Business context and reporting period
The filing is The Carlyle Group L.P.’s Form 10-K for the fiscal year ended December 31, 2013, filed February 26, 2014. Carlyle is a global alternative asset manager operating through Corporate Private Equity, Global Market Strategies, Real Assets and Solutions. The company reported approximately $188.8 billion of AUM, $139.9 billion of fee-earning AUM, more than 1,500 employees and 34 offices across six continents at year-end.
The filing’s 2013 results are not fully comparable with earlier periods because the May 2012 IPO and reorganization changed ownership, compensation and tax accounting. Consolidated GAAP results also include certain funds and variable-interest entities whose assets and liabilities are generally non-recourse to Carlyle.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $4,441.2 million | $2,973.1 million | +49% |
| Fund management fees | $984.6 million | $977.6 million | +1% |
| Performance fees | $2,375.3 million | $1,041.1 million | +128% |
| Net income | $1,347.8 million | $2,399.5 million | -44% |
| Net income attributable to Carlyle Group L.P. | $104.1 million | $20.3 million | +413% |
| Basic diluted earnings per common unit | $2.24 / $2.05 | $0.48 / $0.41 | Improved |
| Economic Net Income | $1,320.1 million | $735.6 million | +79% |
| Fee-Related Earnings | $152.1 million | $171.3 million | -11% |
| Distributable Earnings | $840.0 million | $689.7 million | +22% |
| Net cash from operating activities | $2,994.3 million | $2,028.4 million | +48% |
| Cash and cash equivalents | $966.6 million | $567.1 million | +$399.5 million |
Consolidated net income was heavily affected by non-controlling interests and consolidated funds. The attributable net margin was approximately 2.3% of total revenue, while consolidated net income margin was approximately 30.3%; these ratios are not directly representative of operating profitability because of fund consolidation and non-controlling interests.
- Realized performance fees were $1,176.7 million and unrealized performance fees were $1,198.6 million. Performance fees are valuation-sensitive and may reverse.
- Compensation and benefits increased to $2,244.1 million from $1,143.9 million, including $322.4 million of equity compensation and $1,183.7 million of performance-fee-related compensation.
- Cash flow from operating activities benefited from non-cash performance fees and consolidated-fund activity; it is not equivalent to distributable earnings.
- Corporate debt consisted principally of $500 million of 3.875% senior notes due 2023, $400 million of 5.625% senior notes due 2043, a $25 million term loan and a $17.4 million CLO-related term loan. Carrying value of loans payable and senior notes was $940.6 million.
- The senior credit facility had $750 million of revolving capacity available at year-end and matured in 2018. Management stated that cash, operating cash flow and available credit were expected to cover needs for at least the next 12 months.
- Consolidated CLO liabilities were $15.2 billion and generally non-recourse to Carlyle. Consolidated funds also included approximately $28.9 billion of assets, which were unavailable for general corporate liquidity.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a $1,334.2 million increase in performance fees, reflecting approximately 20% appreciation in the carry-fund portfolio and catch-up allocations from funds entering carry positions.
- Management fees were broadly flat because new-fund commencements and acquisitions offset lower fees from funds moving from commitment-based to invested-capital-based fee calculations, realizations and investment-period expirations.
- Distributable Earnings increased 22%, but Fee-Related Earnings declined 11% as management-fee growth lagged higher operating expenses, fundraising costs and interest expense.
- AUM increased from approximately $170.2 billion to $188.8 billion. Fee-earning AUM increased from $123.1 billion to $139.9 billion, primarily from $27.6 billion of inflows and commitments, acquisitions, subscriptions and market appreciation.
- Corporate Private Equity AUM rose to $64.9 billion and fee-earning AUM to $43.0 billion. Global Market Strategies AUM rose to $35.5 billion and fee-earning AUM to $33.4 billion. Real Assets AUM declined to $38.7 billion and fee-earning AUM to $28.4 billion. Solutions AUM increased to $49.8 billion and fee-earning AUM to $35.1 billion.
- Carlyle acquired the remaining 40% of AlpInvest in August 2013 and acquired Metropolitan Real Estate Equity Management in November 2013. It acquired DGAM on February 3, 2014, after year-end.
- The company issued $900 million of long-term senior notes and used proceeds principally to repay revolving-credit and term-loan borrowings.
Guidance, outlook, commentary, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expected fundraising to continue at a strong pace through 2014, supported by several large funds in the market, while noting that fundraising remained competitive and more costly.
- Management highlighted favorable 2013 capital-market conditions, including strong equity markets, tighter credit spreads and access to reasonably priced financing. It cautioned that higher interest rates, Federal Reserve tapering, weaker emerging markets or renewed credit-market stress could reduce investment activity, realizations and performance fees.
- Performance-fee revenue is volatile because it depends on realized transactions, fund return hurdles, market valuations and high-water marks. Accrued performance fees were $3.65 billion at year-end, but realization timing is uncertain.
- Accrued giveback obligations were $39.6 million. If all fund investments became worthless, previously realized and distributed carried interest subject to potential giveback was estimated at approximately $1.6 billion after tax.
- Urbplan, a Brazilian real-estate development company, was consolidated beginning September 30, 2013. Its loans were approximately $305.3 million principal amount, substantially in covenant default or technical default, and management expected Urbplan to require approximately $200 million of additional funding. The debt was contractually non-recourse to Carlyle, but additional investment and litigation risks remained.
- The filing disclosed a French tax assessment against CEREP I of approximately €97 million, including taxes, interest and penalties. Carlyle provided credit support for €45.7 million and placed €4.4 million in escrow; the matter was being contested.
- Material litigation included the private-equity “club bids” antitrust case, the Foy v. Austin Capital matter and litigation related to Carlyle Capital Corporation. Management did not believe current matters were probable to materially affect the financial statements, but acknowledged that adverse outcomes could materially affect a particular period.
- Valuation risk is significant: approximately $103.4 billion of reported AUM investments were classified as Level III for segment disclosure, requiring substantial judgment. A 10% decline in remaining fair value was estimated to reduce performance-fee revenue by $1.38 billion, before related compensation effects.
- The partnership structure creates tax and governance risks. Carlyle common unitholders have limited voting rights, senior Carlyle professionals controlled approximately 84% of limited-partner voting power, and potential tax-receivable-agreement termination payments were estimated at approximately $1.35 billion under stated assumptions.
Important facts investors should verify
- Reconcile GAAP net income, attributable net income, Economic Net Income, Fee-Related Earnings and Distributable Earnings, particularly the effects of consolidated funds and non-controlling interests.
- Assess the sustainability and cash realization of the $3.65 billion accrued performance-fee balance, including fund hurdles, unrealized valuations and potential givebacks.
- Review the composition and fee basis of the $139.9 billion fee-earning AUM, including funds nearing investment-period expiration and the effect of acquisitions.
- Evaluate corporate debt maturities, credit-facility covenants, interest-rate exposure and the availability of the $750 million revolving facility.
- Monitor Urbplan’s funding needs, covenant defaults, project completion, valuation adjustments and any claims against Carlyle or its affiliates.
- Review the CEREP I French tax assessment, related guarantee and escrow, and the status of disclosed litigation and regulatory matters.
- Consider dilution from 262.2 million Carlyle Holdings partnership units not held by the Partnership, equity awards, exchange rights and the February 2014 grant of approximately 5.6 million deferred restricted common units.
- Verify management’s non-GAAP definitions and recast presentations, which changed in 2013 to exclude equity-based compensation from Fee-Related Earnings and Distributable Earnings.