Carlyle expects low realisations until 2020

An abundance of young investments in the current generation of funds is largely behind the lower revenues, the firm said on its Q1 earnings call.

Carlyle Group’s realised performance revenues will be lower than expected in 2019, driven primarily by young investments in its current generation of funds across all asset classes.

“We are experiencing a short-term trough in realised performance revenue,” Kewsong Lee, co-chief executive officer, said on the firm’s first quarter earnings call Wednesday. “Realised performance revenue will ramp up starting sometime next year and accelerate significantly in the years thereafter.”

Carlyle’s realised net performance revenues fell by 54 percent to $226 million for the 12-month period ending 31 March, compared with $620 million in the preceding 12 months. Realised proceeds fell by 17.5 percent to $23.1 billion over the same period, compared with $28 billion in the previous 12 months.

Many of the investments in Carlyle’s largest fully invested funds across all asset classes are relatively young, with an average duration of two to three years. Investments that are four-or-more-years-old account for 26 percent of fair value of the portfolio, down from 41 percent three years ago, Lee said.

“Although the funds are performing well, they are not quite ready to generate and realise carry, as we typically hold most investments for four to six years,” he said.

Around 40 percent of capital in the “big funds” has been returned so far, according to co-chief executive Glenn Youngkin, who did not specify which funds he was referring to. “We still need some more realisations to begin to take carry and mitigate the risk of clawback on those,” he said.

Historically, Carlyle’s carry funds generated approximately a 2x multiple on invested capital, depending on asset class and strategy.

“At this point, our largest carry funds, as well as our smaller but more focused fund strategies, are on a trajectory to achieve multiples on invested capital in the same range as prior vintage funds,” Lee said.

Carlyle’s three latest fully-invested flagship buyouts funds in aggregate are currently marked at 1.4x.

“It is important to note that the current marks for each of the funds are in line or ahead of their predecessor fund when measured at the same point in time of that fund’s lifecycle,” Lee said.

Carlyle has $84.3 billion of private equity assets under management, and raised $16.6 billion in the last 12 months ending 31 March – almost 31.7 percent less than the $24.3 billion raised in the prior period.

The private equity strategy’s net performance revenues fell almost 75 percent to $136 million in the 12 months ending 31 March, from $536 million in the prior period, according to Carlyle’s first quarter 2019 financial results.

Meanwhile, management fees in private equity brought in a 67 percent increase quarter over quarter to $190 million in Q1, driven largely by fee activation for US, Europe and Asia buyout funds over the past year.

Carlyle deployed $1.1 billion in new and follow-on private equity investments in the first quarter, and had announced an additional $5 billion in equity commitments, including the acquisitions of Standard Aero and CEPSA.

The private equity portfolio generated a net internal rate of return of 18 percent and a return on invested capital of 2x for the 12-month period ending 31 March.

Carlyle raised $6.9 billion in new capital across strategies in the first quarter, effectively reaching its four-year $100 billion goal early, Youngkin said, noting that the rest of 2019 fundraising will now provide an upside to that goal.

Carlyle also continued to seriously explore a conversion to a C-corporation, according to Lee. “The benefits we see from the conversion have not gone unnoticed,” he said. “There are many complex operational moving parts in connection with the conversion and we intend to conclude our thinking with a decision in the not-too-distant future.”

In April, Blackstone announced its decision to convert to a C-corporation after tax cuts implemented by president Donald Trump made its complex partnership status “redundant”. At the time, the company’s chief executive also said the publicly-traded partnership model had become “irksome”.

Carlyle’s total assets under management increased to $221.5 billion for the 12-month period ending 31 March, compared with $216.47 billion a year earlier.