Carlyle Group Inc. annual report, FY2022

Carlyle Group Inc. — FY2022 Form 10-K Summary

Business context and reporting period

The filing is Carlyle’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed February 9, 2023. Carlyle is a global alternative asset manager operating through Global Private Equity, Global Credit and Global Investment Solutions. The filing provides full-year results; it does not present a standalone Q4 income statement.

Total AUM increased 24% to $372.7 billion from $301.0 billion.
Fee-earning AUM increased 38% to $266.6 billion from $193.4 billion; perpetual capital was $58.2 billion.
The firm raised $29.9 billion of new capital and invested $34.8 billion through carry funds.

Financial performance and key metrics

Metric	FY2022	FY2021	Change
Total revenue	$4.44 billion	$8.78 billion	Down 49%
Fund management fees	$2.03 billion	$1.67 billion	Up 22%
Performance allocations	$1.33 billion	$6.08 billion	Down 78%
Income before taxes	$1.57 billion	$4.03 billion	Down 61%
Net income attributable to common stockholders	$1.23 billion	$2.97 billion	Down 59%
Diluted EPS	$3.35	$8.20	Down 59%
Distributable Earnings	$1.91 billion	$2.24 billion	Down 15%
Fee Related Earnings	$834.4 million	$598.1 million	Up 39%
Effective tax rate	18.3%	24.4%	Improved

The decline in GAAP revenue and earnings was primarily caused by substantially lower performance allocations as market appreciation slowed. Carry-fund appreciation was 11% in 2022 versus 41% in 2021. Management fees grew due to new fund fee activation, the CBAM acquisition, Abingworth and the Fortitude strategic advisory agreement.

Global Private Equity DE was $1.51 billion, down from $2.02 billion; FRE was $540.6 million, up from $402.3 million.
Global Credit DE was $315.5 million, up from $119.7 million; FRE was $224.5 million, up from $111.6 million.
Global Investment Solutions DE was $87.9 million, down from $102.1 million; FRE was $69.3 million, down from $84.2 million.
Net accrued performance revenues attributable to Carlyle were approximately $4.0 billion at year-end, including $7.1 billion of gross accrued performance allocations before compensation, taxes, non-controlling interests and giveback obligations.

Cash flow, liquidity and debt

GAAP net cash used in operating activities was $379.3 million, compared with $1.79 billion of cash provided in 2021. Excluding Consolidated Funds activity, operating cash flow was $860.7 million versus $2.14 billion.
Net cash used in investing activities was $828.8 million, principally reflecting $618.4 million for CBAM-related assets and intangibles, $150.2 million for Abingworth and $40.6 million of fixed-asset purchases.
Cash and cash equivalents were $1.36 billion; corporate treasury investments were $20.0 million. Management identified approximately $1.3 billion of cash, cash equivalents and treasury investments available after specified allocations, subject to ordinary-course needs and reserves.
The senior revolving credit facility had $1.0 billion of capacity, no balance outstanding and a maturity of April 2027. Carlyle reported compliance with its covenants.
Debt obligations were $2.27 billion carrying value, including $1.375 billion of senior notes, $500 million of subordinated notes and $421.7 million of CLO borrowings.
Unfunded commitments to Carlyle funds totaled $3.95 billion; approximately $3.2 billion was subscribed individually by senior professionals and other personnel, with the balance funded directly by Carlyle.
The 2022 dividend was $1.30 per share, or approximately $472.5 million. In February 2023, the anticipated annual dividend was increased to $1.40 per share.
Carlyle repurchased approximately 5.0 million shares for $185.6 million during 2022; $214.3 million remained under the authorization at year-end.

Material changes, outlook and unusual items

CBAM: Carlyle acquired CLO and private-credit management contracts for $812.9 million, including $618.4 million cash and approximately 4.2 million shares, adding approximately $15 billion of AUM.
Fortitude: Carlyle entered a strategic advisory agreement that added approximately $48 billion of fee-earning AUM. The Fortitude capital raise diluted Carlyle’s indirect ownership from 19.9% to 13.5% and generated a $176.9 million GAAP loss. A further dilution-related loss of approximately $121 million was expected when remaining capital was called, subject to change.
Abingworth: Carlyle acquired the life-sciences manager for $186.2 million, including $25 million of stock, with up to $130 million of future incentive payments.
The company recorded a $4.0 million impairment on Carlyle Aviation Partners contractual rights related to aircraft leased in Russia and a $7.5 million reserve for advances to a portfolio company.
Management expected a slow start to 2023, with lower transaction fees, realized performance fees and realized investment income over the next quarter or two. Larger private-equity transactions were expected to remain slower, while demand for private credit was expected to remain robust.
Management expected higher defaults in 2023 as inflation, higher financing costs and recession risks pressure borrowers. Fundraising was expected to remain competitive, particularly for corporate private equity strategies.
Harvey M. Schwartz was appointed CEO effective February 15, 2023, following the departure of Kewsong Lee. The appointment included $180 million of inducement equity awards, which is expected to increase future equity-compensation expense.

Principal risks and contingencies

Results and cash flow are highly variable because performance allocations depend on investment valuations, realizations and fund-level return hurdles.
Higher interest rates, inflation, recession risk, constrained debt markets, lower M&A activity and geopolitical tensions could reduce portfolio valuations, fundraising, realizations and carried interest.
Valuation risk is significant: approximately $258.4 billion of investment fair value was classified as Level III, requiring substantial judgment and unobservable inputs.
Potential giveback obligations were accrued at $40.9 million, of which approximately $22.0 million was attributable to Carlyle. Previously distributed carried interest subject to potential giveback could reach approximately $1.5 billion if all fund investments were deemed worthless, a scenario management considers remote.
The company reported approximately $35 million of liabilities for litigation-related contingencies, regulatory inquiries and other matters. The SEC is investigating preservation of certain electronic business communications; Carlyle stated that it intends to cooperate.
Other risks include regulatory changes affecting private funds, ESG and climate disclosures, cybersecurity and data privacy, LIBOR transition, tax changes, employee retention, conflicts of interest, Fortitude-related regulatory and ownership risks, and possible litigation involving portfolio companies.

Most important facts for investors to verify

Reconcile GAAP earnings with Distributable Earnings and Fee Related Earnings, and assess how much future performance revenue depends on unrealized valuations.
Review the sustainability of the $2.03 billion management-fee base, including fee activation, fee-rate changes, step-downs and the contribution from Fortitude and CBAM.
Evaluate the realizability of the $4.0 billion net accrued performance-revenue balance and the related $40.9 million accrued giveback obligation.
Assess liquidity after funding the $3.95 billion of unfunded commitments, acquisitions, contingent payments, dividends, repurchases and debt service.
Track Fortitude’s remaining capital call, expected ownership dilution and the potential additional approximately $121 million GAAP loss.
Review the effects of the new CEO’s $180 million equity award and February 2023 grants of 9.9 million restricted stock units on dilution and future compensation expense.
Confirm the outcome and potential exposure from the SEC communications-preservation inquiry, Authentix litigation and the tax receivable agreement matter.
Consider the sensitivity of performance allocations to portfolio values: management estimated that a 10% decrease in remaining fair value would reduce performance-allocation revenue by approximately $2.47 billion before related compensation effects.