Business Context and Reporting Period
The filing is The Carlyle Group L.P.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. Carlyle operates through Corporate Private Equity, Real Assets, Global Credit, and Investment Solutions. The filing announced a planned conversion from a Delaware limited partnership to The Carlyle Group Inc., expected to become effective January 1, 2020, with the Nasdaq ticker remaining “CG.”
Total assets under management were $221.8 billion and fee-earning AUM was $158.8 billion at September 30, 2019. Approximately 98% of fee-earning AUM was in long-term fund structures not subject to quarterly redemption.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $768.6 million, up 13% | $2.917 billion, up 28% |
| Fund management fees | $359.5 million, up 9% | $1.104 billion, up 23% |
| Performance allocations | $112.4 million, down 48% | $709.1 million, down 25% |
| Principal investment income | $212.2 million | $856.0 million |
| Income before taxes | $261.4 million | $1.274 billion |
| Net income | $252.0 million | $1.225 billion |
| Net income attributable to common unitholders | $68.4 million | $353.6 million |
| Diluted earnings per common unit | $0.55 | $2.93 |
| Distributable Earnings | $160.7 million | $474.9 million |
| Fee Related Earnings | $108.8 million | $344.8 million |
Net income margins were approximately 32.8% for the quarter and 42.0% for the nine-month period. Fee Related Earnings increased 22% year over year in the quarter and 97% year over year for the nine months, while Distributable Earnings declined 24% in the quarter and increased 2% for the nine months.
- Cash flow from operating activities was $924.0 million for the nine months, compared with $95.0 million in the prior-year period.
- Cash, cash equivalents and restricted cash totaled $1.506 billion at September 30, 2019, including $1.490 billion of cash and cash equivalents. Management estimated approximately $995.6 million remained after amounts allocated for specific purposes and the preferred-unit redemption.
- Debt obligations were $1.962 billion, compared with $1.550 billion at December 31, 2018. Consolidated-fund loans payable were $4.231 billion and generally non-recourse to Carlyle.
- Carlyle issued $425 million of 3.500% senior notes due 2029 and had $775 million of available capacity under its senior revolving credit facility. The company was in compliance with applicable debt covenants.
- Total investments, including accrued performance allocations, were $6.896 billion. Accrued performance allocations were $3.867 billion, offset by $63.2 million of accrued giveback obligations.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher management fees from newly raised funds and a substantial increase in principal investment income.
- Principal investment income benefited from Carlyle’s Fortitude Re investment, which contributed $281.6 million in the quarter and $808.9 million for the nine months. These amounts included $213.5 million and $673.7 million, respectively, of unrealized gains related to embedded derivatives.
- Performance allocations declined because of lower fund appreciation and realizations. Q3 carry-fund appreciation was 2%, compared with 3% in Q3 2018; natural-resources and Global Credit funds depreciated during the quarter.
- Total expenses decreased 18% for the quarter and 11% for the nine months, primarily because of lower performance-related compensation, lower equity-based compensation, and the absence of the $63.5 million 2018 lease assignment and termination charge.
- Fee-earning AUM increased 8% year over year but declined modestly from year-end, reflecting distributions, fee-basis step-downs, and foreign-exchange effects. Total AUM increased 2% from December 31, 2018.
- The Series A preferred units were classified as a $405.4 million liability at September 30 and were redeemed in full on October 7, 2019.
- The company repurchased approximately 1.6 million common units for $34.5 million during the nine months.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash on hand, operating cash flows, accumulated earnings, and available credit capacity should fund capital needs for at least the next twelve months.
- Following the planned conversion, Carlyle expects to pay more corporate income taxes than it would have as a partnership. Management estimated an effective tax rate on Distributable Earnings in the mid-to-high teens for several years and the low-twenties over the longer term, subject to significant uncertainty.
- The anticipated post-conversion dividend policy was $0.25 per share per quarter, or $1.00 annually, beginning with the fourth-quarter 2019 distribution payable in February 2020. Payment remains subject to board discretion and legal and financial restrictions.
- Conversion-related obligations include approximately $344 million of cash payments to former Carlyle Holdings unitholders, payable in five annual installments beginning in 2020. The company also terminated future obligations under the tax receivable agreement, apart from legacy obligations.
- Unfunded commitments to Carlyle funds totaled $3.942 billion, of which approximately $3.4 billion was subscribed individually by senior professionals and other professionals; the balance was funded directly by Carlyle.
- Potential contingent cash obligations associated with the Carlyle Aviation Partners acquisition and Fortitude Re investment totaled up to $245 million, compared with $23.2 million recognized on the balance sheet.
- Legal and regulatory contingencies included approximately $35 million of recorded liabilities. Management did not believe existing matters were likely to be material beyond accrued amounts, but acknowledged that adverse outcomes could affect results in a particular period.
- Key business risks include volatile investment valuations, reversals or givebacks of previously recognized carried interest, weaker realizations, energy-sector weakness, foreign-exchange movements, economic and trade uncertainty, regulatory changes, liquidity constraints in underlying funds, and the judgment required to value Level III investments.
Most Important Facts for Investors to Verify
- Confirm completion and detailed tax, governance, ownership, and dividend consequences of the January 1, 2020 conversion to a corporation.
- Assess the sustainability of earnings excluding the $808.9 million nine-month Fortitude Re contribution, particularly its unrealized component.
- Reconcile GAAP net income with Distributable Earnings and Fee Related Earnings, which exclude significant unrealized and non-recurring items.
- Monitor accrued performance allocations, giveback exposure, fund appreciation, realization activity, and the $1.8 billion net accrued performance revenue balance attributable to Carlyle Holdings.
- Evaluate liquidity after the preferred-unit redemption, debt issuance, distributions, unit repurchases, fund commitments, and approximately $344 million of post-conversion cash payments.
- Review the effect of higher corporate taxation on post-conversion earnings per share, distributable cash flow, and dividend capacity.