The Carlyle Group Inc. 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the period ended September 30, 2022. Carlyle is a global investment firm operating through Global Private Equity, Global Credit, and Global Investment Solutions. Consolidated results include certain funds and CLOs, which gross up assets, liabilities, and cash flows but generally do not affect net income attributable to Carlyle.
- Total AUM was $368.8 billion; fee-earning AUM was $260.2 billion.
- Fee-earning AUM increased 47.5% from September 30, 2021, primarily from the Fortitude advisory relationship, the CBAM acquisition, new CLOs, and other fundraising, partially offset by foreign exchange.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $1,088.5 million | $1,639.5 million | $3,719.3 million | $6,783.0 million |
| Fund management fees | $535.9 million | $407.5 million | $1,532.9 million | $1,182.9 million |
| Performance allocations | $298.1 million | $974.5 million | $1,346.2 million | $4,841.3 million |
| Net income attributable to Carlyle | $280.8 million | $532.8 million | $1,097.8 million | $2,327.1 million |
| Diluted EPS | $0.77 | $1.46 | $3.00 | $6.42 |
| Distributable Earnings | $644.4 million | $730.6 million | $1,476.0 million | $1,340.9 million |
| Fee Related Earnings | $212.6 million | $151.4 million | $632.3 million | $423.6 million |
- Revenue declined 33.6% year over year in Q3 and 45.2% for the first nine months, principally because of lower performance allocations and investment income.
- Fund management fees increased 31.5% in Q3 and 29.6% for the first nine months, supported by newly raised funds, CBAM, Abingworth, and Fortitude-related fees.
- Net margin attributable to Carlyle was approximately 25.8% in Q3 2022 versus 32.5% in Q3 2021, and 29.5% for the first nine months versus 34.3% in the prior-year period.
- Q3 carry-fund appreciation was 2%, compared with 7% in Q3 2021; nine-month appreciation was 10%, compared with 33% in 2021.
- Fee Related Earnings increased 40.4% in Q3 and 49.3% for the first nine months, reflecting stronger recurring fee revenue despite higher operating expenses.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $1.36 billion at September 30, 2022, down from $2.47 billion at December 31, 2021. Corporate treasury investments were $69.5 million.
- Operating cash flow was $(258.5) million including Consolidated Funds, or $793.5 million excluding Consolidated Funds, versus $1.30 billion and $1.48 billion, respectively, in the prior-year period.
- Investing cash flow was $(863.2) million, primarily reflecting the $618.4 million CBAM transaction and $150.2 million Abingworth acquisition.
- Debt obligations were $2.24 billion carrying value, including $1.50 billion of senior notes, $500 million of subordinated notes, and $381.6 million of CLO borrowings. The $1.0 billion senior revolving facility and $250 million Global Credit facility had no amounts outstanding.
- Management stated that available liquidity, including approximately $1.3 billion of cash after amounts allocated for specific purposes and $1.0 billion of senior revolver capacity, is sufficient for expected needs for at least the next twelve months.
- The Company was in compliance with its debt covenants at September 30, 2022.
Material changes versus the prior comparable period
- Performance allocations fell sharply because of lower portfolio appreciation and reversals, including a $353.3 million reversal associated with CP VI during the first nine months.
- Global Credit expanded materially through the CBAM acquisition, the Fortitude strategic advisory agreement, new CLO issuance, and other capital deployment. Global Credit fee-earning AUM increased to $117.3 billion from $48.2 billion at September 30, 2021.
- Carlyle acquired CBAM CLO management contracts for $812.9 million and acquired Abingworth for $185.6 million, including $25.0 million of newly issued stock and potential future payments of up to $130 million.
- Fortitude’s capital raise diluted Carlyle’s indirect ownership from 19.9% to 13.5%, resulting in a $176.9 million investment loss. Further dilution to 10.5% is expected when the remaining capital is called, with an estimated additional loss of approximately $121 million based on the September 30 carrying value.
- Accumulated other comprehensive loss increased to $439.7 million from $247.5 million, primarily due to foreign currency translation.
- The quarterly dividend increased to $0.325 per share from $0.25 per share in the comparable 2021 period. The Board declared a further $0.325 per share dividend payable November 25, 2022.
- Carlyle repurchased approximately 3.6 million shares for $146.9 million during the first nine months; $253.1 million remained available under the authorization at September 30.
Outlook, commentary, risks, and unusual items
- Management expects realizations to slow in the near term because of challenging market conditions, although $25.3 billion of carry-fund proceeds were realized year to date and net accrued performance revenues were approximately $4.1 billion.
- Private equity deal activity has retreated from 2021 levels, while management expects demand for private credit to remain robust as traditional credit becomes less available.
- Fundraising is expected to remain competitive. Delays or smaller fund sizes could reduce future catch-up fees and management fees.
- Risks highlighted include inflation, rising interest rates, recession risk, European energy conditions, foreign exchange volatility, weaker capital markets and M&A activity, valuation declines, investment realization risk, regulatory changes, and talent retention pressures.
- The Company had $4.0 billion of unfunded commitments to investment funds, of which approximately $3.3 billion was subscribed by senior professionals and other individuals and the balance funded directly by Carlyle.
- Accrued giveback obligations were $40.9 million. In a remote scenario in which all fund investments became worthless, potential after-tax giveback obligations could reach approximately $1.4 billion, with approximately $0.6 billion attributable to current and former senior professionals.
- In October 2022, the SEC requested information regarding preservation of electronic business communications. Carlyle stated that it intends to cooperate; the ultimate outcome cannot be predicted.
- Recorded liabilities for litigation, regulatory inquiries, and other matters were approximately $40 million. Management did not believe existing matters were likely to have a material effect, but acknowledged that adverse outcomes could exceed recorded accruals.
- The filing includes a separation agreement with former CEO Kewsong Lee. Approximately $15 million of Q3 equity-based compensation reflected modification and accelerated expense related to the former CEO’s departure.
- No formal quantitative earnings guidance was provided in the filing.
Important facts for investors to verify
- Whether lower market valuations and slower realizations will further reduce performance allocations and carried interest.
- The timing and final amount of the expected additional Fortitude dilution loss.
- The sustainability of fee growth from CBAM, Fortitude, Abingworth, CLOs, and newly raised funds.
- Cash availability after restricted or earmarked amounts, unfunded commitments, dividends, buybacks, acquisitions, and contingent payments.
- Exposure to CLO valuation changes, interest-rate increases, foreign exchange movements, and non-recourse versus corporate debt.
- The outcome and potential financial impact of the SEC communications inquiry, tax receivable agreement litigation, and other legal or regulatory matters.
- The timing and terms of the $61.0 million Global Investment Solutions interest purchase and the related expected $12.7 million fourth-quarter loss disclosed after period end.