The Carlyle Group Inc. — 2020 Q2 Form 10-Q Summary
Business context and reporting period
Carlyle is a global investment firm operating through Corporate Private Equity, Real Assets, Global Credit, and Investment Solutions. The filing covers the unaudited three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. Carlyle completed its conversion from a Delaware limited partnership to a corporation on January 1, 2020; consequently, ownership, tax, earnings-per-share, and non-controlling-interest comparisons with 2019 are not fully comparable.
At June 30, 2020, total AUM was $221.3 billion and fee-earning AUM was $162.4 billion. The company reported approximately $12.4 billion of new capital raised during the first half of 2020.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $1,131.0 million, versus $1,061.1 million | $385.3 million, versus $2,148.1 million |
| Income before taxes | $256.8 million, versus $542.0 million | $(532.2) million, versus $1,012.3 million |
| Net income attributable to common stockholders | $145.9 million, versus $148.2 million | $(466.1) million, versus $285.2 million |
| Diluted earnings per share | $0.41, versus $1.23 | $(1.34), versus $2.41 |
| Distributable Earnings | $198.4 million, versus $213.4 million | $373.4 million, versus $314.2 million |
| Fee Related Earnings | $127.3 million, versus $132.7 million | $256.1 million, versus $236.0 million |
Second-quarter revenue increased 6.6% year over year, but reported earnings remained highly sensitive to investment valuations. Performance allocations rose to $1,191.8 million from $247.6 million, while principal investment income was a loss of $512.6 million compared with income of $342.0 million. The principal investment loss included a $620.7 million loss associated with the contribution of Carlyle’s Fortitude Holdings interest to Carlyle FRL.
Fund management fees declined 4.9% in the quarter to $371.8 million and declined 2.2% for the first six months to $727.7 million. Total compensation and benefits increased substantially in the quarter to $778.6 million, primarily because performance-allocation-related compensation increased to $535.6 million. General and administrative expense declined to $80.2 million in the quarter and $149.8 million year to date.
Cash flow, balance sheet, debt, and liquidity
- Cash, cash equivalents, and restricted cash totaled $559.0 million at June 30, 2020, including $554.5 million of cash and cash equivalents. Management identified approximately $457 million as remaining cash after amounts allocated to specific purposes, before ordinary-course payables and reserves.
- Six-month operating cash flow was $(76.9) million, versus $269.0 million in 2019, including consolidated-fund activity. Excluding consolidated funds, operating cash flow was $61.8 million, versus $233.8 million.
- Six-month financing cash flow was $(160.0) million. Uses included $174.6 million of common dividends, $68.8 million paid as the first installment of deferred consideration to former Carlyle Holdings unitholders, and $26.4 million of share repurchases.
- Total debt obligations were $1.94 billion carrying value, including $1.63 billion of senior notes and $324.4 million of CLO borrowings. Consolidated-fund loans payable were $4.52 billion and generally are non-recourse to Carlyle.
- The $775.0 million senior revolving credit facility had no balance outstanding and the full capacity was available at June 30, 2020. Carlyle stated that it was in compliance with its debt covenants, including the minimum management-fee-earning-assets and leverage requirements.
- Total assets were $12.32 billion and total liabilities were $10.18 billion. Accrued compensation and benefits were $2.36 billion, including $1.95 billion related to performance allocations and incentive fees.
Material changes versus the prior comparable period
- For the quarter, net income attributable to common stockholders was broadly stable at $145.9 million, despite a significant increase in performance allocations, because of the Fortitude-related principal investment loss and higher related compensation.
- For the six-month period, the company moved from $285.2 million of common-stockholder income to a $466.1 million loss. The change primarily reflects first-quarter market disruption, lower investment income, and the Fortitude transaction and valuation effects.
- Distributable Earnings increased 18.8% year to date to $373.4 million, while Fee Related Earnings increased 8.5% to $256.1 million, indicating stronger realized and recurring operating performance than reflected in GAAP earnings.
- Total AUM declined from $224.4 billion at December 31, 2019 to $221.3 billion at June 30, 2020. Fee-earning AUM increased modestly from $161.1 billion to $162.4 billion, supported by fundraising and inflows, but was affected by realizations, fee-basis changes, and market activity.
- Segment trends were mixed. Corporate Private Equity’s second-quarter Distributable Earnings rose to $95.8 million from $62.5 million; Real Assets declined to $60.7 million from $134.6 million; Global Credit increased to $28.1 million from $8.8 million; and Investment Solutions increased to $13.8 million from $7.5 million.
Outlook, management commentary, risks, and unusual items
Management did not provide a formal quantitative earnings forecast. It described the COVID-19 recovery as uneven and uncertain, with improving activity in China and Europe but renewed weakness and virus-related risks in the United States and Latin America. Carlyle expects full-year investment deployment to be below recent years, although it believes substantial available capital and eventual increases in M&A activity may create opportunities.
- Approximately 98% of fee-earning AUM was in closed-end structures without redemption risk, and approximately 90% of fee revenue came from management fees on traditional closed-end, long-dated funds.
- CLO subordinated management fees were deferred by approximately $3.6 million in the quarter and $7.6 million year to date. Further downgrades or defaults could cause additional deferrals or lost fee revenue.
- Public investments represented 14% of traditional carry-fund fair value, versus 6% at year-end 2019. Management warned that this could increase sensitivity to public-market volatility and concentrate investment gains.
- Net accrued performance revenues attributable to Carlyle were approximately $1.8 billion. Accrued giveback obligations were $23.0 million; if all carry-fund investments became worthless, potential after-tax givebacks could be approximately $0.4 billion, although management views that scenario as remote.
- The Fortitude transaction was a major unusual item. Carlyle contributed its existing 19.9% interest to Carlyle FRL after Carlyle-affiliated and third-party investors acquired additional interests from AIG. Carlyle’s investment in Carlyle FRL was $513.6 million at June 30, 2020, compared with cost of $465.4 million.
- The company recognized a $29.9 million reduction of general and administrative expense from the settlement of the Carlyle Capital Corporation litigation. Legal and regulatory contingency liabilities totaled approximately $35 million.
- Unfunded commitments totaled $3.70 billion, of which approximately $3.1 billion was subscribed individually by senior professionals and other professionals. The company also guaranteed a $125 million fund credit facility at June 30; subsequent to quarter-end, the fund repaid part of the balance.
- The board declared a $0.25 per share quarterly dividend payable August 18, 2020. Dividend payments remain discretionary and subject to financial, legal, tax, regulatory, and covenant constraints.
- Glenn Youngkin announced retirement as co-chief executive officer effective September 30, 2020; Kewsong Lee was appointed sole chief executive officer.
Most important facts for an investor to verify
- Reconcile GAAP earnings with Distributable Earnings and Fee Related Earnings, particularly the treatment of unrealized performance allocations, Fortitude valuation effects, and non-recurring items.
- Assess the sustainability and realization timing of the $1.8 billion net accrued performance-revenue balance and potential giveback exposure.
- Monitor fee-earning AUM, fundraising, fund-basis stepdowns, realizations, and CLO fee deferrals.
- Review liquidity after restricted or earmarked cash, the $3.7 billion of unfunded commitments, dividends, deferred consideration, taxes, and debt service.
- Evaluate the impact of COVID-19 on portfolio valuations, exits, deployment, fundraising, credit performance, and public-market concentration.
- Consider the comparability limitations caused by the January 2020 corporate conversion, including changes in tax status, share count, and non-controlling interests.