Carlyle Group L.P. 2014 Q2 SEC Filing Summary
Business context and reporting period
The filing is The Carlyle Group L.P.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014. Carlyle is a global alternative asset manager operating through Corporate Private Equity, Global Market Strategies, Real Assets and Solutions. The filing consolidates certain funds, CLOs and the Urbplan real estate development company, which materially increases reported assets, liabilities and cash flows but generally does not affect net income attributable to Carlyle.
As of June 30, 2014, total AUM was approximately $202.7 billion and fee-earning AUM was approximately $145.6 billion, compared with $132.0 billion of fee-earning AUM at June 30, 2013.
Key financial metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Total revenues | $1,138.8 million | $769.3 million | $2,286.2 million | $1,914.3 million |
| Fund management fees | $317.3 million | $242.2 million | $577.6 million | $473.6 million |
| Total performance fees | $542.4 million | $259.1 million | $1,162.9 million | $901.5 million |
| Income before taxes | $541.2 million | $285.9 million | $1,013.6 million | $738.3 million |
| Net income | $487.4 million | $269.3 million | $943.8 million | $696.8 million |
| Net income attributable to Carlyle | $19.5 million | $(3.3) million | $44.1 million | $30.5 million |
| Basic earnings per common unit | $0.30 | $(0.07) | $0.74 | $0.69 |
| Distributable earnings | $323.6 million | $163.0 million | $506.9 million | $334.0 million |
| Fee-related earnings | $80.2 million | $30.6 million | $117.4 million | $69.4 million |
Total revenue increased 48% year over year in the second quarter and 19% year to date. Net income attributable to Carlyle represented approximately 1.7% of second-quarter revenue and 1.9% of first-half revenue. Reported consolidated results include substantial non-controlling interests associated with consolidated funds.
- Second-quarter Economic Net Income increased 104% to $317.7 million from $155.8 million; first-half Economic Net Income increased 16% to $639.6 million from $549.7 million.
- Second-quarter Distributable Earnings increased 98% to $323.6 million; first-half Distributable Earnings increased 52% to $506.9 million.
- Second-quarter performance fees included $415.6 million realized and $126.8 million unrealized. Performance fees remain sensitive to investment valuations and can reverse.
- Cash and cash equivalents attributable to Carlyle were $1,278.8 million at June 30, 2014, up from $966.6 million at December 31, 2013. Management estimated approximately $700 million remained after amounts reserved or allocated for specific purposes.
- Net cash provided by operating activities was $2,077.8 million for the first six months, compared with $1,376.5 million in the prior-year period. Net cash used in financing was $1,834.3 million, and cash increased $312.2 million.
- Total assets were $37.5 billion and total liabilities were $22.5 billion at June 30, 2014. Consolidated fund assets and liabilities were approximately $30.3 billion and $18.0 billion, respectively, and are generally non-recourse to Carlyle.
Debt and liquidity
- Carlyle’s operating debt included approximately $1.14 billion of loans and senior notes: $25.0 million outstanding under the senior credit facility, $17.2 million under a CLO-related 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 included a $750.0 million undrawn revolving facility and matured in August 2018. Carlyle reported compliance with its financial and non-financial covenants.
- In March 2014, Carlyle issued $200.0 million of additional 5.625% senior notes, generating $210.8 million of net proceeds. It also issued 13.8 million common units for $449.5 million of net proceeds.
- Consolidated CLO borrowings totaled $16.5 billion at par, but these obligations are collateralized by CLO assets and are generally non-recourse to Carlyle.
Material changes versus the prior comparable period
- Revenue growth was driven by higher performance fees, increased management fees from newly raised funds and catch-up fees, greater transaction activity, higher AUM, and the acquisitions of Metropolitan and DGAM.
- Compensation and benefits increased 40% in the second quarter and 26% in the first half, primarily from performance-fee compensation, increased headcount, bonuses and employment-related contingent consideration.
- Fee-related earnings improved materially, including a second-quarter increase from a $4.1 million loss to $80.2 million, reflecting higher fee revenue and lower general and administrative expenses.
- Solutions expanded following Carlyle’s acquisition of the remaining 40% of AlpInvest, Metropolitan in November 2013 and DGAM in February 2014. DGAM contributed approximately $2.9 billion of fee-earning AUM at acquisition.
- Real Assets results were affected by Urbplan, which contributed a $2.5 million operating loss attributable to Carlyle for the first six months and required additional funding.
- General and administrative expense included a $24.6 million impairment of acquired intangible assets during the first quarter of 2014.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings guidance. Management stated that strong asset prices, low volatility and abundant financing supported portfolio appreciation and exits but made attractive new investments more difficult. During the second quarter, Carlyle invested approximately $3.4 billion and realized approximately $6.5 billion from 142 investments and 36 funds.
- Management expected quarterly distributions of $0.16 per common unit for the first three quarters of 2014 and stated that the fourth-quarter distribution would depend on Distributable Earnings, liquidity needs and the general partner’s discretion. A $0.16 distribution was declared in July 2014.
- Urbplan was not in compliance with substantially all of its debt covenants and was in technical default on substantially all loans. It was expected to require approximately $100 million to $150 million of additional funding, potentially more, although Carlyle had no contractual obligation to provide it.
- Potential carried-interest givebacks were $32.3 million at June 30, 2014; management estimated that a hypothetical complete loss of fund investments could expose Carlyle to approximately $1.1 billion of realized and distributed carried-interest givebacks.
- Carlyle had $3.1 billion of unfunded commitments to its funds, of which approximately $2.8 billion was subscribed individually by senior professionals and other personnel.
- Contingent cash obligations associated with acquisitions and the NGP investment had a maximum potential amount of approximately $1.0 billion, compared with $316.6 million recognized as liabilities.
- Material risks include volatility in asset valuations, dependence on performance fees and realizations, valuation uncertainty for Level III investments, leverage and credit risk in CLOs and portfolio companies, foreign exchange and international political risks, litigation, tax audits, the French CEREP I tax assessment, and the tax receivable agreement requiring payment of 85% of realized tax savings to eligible former Carlyle Holdings unitholders.
Most important facts for investors to verify
- Reconcile GAAP net income attributable to Carlyle with non-GAAP Economic Net Income, Fee-Related Earnings and Distributable Earnings.
- Assess the sustainability and concentration of performance fees, including the substantial contribution from CP V, CEP III and AlpInvest vehicles and the level of subsequent reversals.
- Separate Carlyle’s operating liquidity from cash, debt and results attributable to consolidated funds and CLOs.
- Monitor Urbplan’s funding requirements, covenant defaults, possible impairments and potential claims against Carlyle despite the stated non-recourse structure.
- Review the effect of the March 2014 equity issuance, increased unit count, senior-note issuance, tax receivable agreement and contingent consideration on future distributions and per-unit economics.
- Evaluate Level III valuation exposure, carried-interest giveback risk, litigation contingencies and the CEREP I French tax matter.