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Carlyle Maintains Operating Margins on Expense Management

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Weak performance and compensation

Carlyle Group’s (CG) total expenses decreased to $459 million in fiscal 1Q16, as compared to $1 billion in the corresponding quarter last year. Carlyle’s various funds derive value from the effective management of their operating companies as well as from the returns generated for their shareholders or limited partners.

As a result, the majority of the company’s expenditures relate to compensation and benefits for fund managing teams. Compensation and benefits include basic compensation and performance fees. As performance improves in the June quarter, compensation expenses are expected to rise. However, overall margins are expected to remain in line with the March quarter.

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Carlyle’s compensation expenses fell further in the first quarter of 2016. Expenses stood at $311 million in 1Q16, as compared to $587 million in 1Q15, mainly due to lower appreciation in carry fund valuations and lower realized performance fees on fewer exits during the quarter. The company’s equity compensation decreased to $75.4 million in 1Q16, a drop of 16% compared to 1Q15. Its first quarter cash compensation expense of $162 million reflects a 6% decline from the previous year.

Carlyle generated a negative return on equity in the last fiscal year, which was the lowest among its alternative investment peers that form part of the iShares Dow Jones US Financial ETF (IYF). In comparison, Carlyle’s peers posted the following returns on equity:

  • Blackstone (BX): 10.6%
  • KKR (KKR): 8.9%
  • Apollo Global Management (APO): 8.7%

Carlyle’s expenses

Carlyle’s general and administrative expenses dropped to $74 million, which was lower than the recent quarterly average of $7 million the company had maintained. Management also expects cash compensation to remain below 2015 levels for the rest of the year.

In the next and final part of this series, we’ll analyze Carlyle’s margins.

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