Carlyle Group Inc. quarterly report, Q2 FY2023

Carlyle Group Inc. 2023 Q2 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 six months ended June 30, 2023, compared primarily with the corresponding 2022 periods.

Total assets under management were $384.8 billion, including $162.8 billion in Global Private Equity, $151.5 billion in Global Credit, and $70.5 billion in Global Investment Solutions.
Fee-earning AUM was $271.4 billion, up from $259.6 billion at June 30, 2022. Pending fee-earning AUM was $15.3 billion.
Perpetual Capital represented $64.7 billion of AUM and $61.4 billion of fee-earning AUM.

Key Financial Metrics

Metric	Q2 2023	Q2 2022	Six Months 2023	Six Months 2022
Total revenues	$462.1 million	$1,049.0 million	$1,321.1 million	$2,630.8 million
Fund management fees	$507.8 million	$546.5 million	$1,008.6 million	$997.0 million
Investment income/(loss)	$(254.0) million	$394.6 million	$(81.5) million	$1,424.4 million
Income/(loss) before taxes	$(70.0) million	$299.7 million	$89.6 million	$1,042.4 million
Net income/(loss) attributable to Carlyle	$(98.4) million	$245.4 million	$2.3 million	$817.0 million
Diluted EPS	$(0.27)	$0.67	$0.01	$2.24
Distributable Earnings	$388.8 million	$528.8 million	$660.4 million	$831.6 million
Fee Related Earnings	$207.3 million	$236.4 million	$400.7 million	$419.7 million

GAAP results were heavily affected by valuation-based performance allocation reversals. The Q2 2023 net loss attributable to Carlyle represented approximately negative 21% of reported revenue; the filing does not present a standardized GAAP operating margin.

Material Changes Versus the Prior Comparable Period

Q2 revenue declined 55.9%, and first-half revenue declined 49.8%, primarily because performance allocations changed from positive revenue of $337.9 million in Q2 2022 to a loss of $246.8 million in Q2 2023.
Performance allocation reversals totaled $582.4 million in Q2 2023, exceeding new accruals of $335.6 million. Reversals were concentrated in Carlyle Partners VII, Carlyle Asia Partners V, and Carlyle Partners VI.
Carry-fund appreciation was 2% in Q2 2023 versus 3% in Q2 2022, and 4% year-to-date versus 9% in the prior-year period.
Fund management fees decreased 7.1% in Q2 but increased 1.2% for the first six months. Lower transaction and portfolio advisory fees and lower catch-up fees offset growth from newly raised funds and acquisitions.
Distributable Earnings declined 26.5% in Q2 and 20.6% year-to-date. Fee Related Earnings declined 12.3% in Q2 and 4.5% year-to-date.
Equity-based compensation increased to $68.0 million in Q2 and $122.4 million year-to-date, compared with $45.4 million and $85.1 million, respectively, driven by increased restricted stock and inducement awards.
General, administrative and other expenses increased 28.0% in Q2 and 37.7% year-to-date, reflecting higher intangible amortization, foreign-exchange losses, fundraising costs, travel, and technology expenses.

