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Carlyle's earnings plunge amid 'challenging' environment

Kevin Dowd

The Carlyle Group on Thursday became the latest private equity powerhouse to report a decline in 3Q earnings, attributing the dip in part to a dearth of exits from the Washington, DC-based firm's biggest buyout funds.

Carlyle recorded after-tax distributable earnings for the quarter of $146.1 million, equating to 41 cents per common unit. That's about in line with reported analyst estimates of 40 cents per share, but it marks a decline of nearly 25% from 3Q 2018.

Other major firms have recently reported similar news. KKR revealed its earnings earlier in the week, highlighted by a 23% YoY earnings drop, while Blackstone logged a more modest 8% YoY dip in 3Q. Apollo Global Management managed to dodge the trend entirely, as its 3Q distributable earnings essentially stayed flat.

In Carlyle's earnings release, co-CEOs Kewsong Lee and Glenn Youngkin noted that "the investment environment remains challenging," while also expressing optimism about quarters to come. They confirmed that Carlyle remains on track to officially convert to C-Corp status at the start of 2020, joining its major publicly traded rivals in moving away from a partnership structure in an effort to make shares more appealing to investors. Carlyle will take things a step further than its peers, also abandoning its dual-class share structure as part of the change.

Carlyle's stock barely budged on Thursday. Over the course of 2019, though, the firm's share price has climbed by about 70%, taking its market cap to well over $9 billion. It's been an industry-wide trend, as Apollo, Blackstone and KKR have experienced similar growth. In that sense, the C-Corp shifts already seem to be having the desired effect.

Carlyle's overall AUM is now $221.8 billion, up 4% from 3Q 2018, with its corporate private equity unit responsible for $84.1 billion of that figure. To drill down a bit deeper, $38.1 billion of that AUM is from the firm's US buyout business, while its Europe and Asia arms are responsible for $12.2 billon each. Carlyle's global credit operations now account for another $48 billion in AUM, a YoY increase of 28%, by far the most significant change to the makeup of the firm's balance sheet.

Within that private equity unit, distributable earnings fell from $121 million in 3Q 2018 to $82 million this year, while fee-related earnings jumped from $44 million to $68 million. Realized proceeds dropped YoY from $1.5 billion to $1.1 billion, and realized net performance revenues plummeted from $78 million to $18 million, with the firm chalking both figures up to "a slower pace of exit activity from our large buyout funds." Carlyle's PE funds appreciated by 1% in 3Q.

Across all its operations, Carlyle registered $768.6 million in total revenue, up 13% YoY, with $359.5 million of that total coming from fund management fees. Expenses fell nearly 18%, down to $505.3 million, resulting in net income of $252 million—up from just $43.2 million in 3Q 2018.

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