Carlyle Group L.P. — Q1 2019 Form 10-Q Summary
Business context and reporting period
The filing is The Carlyle Group L.P.’s unaudited quarterly report for the three months ended March 31, 2019, filed May 1, 2019. Carlyle is a global investment manager operating through Corporate Private Equity, Real Assets, Global Credit and Investment Solutions. The financial statements consolidate certain funds and CLOs, which materially gross up reported assets, liabilities and cash flows but generally do not affect income attributable to Carlyle.
- Total AUM was $221.5 billion and fee-earning AUM was $160.0 billion at March 31, 2019.
- Fundraising was $6.9 billion during the quarter; management expected to exceed its multiyear $100 billion fundraising target during 2019.
- The filing identifies the registrant as The Carlyle Group L.P.; the request’s company label says Carlyle Group Inc.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues | $1,087.0 million | $702.8 million | +55% |
| Fund management fees | $353.4 million | $264.5 million | +34% |
| Performance allocations | $349.1 million | $308.1 million | +13% |
| Principal investment income | $301.8 million | $54.1 million | +458% |
| Income before taxes | $470.3 million | $125.5 million | +275% |
| Net income | $446.3 million | $117.7 million | +279% |
| Net income attributable to common unitholders | $137.0 million | $33.8 million | +305% |
| Basic/diluted earnings per common unit | $1.25/$1.18 | $0.34/$0.30 | Material increase |
| Distributable Earnings | $100.8 million | $138.9 million | -27% |
| Fee Related Earnings | $103.3 million | $28.2 million | +266% |
GAAP income before tax represented approximately 43.3% of revenue, while net income represented approximately 41.1%. Segment Distributable Earnings margin was approximately 22.4% and Fee Related Earnings margin was approximately 22.9% of segment revenue. The sharp difference between GAAP earnings and Distributable Earnings reflects the exclusion from DE of unrealized performance allocations and principal investment income.
- Fortitude Re contributed $256.3 million of investment earnings, including $229.3 million of unrealized gains from changes in the fair value of embedded derivatives. The Fortitude Re investment carrying value was $721.9 million at quarter-end.
- Operating cash flow was $341.0 million, compared with cash used in operations of $22.6 million in Q1 2018. Excluding consolidated funds, operating cash flow was $191.3 million, compared with $166.8 million.
- Net cash used in financing activities was $251.8 million, including distributions, debt repayments and $10.4 million of unit repurchases.
- Cash, cash equivalents and restricted cash ended at $728.1 million, including $723.0 million of unrestricted cash and $5.1 million of restricted cash. Corporate treasury investments were $28.4 million.
- Management estimated approximately $647 million of remaining cash and treasury investments after amounts allocated to specific purposes, before ordinary-course payables and reserves.
- Debt obligations were $1.54 billion at March 31, 2019, including $1.21 billion of senior notes and $328.2 million of CLO borrowings. No amount was outstanding under the $775 million senior revolving credit facility.
- Loans payable of consolidated funds were $3.75 billion and were generally non-recourse to Carlyle.
Material changes versus the prior comparable period
- Revenue growth was driven by higher management fees from newly raised funds and substantially higher principal investment income, particularly from Fortitude Re.
- Management fees increased $88.9 million, primarily from activation of fees for newer funds, partly offset by fee-basis changes and distributions in older funds.
- Total expenses increased only $23.2 million to $602.5 million. Equity-based compensation declined $48.9 million, while cash compensation increased $23.2 million and performance-related compensation increased $27.4 million.
- Distributable Earnings declined because realized net performance revenues fell to $7.0 million from $103.1 million and realized principal investment income fell to $4.1 million from $18.7 million.
- Fee Related Earnings increased substantially as recurring fee revenues grew and realized performance income is excluded from FRE.
- Corporate Private Equity DE declined to $62.1 million from $86.8 million, Real Assets declined to $18.1 million from $33.2 million, Global Credit increased to $14.2 million from $10.2 million, and Investment Solutions declined to $6.4 million from $8.7 million.
- Two CLOs were deconsolidated during the quarter, reducing consolidated fund investments and related loans payable by approximately $1.3 billion and $1.1 billion, respectively.
- The February 2019 credit facility amendment increased revolver capacity from $750 million to $775 million, extended maturity to February 2024 and repaid the $25 million term loan.
- Carlyle repurchased and retired approximately 568,000 common units for $10.4 million under its $200 million repurchase authorization.
Guidance, outlook, commentary and risks
- Management expected fundraising to exceed $100 billion during 2019 but cautioned that fundraising pace would decelerate as product mix changes.
- Carry funds appreciated 3% in Q1 2019 and 9% over the prior twelve months. Management expects net realized performance revenues to remain lower in 2019 as the portfolio transitions from older to newer fund vintages.
- Management reported $4.7 billion of carry-fund realizations during the quarter, $3.4 billion of new or follow-on investments and approximately $21.8 billion invested over the prior twelve months.
- Management cited moderating global growth, declining global trade volumes, competitive investment conditions, elevated industry dry powder, volatile markets, credit-market liquidity constraints and potential effects from trade disputes.
- Accrued performance allocations were $3.71 billion, accrued giveback obligations were $63.2 million, and net accrued performance revenues attributable to Carlyle Holdings were $1.83 billion. These balances are valuation-sensitive and may reverse before realization.
- Unfunded commitments totaled $4.05 billion, of which approximately $3.5 billion was subscribed individually by senior Carlyle professionals and other professionals; the balance was funded directly by the Partnership.
- Potential contingent cash obligations associated with Carlyle Aviation Partners and Fortitude Re totaled up to $245 million, compared with $7.6 million recognized on the balance sheet.
- Legal and regulatory matters included SEC information requests, the Foy v. Austin Capital litigation, a French tax dispute and other investigations. Recorded liabilities for litigation, regulatory inquiries and other matters were approximately $35 million. Management stated that material adverse outcomes were not currently considered probable, but acknowledged that adverse outcomes could materially affect a particular period.
- Investment valuations rely substantially on Level III inputs and management judgment. Significant decreases in indicative prices or recovery rates, or increases in discount rates, discount margins or default rates, could reduce reported values and performance allocations.
- Management stated that liquidity sources, including cash flow and the senior credit facility, should be sufficient to fund needs for at least the next twelve months. The filing also states that distributions are discretionary and may be adjusted or suspended.
Most important facts for investors to verify
- Separate recurring fee performance from volatile, largely unrealized investment income, especially the $256.3 million Fortitude Re contribution.
- Reconcile GAAP earnings with DE and FRE and assess whether the decline in realized performance revenues affects distributable cash and future distributions.
- Review the composition, valuation assumptions and realization prospects of the $3.71 billion accrued performance allocations and $1.83 billion net accrued performance revenues.
- Confirm the actual cash available after restricted or allocated cash, fund commitments, distributions, tax receivable agreement payments and other obligations.
- Monitor $1.54 billion of Carlyle debt, $328.2 million of CLO borrowings, covenant compliance and the $13.5 million promissory notes maturing July 15, 2019.
- Evaluate the $4.05 billion of unfunded commitments and the portion expected to be funded by Carlyle rather than individual professionals.
- Track Fortitude Re reserve, derivative valuation and asset-management commitment developments, as well as the potential deferred consideration and purchase-price adjustments.
- Review pending legal, regulatory and tax matters, including the SEC inquiries and the French tax refund appeal.