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, 2017, filed August 2, 2017. Carlyle is a global alternative asset manager operating through Corporate Private Equity, Real Assets, Global Market Strategies, and Investment Solutions. The consolidated financial statements include certain CLOs, funds, and Urbplan, a Brazilian real estate development VIE; these consolidations materially gross up reported assets, liabilities, revenues, expenses, and cash flows without generally affecting income attributable to Carlyle.
At June 30, 2017, total AUM was $169.8 billion and fee-earning AUM was $116.1 billion. Reported AUM includes $54.1 billion of available capital commitments. The filing cautions that AUM and fee-earning AUM are non-GAAP operating measures and may not be comparable with other alternative asset managers.
Key Financial Metrics
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Total revenues | $908.4 million | $2,028.5 million |
| Income before taxes | $243.7 million | $571.4 million |
| Net income attributable to Carlyle | $57.6 million | $140.6 million |
| Basic earnings per common unit | $0.65 | $1.61 |
| Diluted earnings per common unit | $0.59 | $1.49 |
| Distributable Earnings | $198.9 million | $254.3 million |
| Fee Related Earnings | $6.2 million | $31.7 million |
| Net cash provided by operating activities | Not separately presented | $373.1 million |
- GAAP pretax margin was approximately 26.8% for the quarter and 28.2% for the six-month period. Net income attributable to Carlyle represented approximately 6.3% and 6.9% of revenue, respectively.
- Performance fees were $543.6 million in the quarter and $1.225 billion year to date, including $185.9 million and $784.3 million of unrealized performance fees, respectively. Approximately 62% of quarterly and 72% of year-to-date performance fees related to three Corporate Private Equity funds.
- Fund management fees were $238.8 million for the quarter and $485.1 million year to date. Accrued performance fees were $3.365 billion at June 30, 2017, offset by $162.2 million of accrued giveback obligations and $1.726 billion of accrued performance-fee-related compensation.
- Cash and cash equivalents were $789.9 million, corporate treasury investments were $115.4 million, and cash held at consolidated funds was $416.1 million but was not available for Carlyle’s general liquidity needs.
- Debt obligations were $1.437 billion, excluding $3.721 billion of loans payable of consolidated funds and $72.6 million of Urbplan debt measured at fair value. Carlyle had $750 million of revolving-credit capacity and $25 million outstanding under its senior credit facility. Management stated that liquidity sources were sufficient for at least the next twelve months.
- Six-month operating cash flow was $373.1 million, compared with cash used in operations of $394.0 million in the prior-year period. Cash increased by $119.0 million to $789.9 million after $277.0 million of net financing cash outflows.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 49% to $908.4 million, and six-month revenue increased 86% to $2.029 billion. The principal driver was performance fees, which increased 158% for the quarter and 244% year to date, reflecting stronger portfolio appreciation, particularly in U.S. and Asia buyout funds.
- Fund management fees declined 12% for the quarter and 14% year to date, primarily due to distributions and changes from commitment-based to invested-capital fee bases, lower former hedge-fund AUM, and lower transaction and advisory fees.
- Quarterly net income attributable to Carlyle increased from $6.1 million to $57.6 million; year-to-date net income increased from $14.5 million to $140.6 million. The improvement was substantially performance-fee driven and includes significant unrealized amounts.
- Distributable Earnings declined from $287.5 million to $198.9 million for the quarter and from $416.1 million to $254.3 million year to date. Lower realized net performance fees, realized investment income, and fee-related earnings more than offset stronger GAAP performance fees.
- Fee Related Earnings declined from $44.9 million to $6.2 million for the quarter and from $95.9 million to $31.7 million year to date, reflecting lower fee revenues and the cost structure associated with fundraising and business development.
- Fee-earning AUM declined from $125.3 billion at June 30, 2016 to $116.1 billion at June 30, 2017, although total AUM increased from $157.6 billion at December 31, 2016 to $169.8 billion, supported by market appreciation, fundraising, and foreign exchange.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects to raise $100 billion of gross new capital over the four-year period beginning in 2016 and ending in 2019. Carlyle raised $8.4 billion in the second quarter and $18.1 billion over the preceding twelve months. It expects fundraising to accelerate in the remainder of 2017 and into 2018 as large buyout funds enter the market.
- Pending fee-earning AUM was approximately $9 billion at quarter end, up from $4 billion at the beginning of the quarter. Management noted that fundraising costs may precede the activation of fees on new commitments.
- Global Market Strategies is focused on expanding global credit. Carlyle completed its exit from the commodities advisory business and former hedge-fund platforms, but expects elevated expenses from new hires and expansion of the credit business.
- Carlyle settled investor claims involving two Vermillion commodities investment vehicles for approximately $165 million in cash and approximately $54 million of promissory notes, while recognizing $103 million of insurance proceeds to date. Additional recovery proceeds are uncertain.
- Urbplan has liquidity problems, substantial covenant violations or technical defaults, and may require debt restructuring, bankruptcy reorganization, or insolvency proceedings. Carlyle had funded $136.4 million directly through June 30, 2017 and funded $8.1 million during the quarter. Management does not anticipate additional support for Urbplan debt obligations, but potential future charges were estimated at $30 million to $50 million.
- Legal, regulatory, and other contingencies included approximately $60 million of recorded liabilities. The Carlyle Capital Corporation litigation in Guernsey seeks more than $1 billion, and the court had not issued a decision as of the filing. SEC inquiries include historical monitoring-fee practices and other matters.
- Potential giveback exposure was $162.2 million at quarter end; in an extreme scenario in which all carry-fund investments became worthless, realized and distributed performance fees subject to potential giveback could be approximately $1.1 billion after tax.
- Management expects to contribute approximately $750 million to new CLOs over the next five years to comply with risk-retention rules, using a combination of Carlyle, professional, third-party, and limited-recourse financing sources.
- The general partner declared a $0.42 per common unit distribution payable August 21, 2017. The distribution policy targets approximately 75% of Distributable Earnings per common unit, net of taxes and tax-receivable-agreement payments, but distributions remain discretionary.
Most Important Facts for Investors to Verify
- Whether the unusually strong GAAP results are sustainable, given the substantial contribution from unrealized performance fees and fair-value estimates.
- The conversion of accrued performance fees into realized cash, including the timing of realizations and potential givebacks.
- The decline in fee-earning AUM and Fee Related Earnings, particularly in Corporate Private Equity and Real Assets.
- Actual cash available to Carlyle after restricted or allocated cash, compensation accruals, capital commitments, debt service, taxes, and distributions.
- The outcome and potential additional cost of the Vermillion settlements, SEC inquiries, Carlyle Capital Corporation litigation, and other legal contingencies.
- Urbplan’s restructuring prospects, covenant defaults, potential bankruptcy exposure, and whether the estimated $30 million to $50 million of possible future charges changes.
- The funding burden from $2.862 billion of unfunded commitments, CLO risk-retention requirements, tax-receivable-agreement payments, and future fundraising expenses.
- The reconciliation between GAAP net income, Economic Net Income, Fee Related Earnings, and Distributable Earnings before relying on non-GAAP measures for valuation or distribution expectations.