Cash Flow, Debt, Liquidity, and Capital Allocation

Cash, cash equivalents, and restricted cash declined to $875.7 million at June 30, 2023 from $1.36 billion at December 31, 2022. Corporate operating cash, excluding Consolidated Funds, was $870.3 million, and corporate treasury investments were $44.5 million.
GAAP operating cash flow was $(849.0) million for the first six months, including substantial Consolidated Fund activity. Excluding Consolidated Funds, operating cash flow was $74.2 million, compared with $(113.7) million in the prior-year period.
GAAP investing cash flow was $(55.3) million, while financing cash flow was $408.0 million, including $876.1 million of net borrowings by Consolidated Funds, $245.1 million of dividends, and $160.8 million of share repurchases.
Corporate debt obligations were $2.274 billion carrying value, including $1.375 billion of senior notes, $484.9 million of subordinated notes, and $419.9 million of CLO borrowings. No amounts were outstanding under the $1.0 billion senior revolving credit facility or the $250.0 million Global Credit facility.
The senior revolving facility matures in April 2027. Management stated that available liquidity sources should be sufficient to fund needs for at least the next twelve months; approximately $0.8 billion of cash, cash equivalents, and treasury investments was considered available after amounts allocated for specific purposes.
The company was in compliance with all debt covenants at June 30, 2023.
Unfunded commitments to Carlyle funds totaled $3.911 billion, of which approximately $3.3 billion was subscribed by senior professionals and other individuals and the balance was funded directly by Carlyle.
The company repurchased approximately 5.2 million shares for $160.8 million during the first six months. Remaining authorization was $440.0 million at June 30, 2023.
The quarterly common dividend increased to $0.35 per share from $0.325 previously. A $0.35 dividend payable August 23, 2023 was declared after quarter-end.

Guidance, Outlook, Commentary, and Unusual Items

Management expects Fee Related Earnings to remain below 2022 levels and currently expects second-half 2023 Fee Related Earnings to approximate first-half levels, with a relatively stronger fourth quarter.
Management expects transaction fee revenue, realized performance fee revenue, and realized investment income to be lower for 2023 than in 2022 because of slower investment and realization activity.
Fundraising was $7.1 billion in Q2. Management expects fundraising to remain competitive, with potential declines in buyout fund sizes across most geographies, which could delay catch-up fees and reduce future management fees.
Management expects strong deployment opportunities in opportunistic credit as traditional financing remains constrained, but expects higher default rates during 2023 due to inflation, higher financing costs, and recession risk.
Approximately 40% of the CLO portfolio was scheduled to exit its reinvestment period by the end of 2023. Without resets, collateral runoff could reduce AUM and fee-earning AUM.
Fortitude called the remaining $1.0 billion of capital commitments in May 2023. Carlyle’s indirect ownership declined from 13.5% to 10.5%, producing a $104.0 million investment loss.
Accrued performance allocations were $6.532 billion, offset by $40.9 million of accrued giveback obligations. Net accrued performance revenues attributable to Carlyle were $3.682 billion.
Potential future giveback exposure was approximately $1.6 billion after tax if all fund investments became worthless, although management views that scenario as remote. Approximately $0.7 billion would be attributable to current and former senior professionals.
Abingworth-related contingent payments could reach $130.0 million based on performance through 2028; no amount was accrued at June 30, 2023. A Carlyle Aviation Partners earn-out was settled with a $68.6 million payment during the first quarter, with $2.4 million remaining payable.
Legal and regulatory matters include the Authentix litigation, a tax receivable agreement shareholder action, and an SEC inquiry regarding electronic communications. Recorded liabilities for litigation, regulatory inquiries, and other matters totaled approximately $35 million.
Key market risks include valuation volatility, higher interest rates, slower M&A and capital-markets activity, credit defaults, fundraising delays, foreign-exchange movements, regulatory changes, and reliance on estimated fair values for illiquid Level III investments.

Important Facts for Investors to Verify

Reconcile GAAP earnings with Distributable Earnings and Fee Related Earnings, particularly the treatment of unrealized performance allocations, Consolidated Funds, equity compensation, and Fortitude dilution losses.
Assess the sustainability of fee-related earnings amid slower fundraising, lower transaction activity, fee-basis stepdowns, and potential CLO runoff.
Review the valuation sensitivity of the $267.6 billion of Level III investments included in AUM and the assumptions for discount rates, default rates, recovery rates, and indicative pricing.
Monitor liquidity after dividends, repurchases, fund commitments, debt service, deferred consideration, tax receivable agreement payments, and potential litigation or giveback obligations.
Track performance allocation realizations and reversals, including the concentration of accrued performance allocations in Global Private Equity and the potential for future givebacks.
Review the status and potential financial impact of the SEC inquiry, Authentix litigation, tax receivable agreement matter, and other regulatory or legal contingencies.