Carlyle (CG) Rides on Organic Growth Despite Rising Expenses
The Carlyle Group CG is growing organically through its increasing assets under management (“AUM”) balance. The company’s focus on scaling its investment platforms and sustainable capital deployment are positives as well. However, a rise in expenses and competition for investment opportunities are concerning.
The company’s global presence and efforts to expand businesses are likely to continue aiding AUM growth. On Apr 1, 2022, the company entered a strategic advisory services agreement with Fortitude Re, increasing the total AUM and the fee-earning AUM by around $50 billion as of the same date. In May 2023, Fortitude Re announced an agreement to reinsure $28 billion of life and fixed annuity products. On the closure of the transaction, Carlyle’s AUM will increase by around $24 billion.
Through these efforts, Carlyle’s fee-earning AUM and total AUM have demonstrated strong growth over the years. Over the last four years (2019-2022), fee-earning AUM witnessed a compound annual growth rate (CAGR) of 18.3% and total AUM recorded a CAGR of 18.4%. Both metrics increased in the first nine months of 2023. We expect fee-earning AUM and total AUM to improve 4% and 4.8%, respectively, in 2023.
The company is focusing on scaling its investment platforms, building out infrastructure credit and real estate credit, and foraying into new avenues, such as insurance and capital markets. These efforts are likely to support revenue growth in the future. Our model estimates total revenues to rise, seeing a CAGR of 2.4% over the next three years.
Carlyle’s capital distribution activities seem impressive. Notably, in April 2023, the board of directors approved a hike of 7.7% in the quarterly dividend to 35 cents per share. Also, as of Sep 30, 2023, $396.8 million of repurchase capacity remained available under the buyback program. Such capital distribution activities seem sustainable, given the company’s consistent earnings strength.
However, CG has been witnessing a persistent rise in expenses over the past few years. Going forward, inflationary pressures, along with any additional investments in technology and compensation costs, might weigh on its expense base to some extent. This will likely hinder its bottom-line growth. We project total expenses to witness a CAGR of 5.7% over the next three years.
As of Sep 30, 2023, Carlyle had a total debt (comprising loans payable of consolidated funds and debt obligations) of $8.7 billion. As of the same date, it held $1.6 billion of cash and cash equivalents, as well as cash and cash equivalents held at consolidated funds. Thus, with limited liquidity, the company might not be able to meet its near-term debt obligations, especially if the economic situation worsens.
The firm has been facing competition from insurance and reinsurance companies, local and regional firms, sovereign wealth funds, family offices, and agencies. Apart from this, greater reliance on advisory firms or in-house investment management may reduce fund of funds’ appeal to large institutional investors.
Currently, Carlyle carries a Zacks Rank #3 (Hold). Over the past year, shares of the company have gained 9.9% compared with 9.3% growth recorded by the industry.
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Stocks to Consider
A couple of better-ranked stocks from the finance space are Prospect Capital Corporation PSEC and Customers Bancorp CUBI.
Earnings estimates for PSEC have been revised 8.1% upward for the current fiscal year over the past 60 days. The company’s share price has decreased 5% over the past three months. PSEC currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Customers Bancorp currently carries a Zacks Rank #2 (Buy). Its earnings estimates have been revised upward by 10.5% for the current year over the past 30 days. In the past three months, CUBI’s share price has increased 26.2%.
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