How Carlyle makes money
The Carlyle Group (CG) manages money for over 1,650 active carry fund investors, spread across 78 countries, through its private equity, hedge funds, and real estate funds. The company’s revenue model is based on charging fund management and performance fees for managing the portfolios in its investment advisor firms. It receives an annual management fee based on a certain percentage, usually 1% to 2%, of a fund’s capital commitments or invested capital during the investment period. Following the investment period, it receives step-down fees between 0.6% and 2.0%, generally on the lower of cost or fair value of capital invested.
In the case of credit-focused carry funds, the company charges fees based on a percentage of invested capital or net asset value throughout the fund’s term.
Carlyle sets performance fees or carried interest for generating higher returns. The performance fee is usually 10% to 20% of the fund’s net realized profit, subject to certain net loss carry-forward provisions. The company aligns an interest of its senior partner by allocating up to 45% of the total carried interest. For most of the company’s carry funds, the carried interest is subject to an annual preferred return of 8% or 9%, subject to a catch-up allocation to the general partner.
Carlyle records the unrealized and realized gains and losses on the fund’s investments under the investment income category. Investment income is realized when the fund sells its holdings in the investment companies. It’s also realized when the investment fund receives dividends or cash income from its holdings in the invested companies.
Carlyle’s management fees and realized fees form distributable earnings. Meanwhile, economic net income constitutes distributable earnings as well as unrealized fees and investment income.