Carlyle Earnings Drop 28% As Carry Fails To Follow Record Exits

This article first appeared on GuruFocus.

Carlyle Group (NASDAQ:CG) reported a weaker first quarter as the firm's strong pace of asset sales has not yet flowed through into carried interest for shareholders. Distributable earnings dropped 28% from a year earlier to $327 million, or 89 cents a share on an after-tax basis, below the 93-cent average estimate from analysts surveyed by Bloomberg. The Washington-based investment firm generated $7 billion of proceeds across its US buyouts business, mainly from Carlyle Partners VII and Carlyle Partners VIII, with asset sales including secondary share offerings for health-care company Medline Inc. and airline-repair business StandardAero Inc. CEO Harvey Schwartz said Carlyle remains disciplined and focused, while noting that the quarter marked a record period for US buyout exits.

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The pressure point for investors is that exits are moving faster than realized shareholder carry. Realized net performance revenue, the portion of carried interest flowing to shareholders, fell 84% from a year earlier to $20.5 million. That decline reflects the way Carlyle's funds are structured, since they need to distribute a certain amount to fund investors before the firm can begin passing those gains on to shareholders. Fee-related earnings also slipped 3.4% to $300 million, adding another layer of softness to the quarter even as asset sales remained robust. This could make Carlyle's first-quarter report less about exit activity itself and more about the timing of when those exits possibly translate into earnings power.

Still, the broader platform continued to expand. Assets under management rose 4.9% to $475 billion, supported by $13 billion of inflows, driven by a record quarter for Carlyle's AlpInvest secondaries business. The firm also reported $96 billion of dry powder, up 13% from a year earlier, giving it more capital available for future deployment. Since taking the helm three years ago, Schwartz has focused on growing Carlyle's credit, wealth and AlpInvest units, a strategy that could remain central to the firm's long-term earnings path. Even so, Carlyle shares had fallen 14% this year through Wednesday, moving lower alongside peers as investors remain cautious about the potential threat of artificial intelligence to private equity portfolio companies and the industry's exposure to private credit.

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