.3 million |
| Distributable earnings | $243.7 million, versus $157.0 million | $777.4 million, versus $662.6 million |
| Net cash provided by operating activities | Not separately provided | $4,442.7 million, versus $2,516.3 million |
Reported consolidated margins were highly volatile and not representative of recurring operating profitability. Total revenues were reduced by unrealized performance-fee losses of $575.8 million in the quarter and $629.7 million year to date. Fee-related earnings, a non-GAAP measure, were approximately 18% of total segment revenues in the quarter and 9% year to date; these ratios should be interpreted with caution because segment revenues exclude consolidated-fund effects and non-GAAP adjustments.
Balance Sheet, Debt, and Liquidity
- Total assets were $32.8 billion, down from $36.0 billion at December 31, 2014, primarily due to lower consolidated-fund investments, accrued performance fees, and cash held at consolidated funds.
- Cash and cash equivalents were $1.31 billion, including approximately $1.1 billion that management identified as available after amounts allocated for specific purposes.
- Total liabilities were $23.4 billion. Carlyle operating debt included $25.0 million under the senior credit facility, $14.1 million of a CLO term loan, $500.0 million of 3.875% senior notes due 2023, and $600.0 million of 5.625% senior notes due 2043.
- The senior credit facility had $750.0 million of unused revolving capacity and matures May 5, 2020. Carlyle reported compliance with its financial and non-financial covenants.
- Consolidated-fund loans payable were $16.7 billion but are generally non-recourse to Carlyle. Urbplan debt had a $167.8 million principal amount and $109.1 million fair value and was contractually non-recourse to Carlyle.
- Carlyle had $3.13 billion of unfunded commitments to its funds, approximately $2.7 billion of which was subscribed by senior professionals and other employees rather than directly by the Partnership.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue fell 61%, and nine-month revenue fell 25%, primarily because performance fees declined from $187.4 million to $(246.6) million in the quarter and from $1.35 billion to $621.3 million year to date.
- Fund management fees declined 9% in the quarter and 6% year to date, reflecting lower hedge-fund AUM, distributions and fee-basis step-downs, lower AlpInvest fees from currency effects, and lower transaction and advisory fees.
- Realized performance fees increased to $329.2 million in the quarter and $1.25 billion year to date, but were more than offset by unrealized reversals and valuation declines.
- Fee-earning AUM declined 9% year over year to $128.1 billion. Global Market Strategies fee-earning AUM fell 15% to $29.5 billion, primarily due to hedge-fund redemptions, market depreciation, and outflows. Investment Solutions fee-earning AUM fell 17% to $29.4 billion.
- General, administrative, and other expenses increased to $289.6 million in the quarter and $539.2 million year to date, driven substantially by intangible-asset impairments. Compensation and benefits decreased because performance-fee-related compensation and base compensation were lower.
- Distributable earnings increased 55% in the quarter and 17% year to date, reflecting higher realized net performance fees, despite weaker GAAP earnings and lower fee-related earnings.
- In June 2015, Carlyle issued 7.0 million common units for net proceeds of approximately $209.9 million and used the proceeds to acquire an equivalent number of Carlyle Holdings partnership units.
- Effective July 1, 2015, Carlyle’s economic interest in Carlyle Commodity Management increased from 55% to approximately 83% without additional consideration.
Outlook, Commentary, Risks, and Unusual Items
- Management described the third quarter as a period of heightened volatility, including weaker Chinese and emerging-market conditions, falling commodity and energy prices, wider speculative-grade credit spreads, and tighter financing conditions.
- Carlyle’s carry-fund portfolio declined approximately 4% in the quarter, with public investments down 12% and private investments down 1%. The company invested approximately $1.6 billion and realized approximately $3.7 billion from 121 investments in 38 carry funds.
- Claren Road received approximately $1.9 billion of redemption notices during the quarter, expected to be paid over several quarters beginning in the fourth quarter of 2015. Carlyle recorded a $186.6 million impairment of related intangible assets; the estimated pretax net impact after reducing related contingent consideration was $162.4 million.
- Accrued performance fees were $3.02 billion, while accrued giveback obligations increased to $264.0 million from $104.4 million at December 31, 2014. If all fund investments were worthless, potential after-tax giveback exposure was estimated at approximately $1.9 billion.
- Urbplan remains financially stressed. Substantially all of its loans were in covenant violation or technical default, although there were no acceleration notices and the debt was non-recourse to Carlyle. Urbplan was estimated to require approximately $60 million of additional capital over the next twelve months, with the possibility of further funding.
- Carlyle recognized approximately $34 million of losses related to the CEREP I French tax dispute and paid approximately €67 million as guarantor in June plus €7 million in the third quarter. The Partnership appealed the adverse French tax court decision.
- Pending litigation includes the Foy v. Austin Capital matter and a Guernsey action relating to Carlyle Capital Corporation seeking $1.0 billion in damages. Management did not believe a material loss was probable, but acknowledged that adverse outcomes could materially affect a particular period.
- Management stated that cash, operating cash flows, accumulated earnings, and the senior credit facility should be sufficient to fund needs for at least the next twelve months. The distribution policy targets approximately 75% of distributable earnings per common unit, net of taxes and tax receivable agreement payments, but distributions remain discretionary.
- ASU 2015-2, effective January 1, 2016, was expected to reduce the number of consolidated funds and therefore reduce reported assets, liabilities, and partners’ capital. Management expected no impact on net income attributable to Carlyle. New revenue guidance could significantly delay performance-fee recognition.
Most Important Facts for Investors to Verify
- Whether Claren Road redemptions, lower hedge-fund AUM, and continued market volatility will further reduce management fees, AUM, and future performance fees.
- The realizability of $3.02 billion in accrued performance fees and the ultimate amount and timing of the $264.0 million accrued giveback obligation.
- The sustainability of distributable earnings relative to GAAP income and fee-related earnings, particularly given the large contribution from realized performance fees.
- The effect of the 2016 consolidation guidance and later revenue-recognition guidance on reported financial statements and performance-fee timing.
- Urbplan’s funding requirements, covenant defaults, potential additional capital contributions, and possible legal or impairment exposure.
- The outcome and potential financial exposure from the CEREP I tax dispute, CCC litigation, and Foy v. Austin Capital.
- Actual liquidity available after reserves, restricted cash, tax receivable agreement payments, fund commitments, compensation obligations, and potential givebacks.
- The filing uses non-GAAP ENI, fee-related earnings, and distributable earnings; investors should reconcile these measures to GAAP results and review the company’s definitions before comparing them with other asset managers.