Four Carlyle funds fall out of carry as PE portfolio drops 8%

The investment giant categorised about 30% of its $80.4bn PE portfolio as highly impacted by the coronavirus pandemic, which drove most of the quarter’s depreciation.

Four of Carlyle Group’s investment funds fell out of carry in the first quarter as the impact of the coronavirus pandemic took its toll.

The €3.7 billion Carlyle Europe Partners IV, the $3.6 billion Carlyle Global Partners (the firm’s long-dated private equity vehicle), the $2.4 billion Carlyle’s Credit Opportunities Fund and the $2.5 billion Carlyle International Energy Partners are no longer accruing performance revenue, causing the in-carry ratio to decline from 54 percent in Q4 2019 to 36 percent at quarter’s end.

The fair value in the firm’s traditional carry funds was $76 billion on 31 March, down 5 percent from one year ago.

On the firm’s first-quarter earnings call on Thursday, chief financial officer Curtis Buser said each of these funds has different strategies and the firm is “working hard on all of them [to] position them back into carry”.

The firm has a long time to deploy capital in the long-dated fund, Buser added, also noting that the credit opportunities vehicle is well-positioned during this time, and while the Europe buyout fund will have some challenges, the fund’s structure and diversity remain.

This isn’t the first time Carlyle funds have fallen out of accrued carry. Buser said the same happened during the global financial crisis with its fourth US buyout fund and fifth US real estate fund; both funds “came back and have done well”.

Carlyle’s corporate private equity arm depreciated 8 percent in the first quarter due to the impact of the coronavirus pandemic on valuations.

Its corporate PE portfolio assets under management hit $80.4 billion in Q1, decreasing 5 percent from a year ago due to a decline in fair value in the portfolio and $6.2 billion of realised proceeds in the last 12 months, according to the firm’s Q1 2020 earnings results. This was partially offset by $4.3 billion of fundraising in the last 12 months.

Carlyle categorised about 30 percent of its PE portfolio as “high impact” – referring to the impact of covid-19 – which drove most of the quarter’s depreciation, Buser said. Forty percent was categorised as medium impact, which was generally negative to modest appreciation in the quarter. Roughly 27 percent was low impact, with investments recording low single-digit movement.

Co-chief executive Kewsong Lee noted that the firm’s PE portfolio has low exposure to sectors that have been hardest hit by the crisis – direct retail (5 percent), commercial aviation (approximately 7 percent), energy (2 percent), lodging and hotels (less than 1 percent) and publicly-listed securities (less than 5 percent).

The firm invested $700 million through its corporate private equity funds in the quarter and $7.8 billion in the last 12 months. Fundraising was down: the division collected $500 million in Q1, compared with $1.4 billion in the previous quarter.

Corporate private equity fee-related earnings were $280 million for the last 12 months at end-March, a 40 percent increase on the previous year. The firm recorded $77 million in fee earnings for Q1 2020, up from $58 million in Q1 2019.

Co-chief executive Glenn Youngkin said the next few months and quarters will be “challenging”.

“Recovery will be in fits and starts and will take longer than what we all would have hoped.”

The firm also expects a slower pace of realisations over the next few quarters as markets remain unstable, and how economies will recover from the pandemic remains unclear.

Some bright spots amid the pandemic include opportunities in credit, distressed and special situations, Lee said. The firm is also “starting to see new opportunities in Asia and [the] secondaries business”.

Carlyle ended the quarter with $74 billion in dry powder, $1 billion in cash on its balance sheet and an undrawn revolving credit line capacity of $525 million.

Carlyle reported a $612 million loss for the first quarter, compared with a profit of $137 million in the same period last year. The firm posted a Q1 loss in revenue of $745.7 million, down from positive revenue of nearly $1.1 billion in the equivalent period last year.

Carlyle’s assets under management stood at $217 billion at the end of the quarter, down 3 percent from the previous quarter and 2 percent year-on-year. Distributable earnings of $175 million are almost in line with Q4’s $172 million. The firm raised $7.5 billion of new capital in Q1 and $20 billion for the full year.