Business Context and Reporting Period
This Form 8-K, filed on December 19, 2012, by The Carlyle Group L.P., reports a strategic investment transaction closed on December 20, 2012. The filing details the acquisition of a significant interest in NGP Energy Capital Management, an Irving, Texas-based energy investor established in 1988 with $12.1 billion in assets under management.
Key Financial Metrics and Transaction Structure
- Initial Investment Consideration: Carlyle paid an aggregate of $384 million in cash and issued 1,594,516 Carlyle Holdings partnership units (valued at approximately $40 million).
- Acquired Interests: The initial transaction grants Carlyle a 47.5% interest in management fee-related revenues of NGP entities and a 7.5% interest in carried interest from future funds.
- Contingent Consideration: Additional payments are tied to NGP achieving business performance goals between 2015 and early 2018.
- Baseline goals: Up to $198 million in cash/promissory note and up to $15 million in partnership units.
- Outperformance goals: Up to an additional $30 million in cash/promissory note payable to BNRI.
- Future Revenue Interest: Subject to regulatory approval, Carlyle will pay an additional $7.5 million by May 11, 2017, to increase its revenue interest to 55%.
- Target Historical Revenue: NGP's gross management fee-related revenues were $105.0 million for the nine months ended September 30, 2012, and $110.0 million for the year ended December 31, 2011.
Material Changes and Strategic Options
The transaction represents a material expansion into the energy and natural resources sector. Carlyle has secured options to purchase additional interests in NGP:
- Option 1: Exercisable July 1, 2014 – July 1, 2015, to acquire 40% of carried interest in NGP X for an estimated $65–$74 million plus net capital contributions.
- Option 2: Exercisable until January 1, 2015, to acquire an additional 40% of carried interest in future funds for an estimated $34–$38 million.
- Option 3: Exercisable in approximately 13 years to purchase remaining interests in NGP Management for a formulaic price based on earnings.
Outlook, Accounting, and Risks
Accounting Treatment: The investment will be accounted for under the equity method of accounting. Revenues and expenses will be included in Carlyle's Real Assets segment. The filing excludes the impact of equity-based compensation and contingent consideration from segment results.
Management Commentary: Carlyle believes the baseline performance goals are achievable and anticipates paying a majority or all of the first tier of additional consideration. A strategic alliance agreement covers fundraising, branding, and administrative services.
Risks: Forward-looking statements are subject to risks including the failure to complete the acquisition, NGP's failure to perform as expected, and the need for regulatory approvals. Certain partnership units are subject to forfeiture if performance goals are not met.
Investor Verification Checklist
- Verify the receipt of required regulatory approvals for the additional $7.5 million payment and future interest acquisitions.
- Monitor NGP's performance against the baseline business plan goals to determine the actual amount of contingent consideration payable (up to $228 million total).
- Review the terms of the strategic alliance and senior advisor consulting agreements for potential conflicts or additional costs.
- Assess the impact of the equity method accounting on Carlyle's Real Assets segment results in future quarterly reports.
- Track the exercise windows for the three options to acquire additional carried interest and management control.