Carlyle Group Inc. — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
The Carlyle Group Inc. is a global investment firm operating through Global Private Equity, Global Credit, and Global Investment Solutions. This unaudited Form 10-Q covers the three months ended March 31, 2022, with comparisons to the three months ended March 31, 2021.
At March 31, 2022, total assets under management were $325.2 billion and fee-earning AUM was $211.1 billion. Fee-earning AUM increased 21.9% from $173.1 billion a year earlier, including $14.0 billion acquired through the CBAM transaction.
Financial Performance and Key Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenues | $1,581.8 million | $2,437.2 million | Down 35.1% |
| Fund management fees | $450.5 million | $381.0 million | Up 18.2% |
| Performance allocations | $710.2 million | $1,786.1 million | Down 60.2% |
| Principal investment income | $319.6 million | $179.1 million | Up 78.4% |
| Total expenses | $841.9 million | $1,285.2 million | Down 34.5% |
| Income before taxes | $742.7 million | $1,164.3 million | Down 36.2% |
| Net income attributable to Carlyle | $571.6 million | $869.3 million | Down 34.2% |
| Diluted EPS | $1.57 | $2.41 | Down 34.9% |
| Distributable Earnings | $302.8 million | $214.9 million | Up 40.7% |
| Fee Related Earnings | $183.3 million | $129.0 million | Up 42.1% |
Reported net income margin was approximately 37.6% in Q1 2022 versus 36.6% in Q1 2021, calculated from net income attributable to Carlyle divided by total revenues. Management emphasizes Distributable Earnings and Fee Related Earnings as supplemental non-GAAP measures that exclude, among other items, unrealized performance allocations and related compensation, unrealized principal investment income, equity compensation, and acquisition-related items.
- Cash-based compensation and benefits increased 11.3% to $254.3 million, while performance allocation and incentive-fee compensation declined to $370.7 million from $866.6 million.
- Income tax expense was $147.9 million, with an effective tax rate of approximately 20%, compared with 23% in Q1 2021.
- Net cash used in operating activities was $371.7 million, compared with $69.5 million of cash provided in the prior-year quarter. Excluding Consolidated Funds, operating cash flow was negative $372.7 million versus positive $50.6 million.
- Net cash used in investing activities was $630.7 million, primarily reflecting $618.4 million paid for the CBAM acquisition.
- Cash, cash equivalents, and restricted cash declined by $1.2 billion to $1.3 billion at March 31, 2022.
- Debt obligations were $2.3 billion, including $405.1 million of CLO borrowings. The company had no borrowings outstanding under its $775.0 million senior revolving credit facility or its $250.0 million Global Credit revolving facility.
- Accrued performance allocations were $8.5 billion, while net accrued performance revenues attributable to Carlyle were $4.3 billion.
Material Changes Versus the Prior Comparable Period
- Management fees increased $69.5 million, primarily from newly raised funds entering their investment periods, partially offset by fee-basis step-downs, investment realizations, lower advisory fees, and the sale of Metropolitan Real Estate.
- Performance allocations declined $1.1 billion because carry-fund appreciation was 5% in Q1 2022 versus 13% in Q1 2021. Q1 2022 included $96.5 million of performance allocation reversals versus $20.1 million in the prior-year quarter.
- Principal investment income increased primarily because of $250.4 million of net investment earnings from performance allocations associated with NGP, compared with no comparable earnings in Q1 2021.
- Distributable Earnings and Fee Related Earnings increased despite lower GAAP revenue, reflecting higher fee revenues, realized performance revenues, and lower relative non-GAAP expense impacts.
- Total assets increased to $21.7 billion from $21.3 billion, driven by higher investments and $0.8 billion of net intangible assets, partly offset by the cash decline.
- Total liabilities decreased to $15.4 billion from $15.5 billion, primarily because of lower accrued compensation, partly offset by higher CLO borrowings.
- Carlyle repurchased approximately 1.7 million shares for $80.4 million. Approximately $319.6 million remained under the $400 million authorization at March 31, 2022.
