Yahoo Finance Carlyle Deal Sales Buoy Profits But Shrink Firm’s Assets
(Bloomberg) -- Carlyle Group’s private equity dealmakers stepped up the pace of exiting investments in the first quarter, driving profits higher but shrinking assets managed.
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A spurt of sales sent distributable earnings — the profit available to shareholders — up 59% from a year earlier to $431 million, the firm reported Wednesday. That amounted to $1.01 a share, beating the 95-cent average estimate of analysts.
The exits were a double-edged sword, driving money managed at Carlyle’s private equity arm 1% lower in the quarter. Across the firm, fee-earning assets were down 1% too.
Carlyle’s private equity arm is an asset, as well as a test, for new Chief Executive Officer Harvey Schwartz’s push to produce steadier profits. While it’s no longer the firm’s largest business, it still has power to move the bottom line — and introduce volatility — as Schwartz enters his second year atop the $425 billion investment firm with shareholders hoping to see a more balanced mix of earnings.
Returns for Carlyle’s 2018 flagship private equity fund slipped below a key threshold, leaving the firm ineligible, for now, to collect its share of carried interest. That could change if it secures big exits, but industry hopes of a deal thaw have been tempered by questions over how long the Federal Reserve will keep rates elevated.
Shares of Carlyle fell 8.8% at 1:06 p.m. in New York. The stock went from outpacing the S&P 500 this year on Tuesday to lagging the index by mid-Wednesday.
Carlyle’s private equity business was a major driver as the firm’s fee-related earnings jumped 38% to a quarterly record of $266 million, surpassing estimates.
Still, buyout businesses — and deal profits — are seen as vulnerable to ups and downs in markets. Heightened interest rates raise borrowing costs and keep a lid on valuations. Schwartz has told staff that improving investment performance is a high priority.
“If the markets continue to move on the current trajectory, I do expect realization activity to pick up,” finance chief John Redett told analysts. “It’s one of the hardest aspects of this business to project.” The private equity business didn’t pull in enough new money from investors to make up for the cash leaving the firm through deal exits.
Read More: Harvey Schwartz Spends First Year at Carlyle Tending Old Wounds
Carlyle’s total $5.3 billion of fundraising in the quarter lagged behind analysts’ estimates, slowing from a year earlier. Executives project the firm is still on track to hit its goal to pull in about $40 billion by the end of the year.
The company enlisted Schwartz, 60, early last year to reinvigorate growth, and he stands to reap incentives if he can nudge the share price higher. The firm has since expanded its stock-buyback program, while Schwartz confers with Carlyle’s founders and plots further changes. Schwartz has been reviewing how the firm’s investor relations team is set up, and broader changes are expected to get teams to work more tightly.
Carlyle’s credit arm, another part of the strategy for steadier profits, boosted fee earnings almost 50% from a year ago. The business is now the company’s largest by assets, even as its fee earnings haul remains less than half that generated by private equity.
The firm’s smallest unit – the investment solutions arm — more than doubled fee-related earnings and boosted distributable earnings 81%, the steepest increase in profitability among Carlyle’s main segments. It also raised the most money.
Compared with his predecessors, Schwartz is paying greater attention to that business, which assembles portfolios of fund stakes for investors. It’s expected to benefit as pensions and endowments look to streamline portfolios and as private equity firms seek new ways to cash out in a tepid market for initial public offerings.
(Updates shares in sixth paragraph. An earlier version corrected third paragraph to specify that the decline is for fee-earning assets.)
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