Carlyle’s Lee: ‘We’re by no means out of the woods’

The fair value of Carlyle's private equity portfolio climbed 13% in the second quarter, but co-chief executive Kewsong Lee says there's more to be done in terms of recovery.

Carlyle Group’s corporate private equity portfolio appreciated 13 percent in the second quarter, driven by a rebound in the value of many of its funds.

The private equity portfolio benefited from improved public markets and tighter credit spreads, said co-chief executive Kewsong Lee on the firm’s second-quarter earnings call Thursday.

Corporate private equity’s realised proceeds hit $2.6 billion in the quarter and $4.7 billion year-to-date. Meanwhile, Carlyle reported realised net performance revenues of $22 million in Q2, driven by exit activity in its third European technology fund, according to a earnings presentation materials.

Carlyle’s net accrued performance revenues were $1.8 billion as of Q2 2020, up 49 percent from $1.2 billion last quarter, due largely to strong appreciation in its sixth US buyout fund.

Four of Carlyle’s funds fell out of carry at the end of the first quarter and its PE portfolio depreciated 8 percent due to the impact of the coronavirus pandemic on valuations. It is unclear whether these funds are now accruing performance revenue.

Lee noted that despite the portfolio appreciation, there’s still a lot to be done. “[Carlyle] and the industry, we’re by no means out of the woods. There’s a lot to play out in respect to this recovery.”

Covid-19 and other geopolitical and economic issues are likely to increase headwinds, including a material drop in M&A activity, large transactions remaining difficult, significant disruption in certain industries such as energy and aviation, as well as weakening financial conditions of many municipalities, which will have destructive effects on the infrastructure sector, Lee said.

Chief financial officer Curt Buser also noted that realisations of carry in the second half of the year will be well below first half levels. He expects around $500 million-$600 million of net carry per year by 2021, but noted “patience is the right word, especially in this world where big transactions are tough to do”.

Across all strategies Carlyle deployed just under $3 billion in the first half of the year, notably in Asia, healthcare and technology. Less than 20 percent of that figure, or $500 million, was invested in private equity in Q2, including in software firm Unison. Carlyle expects to close $1.3 billion of new PE transactions in the coming quarters, it said in a statement.

Fundraising across strategies was $4.8 billion in Q2 2020, driven by activity in investment solutions and global credit, lower than the previous year’s $3.5 billion. Capital raised from January this year was $12.4 billion. Carlyle expects fundraising to slow, which could cause it to come under its $20 billion fundraising goal for the year, according to Lee and Buser.

The firm collected at least $1.84 billion in commitments so far for its latest long-duration investment fund, according to a regulatory filing.

Carlyle managed $221 billion of assets as of end-June, an increase of 2 percent from the previous quarter. Dry powder stood at $73 billion, decreasing $1 billion from the prior quarter.