Transactions, Outlook, Risks, and Unusual Items
- On March 21, 2022, Carlyle acquired CBAM’s CLO management contracts and related assets for $812.9 million, funded with $618.4 million of cash and approximately 4.2 million Carlyle shares. The transaction added approximately $15 billion of AUM and $14 billion of fee-earning AUM.
- In March 2022, a Carlyle-affiliated fund acquired a $3 billion iStar triple-net-lease portfolio using $2 billion of debt and $1 billion of equity. Carlyle contributed $200 million as a minority balance-sheet investment; the debt is non-recourse to Carlyle.
- Carlyle raised $2.0 billion of third-party capital for Fortitude and committed up to $100 million of additional capital. Carlyle’s indirect ownership is expected to decline from 19.9% to 10.5%, with an expected approximate $277 million reduction in the carrying value of its equity-method investment and corresponding loss, subject to timing and valuation.
- On April 1, 2022, Carlyle entered into a strategic advisory services agreement with Fortitude that is expected to generate recurring fees based on Fortitude’s general-account assets and profitability.
- In April 2022, Carlyle agreed to acquire Abingworth for a base purchase price of $187.5 million, with up to $47.5 million payable in shares and up to $130 million of future incentive payments. Closing is expected in 2022.
- Management stated that available liquidity, operating cash flow, accumulated earnings, and borrowing capacity should be sufficient to fund needs for at least the next twelve months. Carlyle intended to amend and restate its senior revolving credit facility, potentially increasing capacity to $1.0 billion and extending maturity to 2027.
- Management declared a Q1 2022 dividend of $0.325 per share, payable May 17, 2022. The stated policy target is $0.325 per share quarterly, subject to board discretion and applicable restrictions.
- Key market risks include valuation volatility, higher interest rates, inflation, slower growth, Russia’s invasion of Ukraine, supply-chain disruption, foreign exchange movements, credit risk, fundraising competition, regulatory changes, and increased compensation costs.
- Approximately 5% of aircraft leases in Carlyle Aviation Partners’ portfolio were in the Russia, Belarus, or Ukraine region; Aviation carry funds depreciated 18% during the quarter. Carlyle recorded a $4.0 million impairment charge on certain Aviation-related intangible assets tied to impaired Russian aircraft lease income streams.
- Unfunded commitments totaled $4.1 billion, of which approximately $3.3 billion was subscribed individually by senior professionals and other professionals and the balance was funded directly by Carlyle.
- Accrued giveback obligations were $40.4 million. If all fund investments were deemed worthless, management estimated potential after-tax realized and distributed carried-interest givebacks of approximately $1.6 billion, although management views that scenario as remote.
- The company had approximately $35 million accrued for litigation, regulatory examinations, and other contingencies. Management stated that existing matters were not expected to have a material effect, while noting that outcomes remain uncertain.
Important Facts for Investors to Verify
- Reconcile GAAP earnings with Distributable Earnings and Fee Related Earnings, particularly the treatment of unrealized performance allocations, compensation, acquisition costs, and other adjustments.
- Assess the sustainability and realization timing of the $4.3 billion of net accrued performance revenues and the related potential giveback exposure.
- Review the expected $277 million Fortitude dilution-related loss, the $100 million additional capital commitment, and the economics of the new advisory agreement.
- Evaluate CBAM integration, acquired fee-earning AUM, incremental CLO borrowings, and the expected amortization of approximately $807 million of acquired finite-lived intangible assets.
- Monitor liquidity after the $1.2 billion quarterly cash decline, the $4.1 billion of unfunded commitments, acquisition obligations, dividends, share repurchases, and debt service.
- Consider the sensitivity of private-asset valuations, carried interest, CLO investments, Aviation assets, and fundraising to higher rates, market volatility, geopolitical events, and foreign exchange movements.
- Confirm the final terms and completion of the proposed senior revolving credit facility amendment and the timing and consideration for the Abingworth acquisition.