Carlyle’s Lee on US tax changes: We are prepared

Growth in its Asia and US buyouts funds boosted the PE giant's third-quarter earnings from its corporate private equity portfolio.

Carlyle Group does not expect tax changes under a new US administration to make a material impact on the firm’s future earnings, its chief executive has said.

Kewsong Lee
Lee: PE is the firm’s largest and strongest platform

On the Washington, DC-headquartered firm’s third-quarter earnings call on Thursday, Kewsong Lee said: “When we converted to a C-corp, our structure is really very simple. It’s one class of shares – one share, one vote. This means that whatever changes to current taxes, the simplicity of C-corp structure makes it much easier to understand and manage through future tax changes. I am confident that the firm will be prepared regardless of whatever the outcomes are.”

“It also means real alignment as we don’t have private or public shareholder distinctions. All of us are shareholders owning the same shares just like you.”

The firm was the last PE giant to make the change last year from a publicly-traded partnership to a full C-corporation. Ares Management was the first to adopt the structure for tax purposes last year, followed by KKR, Blackstone and Apollo Global Management. Unlike its peers, Carlyle instituted a one share one vote structure for all private and public unit-holders, with a fixed annual dividend initially set at $1, paid quarterly, for all shares for 2020.

Lee noted on the call that there is “a lot of work” going on at the firm with scenario planning and thinking through all the implications of any potential tax changes. The bottom line is that the firm has been around for a long time through all types of markets, environments, administration and changes in tax policy, he said.

Curt Buser, chief financial officer at Carlyle, also noted on the call that the firm does not expect the tax proposals to change the firm’s fixed dividend.

“We are confident with that. The real question is when do we increase our dividend, and that will come as we continue to grow,” Buser said.

Presidential candidate Joe Biden is planning large tax increases if elected next week. As well as hiking the capital gains tax, Biden also plans to increase the corporate income tax rate to 28 percent from 21 percent.

The corporate tax rate dropped to 21 percent from 35 percent in 2017 as part of president Trump’s Tax Cuts and Jobs Act.

Carlyle’s accrued performance revenue reached nearly $2 billion at the end of Q3, up 14 percent on a YTD basis, according to an earnings statement. The increase was largely driven by its sixth US buyout fund, which appreciated 4 percent in the quarter and 28 percent YTD, as well its fourth Asia buyout fund, which appreciated 17 percent in Q3 and is also up 28 percent YTD.

Total AUM for corporate private equity stood at $85.3 billion, down 1 percent since the beginning of the year as realisations exceeded new fundraising and fund appreciation, the firm said in a statement.

It invested $1.5 billion in Q3 2020 and $2.7 billion YTD. Notable Q3 2020 investments included high-tech disinfection tools company Victory Innovations and drug development company Shenzhen Salubris Pharmaceutical. An additional $3 billion of new or follow-on transactions are expected to close in the coming quarters.

Lee noted on the call that the firm’s PE business continues to show resilience amid the coronavirus pandemic and “remains its largest and strongest platform”.

Growth investments in sectors like tech, healthcare, consumer and financial services are a key pillar. The firm has also been busy in the last nine months in Asia, most notably in China, India and Korea, as well as in take-privates and carve-outs. The firm’s latest acquisition – mechanical drives business Flender from Siemens in a deal valued at €2 billion – is an example.

Carlyle raised $5.5 billion in fresh capital in the quarter ending 30 September and invested $3.7 billion of equity. Fundraising was driven by activity in AlpInvest Partners’ seventh secondaries programme, which is targeting $8 billion, and its second credit opportunities fund, which is targeting $3.5 billion. Over the past 12 months it raised $17.8 billion and invested $9.6 billion.

Carlyle had $230 billion of assets under management as of end-September, up from $221 billion three months earlier. It closed the quarter with $74 billion of uninvested capital.