* Private equity arm mostly to blame for earnings drop
* ENI per adjusted unit 47 cts vs Street view of 69 cts
* Pretax distributable earnings down 24 pct to $188 mln
* Carlyle shares fall nearly 8 pct
(Adds CEO comments, financial and industry details, closing
By Greg Roumeliotis
Feb 21 Carlyle Group LP, an asset
manager, said on Thursday fourth-quarter earnings fell 28
percent after its private equity funds made less money from
selling companies and its performance fee income fell.
Carlyle's shares closed nearly 8 percent lower on Thursday
as investors vented their disappointment with what the firm
likes to call "the Carlyle engine." The stock had been up 41
percent since the start of the year, compared with a 5 percent
rise in the Nasdaq Composite Index.
Carlyle's private equity arm, which accounted for about a
third of its assets but about two-thirds of profit, was mostly
responsible for the earnings drop, because the funds made less
money from selling companies. Carlyle shareholders get dividends
mainly from management fees and funds' asset sales.
In the fourth quarter of 2011, a few months before Carlyle
went public, its funds generated big profits from selling
companies in their portfolios.
With less of that activity in the fourth quarter of 2012,
the cash generated to pay dividends to shareholders dropped.
To be sure, Carlyle did complete transactions that paid
investors in its funds: its private equity funds borrowed more
against the assets of the companies in their portfolios, and
essentially gave the borrowed money to fund investors as
But those dividends for fund investors do not directly
translate into dividends for shareholders.
And even with those dividends, its funds gained 4 percent in
the fourth quarter of 2012, less than the 7 percent rise in the
same quarter a year earlier.
Carlyle's earnings highlight the challenges publicly listed
asset managers face in balancing the interests of their fund
investors, who earn profit on investments first, with those of
their shareholders, who rely on carried interest and management
fees trickling down to them.
The asset manager's profit drop differs from peers like
Blackstone Group LP, KKR & Co LP and Apollo
Global Management LLC, which posted stronger quarterly
results as they sold more assets in a strong stock market.
Part of the reason for the difference is Carlyle's decision
to defer some income for itself and shareholders. When the asset
manager's private equity funds generate enough profit from
selling companies, the manager is entitled to a percentage of
the gains, known as "performance fees" or "carried interest."
But if the funds then perform less well, fund investors can
ask Carlyle to give money back in a move known as a "claw-back."
To avoid having to give money back, Carlyle says it is
conservative in taking carried interest.
"I guess you might roll your eyes a bit, but the truth is we
have this obsession with not having claw-backs," Carlyle
co-founder and co-chief executive David Rubenstein told analysts
on a conference call.
He added that there is no industry standard regarding when
to pay carried interest.
Carlyle said economic net income (ENI), a measure of
profitability that reflects the market valuation of its assets,
came in at $182 million, down from $254 million a year earlier.
This translates to ENI per adjusted unit of 47 cents versus
an average forecast of 69 cents by analysts in a Thomson Reuters
poll. Blackstone, KKR and Apollo all significantly beat
analysts' fourth-quarter earnings expectations.
"The miss versus our ENI per share estimate was largely
driven by realized performance fees and, to a lesser extent,
unrealized performance fees coming in lower than our estimates,"
Barclays Capital analysts wrote in a note.
Pretax distributable earnings, Carlyle's favored indicator
of profitability that shows cash that has been generated and is
available to pay distributions to its shareholders, were down 24
percent to $188 million.
This was despite realizing profit in its funds of $6.8
billion for the fourth quarter and $18.7 billion for 2012, up
from $17.6 billion in 2011.
Fee-related earnings were $55 million in the fourth quarter,
up from $14 million a year ago, due to an increase in
fee-earning assets under management, lower general and
administrative expenses, and $18 million in proceeds from an
insurance settlement, Carlyle said.
Carlyle said it got more than $1.7 billion in dividends from
its companies in the fourth quarter, including drug research
firm Pharmaceutical Product Development Inc, vitamin maker NBTY
Inc, telecommunications equipment company CommScope Inc, French
digital set-top box maker Sagemcom and British roadside recovery
company RAC Ltd.
On the dealmaking side, Carlyle invested $3.3 billion in
equity in the fourth quarter and $7.9 billion in 2012, down from
$11.3 billion in 2011, despite the firm carrying out more deals
and totaling higher transaction volume in 2012 than any rival.
"When it comes to our activity in 2012, I would say I am
pleased but not satisfied, especially with regard to our
investment pace," Co-Chief Executive Bill Conway, who founded
Carlyle in 1987 with Rubenstein and Daniel D'Aniello, told
analysts on the same call.
Among the sales of assets Carlyle profited from in the
fourth quarter were retail assets at 666 Fifth Avenue in New
York, car parts manufacturer Metaldyne, Chinese chemical company
Sinochem and stakes in pipeline company Kinder Morgan Inc
and car rental firm Hertz Global Holdings Inc in
the United States, healthcare company Qualicorp SA in
Brazil and mortgage lender Housing Development Finance Corp
Carlyle said its funds that generate carry had about $25
billion in so-called dry powder that is available capital to
The Washington, D.C.-based firm capped a very strong year
for fundraising, amassing $14 billion in 2012 compared with $6.6
billion in 2011 and bringing total assets under management to
Carlyle's latest flagship buyout fund, Carlyle Partners VI,
has reached 60 percent of its $10 billion fundraising target,
Rubenstein said. Across its 101 funds, Carlyle boasts about
1,500 investors from 76 countries.
Carlyle, which completed a $671 million initial public
offering in May 2012, declared a quarterly distribution of 85
cents per common unit.
Carlyle shares closed 7.8 percent lower at $33.80 on the
Nasdaq on Thursday.
(Reporting by Greg Roumeliotis in New York; editing by Gerald
E. McCormick, John Wallace and Matthew Lewis)