Carlyle Group Inc. 2023 Q3 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. The filing covers the unaudited quarter and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods.
- Total AUM was $382.3 billion; Fee-earning AUM was $273.0 billion.
- Segment AUM was $160.6 billion in Global Private Equity, $150.1 billion in Global Credit and $71.6 billion in Global Investment Solutions.
- The financial statements consolidate certain funds and CLOs. This materially increases reported assets, liabilities and cash flows, while the related liabilities are generally non-recourse to Carlyle.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Total revenues | $716.6 million | $1,088.5 million | $2,037.7 million | $3,719.3 million |
| Fund management fees | $502.6 million | $535.9 million | $1,511.2 million | $1,532.9 million |
| Performance allocations | $(118.3) million | $298.1 million | $(204.3) million | $1,346.2 million |
| Total expenses | $555.1 million | $699.6 million | $1,805.8 million | $2,267.3 million |
| Net income attributable to Carlyle | $81.3 million | $280.8 million | $83.6 million | $1,097.8 million |
| Diluted EPS | $0.22 | $0.77 | $0.23 | $3.00 |
| Distributable Earnings | $367.4 million | $644.4 million | $1,027.8 million | $1,476.0 million |
| Fee Related Earnings | $204.7 million | $212.6 million | $605.4 million | $632.3 million |
Q3 net income attributable to Carlyle represented approximately 11.3% of revenue, compared with approximately 25.8% in Q3 2022. YTD net income attributable to Carlyle represented approximately 4.1% of revenue, compared with approximately 29.5% in the prior-year period.
- Q3 carry fund appreciation was 2%; year-to-date appreciation was 5%.
- Q3 realized performance revenues were $180.4 million, down from $764.8 million. YTD realized performance revenues were $680.6 million, down from $1.52 billion.
- Cash-based compensation increased 6.4% in Q3 and 2.4% year to date. Equity-based compensation increased to $64.4 million in Q3 and $186.8 million year to date.
- Cash and cash equivalents were $1.27 billion, including $4.5 million of restricted cash; corporate treasury investments were $57.3 million.
- Cash flow from operating activities was $(49.2) million on a consolidated basis, reflecting consolidated-fund investment activity. Excluding consolidated funds, operating cash flow was $718.8 million versus $793.5 million in the prior-year period.
- Debt obligations were $2.28 billion at carrying value, including $1.88 billion of senior and subordinated notes and $421.3 million of CLO borrowings. Consolidated-fund loans payable were $6.42 billion and generally non-recourse to Carlyle.
- The $1.0 billion senior revolving credit facility was undrawn and available through April 2027. Management stated that available liquidity sources should be sufficient for at least the next twelve months.
Material changes versus the prior comparable period
- Revenue declined 34.2% in Q3 and 45.2% year to date, primarily because performance allocations fell sharply and became negative in 2023.
- Performance allocation reversals were driven principally by CP VII, where appreciation was below the preferred return hurdle, and CP VI, which experienced depreciation in publicly traded investments.
- Fund management fees declined 6.2% in Q3 and 1.4% year to date, reflecting lower transaction and portfolio advisory fees, fee-basis changes and investment realizations, partly offset by newly raised funds and acquisitions.
- Lower performance-related compensation reduced total expenses by $191.0 million in Q3 and $715.4 million year to date, partially offsetting the revenue decline.
- Global Private Equity DE declined to $292.2 million in Q3 from $505.7 million; Global Credit DE declined to $54.8 million from $111.7 million; Global Investment Solutions DE declined to $20.4 million from $27.0 million.
- Fee Related Earnings was comparatively resilient, declining 3.7% in Q3 and 4.3% year to date.
- Fortitude’s capital raise diluted Carlyle’s indirect ownership from 13.5% to 10.5%, producing a $104.0 million investment loss in the first nine months of 2023.
- Carlyle paid $203.7 million to repurchase approximately 6.5 million shares during the first nine months and had $396.8 million of remaining authorization at September 30, 2023.
- The quarterly common dividend increased to $0.35 per share from $0.325 per share previously. A $0.35 dividend was declared in November 2023.
Guidance, outlook, commentary and risks
- Management expects second-half 2023 Fee Related Earnings to exceed first-half 2023 Fee Related Earnings.
- Management expects transaction fee revenue, realized performance fee revenue and realized investment income to be lower for full-year 2023 than in 2022, with lower deployment and realization activity continuing in the near term.
- Management cited higher interest rates, elevated financing costs, slower M&A and IPO activity, muted fundraising conditions, geopolitical uncertainty and potential recessionary pressure.
- Credit defaults are expected to increase in 2023 as inflation and higher financing costs pressure borrowers, although Carlyle stated that its CLO default rate remained below the industry average.
- More than 40% of the CLO portfolio had exited its reinvestment period; absent resets, collateral runoff could reduce AUM and Fee-earning AUM.
- Accrued performance allocations were $6.21 billion, offset by $44.0 million of accrued giveback obligations. Net accrued performance revenues attributable to Carlyle were $3.51 billion, but these amounts depend on future realizations and valuations.
- Unfunded commitments totaled $3.62 billion, of which approximately $3.0 billion was subscribed individually by senior professionals and other employees. Carlyle also had $93.0 million of unfunded capital markets commitments.
- Legal and regulatory matters include the Authentix litigation, a tax receivable agreement lawsuit, and an SEC inquiry regarding electronic communications preservation. Recorded legal and regulatory contingency liabilities totaled approximately $35 million; management could not estimate potential losses for certain matters.
- Valuations of private investments, CLO assets and performance allocations rely substantially on estimates and Level III inputs. Actual realizations may differ materially from reported carrying values.
Investor verification checklist
- Verify the sustainability of management fees and Fee-earning AUM, including the effects of fund step-downs, CLO runoff, realizations and foreign exchange.
- Reconcile GAAP earnings with DE and FRE, particularly the treatment of unrealized performance allocations, equity compensation, consolidated funds and non-recurring items.
- Assess the timing and probability of performance allocation realizations, givebacks and the $3.51 billion of net accrued performance revenues.
- Review liquidity after considering restricted or earmarked cash, dividends, share repurchases, fund commitments, debt service and potential contingent payments.
- Monitor CLO credit quality, defaults, reinvestment-period expirations, interest-rate exposure and the non-recourse structure of consolidated-fund liabilities.
- Evaluate the effect of Fortitude ownership dilution, regulatory rule changes, pending litigation and the SEC communications inquiry.