The Carlyle Group paid $47.3 million in clawback in 2016 related to Carlyle Asia Partners II and plans to pay at least $36 million in 2017 in relation to its legacy energy funds, according to the firm's recent yearly earnings filing with the US Securities and Exchange Commission.
Since inception in 1987, Carlyle had paid only $53.9 million in aggregate clawback obligations as of 31 December 2015. The clawback related to CAP II now nearly doubles that amount to $101.2 million.
CAP II closed in 2006 on $1.8 billion. It had an 8 percent net internal rate of return and a 1.8x multiple as of 31 December, according to the firm's 10-K regulatory filing.
Overall, Carlyle's clawback obligations stood at $160.8 million as of 31 December. This represents the amount of carried interest Carlyle would have to return to limited partners if its funds were liquidated at their fair values as of that date.
The vast majority, or about $157 million of the accrued clawback obligations, relates to the firm's interests in its “legacy energy funds, over half of which relates to Energy II and Energy III and is expected to be paid in 2017”, Carlyle wrote.
Energy II refers to Carlyle/Riverstone Global Energy and Power Fund II, which closed in 2003 on $1.1 billion. That fund had a 55 percent net IRR and a 2.4x investment multiple as of 31 December, according to performance data from Carlyle.
Energy III refers to Carlyle/Riverstone Global Energy and Power Fund III, which closed in 2005 on $3.8 billion. That fund had a 7 percent net IRR and a 1.5x investment multiple as of 31 December, according to Carlyle.
Carlyle has recognised $35.9 million in legacy energy clawback in its distributable earnings for 2016, an amount expected to be paid in 2017.
The firm is not the only party on the hook to repay carried interest. According to the filing, about $102 million of the $160.8 million accrued clawback obligation is the responsibility of various current and former senior Carlyle professionals. The remaining $58.3 million is attributable to Carlyle Holdings.
“The majority of our clawback obligations relate to carry paid to our current and former senior Carlyle professionals prior to our IPO in May 2012, and those obligations will be paid back by those professionals and not Carlyle Holdings,” a Carlyle spokesman told Private Equity International.
Carlyle is conservative in its decisions to take carry.
“About $50 million has been clawed back out of about $80 billion distributed back to investors,” Carlyle co-founder David Rubenstein said during the firm's second-quarter earnings conference call in July 2016.
“Obviously, we're very conservative. The investors aren't happy with clawbacks, but the professionals in our firm are even less happy when you have to call it back, so we're very cautious about that.”
There's no industry standard as to when private equity firms receive carry, but there are several ways to avoid a clawback situation.
Carlyle, for example, typically withholds a portion of the cash from carried interest distributions to individual senior Carlyle professionals and other employees as security for their potential clawback obligations.
“In certain circumstances, we may also need to reduce the amount of realised carried interest we receive in order to maintain a sufficient level of reserves and reduce the risk of potential future giveback obligations,” it wrote in the filing. Giveback refers to clawback.
Carlyle indicated in its yearly filing that although, under the terms of the limited partnership agreement for Carlyle Partners V, the carried interest equals 20 percent of realised profits after a preferred return threshold has been met, in 2016 Carlyle decided to take carried interest from profitable exits in the fund at a reduced rate. This was done to “reserve for potential risk in the portfolio and reduce the potential for giveback”.
CPV closed in 2007 on $13.7 billion. It had a 13 percent net IRR and 2x investment multiple as of 31 December.