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Carlyle’s Portfolio Could Continue on a Subdued Trajectory in 2Q16

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Updated

Carry fund snapshot

Carlyle Group’s (CG) performance is directly impacted by the global macroeconomic environment as well as financial conditions in and outside of the United States. Global financial markets shed the selling witnessed during the first quarter of 2016, while the US dollar price of crude oil saw improvements. Carlyle’s Corporate Private Equity segment is expected to see improved profitability in 2Q16 as well.

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Carlyle’s total carry fund valuations rose by 1% in 1Q16, led by a recovery in the portfolio valuations of private equity funds. On an LTM (last-12-month) basis, Carlyle’s carry fund portfolio valuation rose by 1% on account of strength in US buyouts and US real estate funds. The rise was partially offset by depreciation in global market strategies, natural resources, and legacy energy carry funds.

In 1Q16, net accrued performance fees of $1.3 billion were up slightly from the end of 4Q15, but these were lower than the $1.8 billion we saw at the end of 1Q15. The decline was primarily due to strong 2015 exit activity in Corporate Private Equity and Real Estate funds that realized carry. In 1Q16, the company generated economic net income of $89 million, up from $73 million in 4Q15.

For the June quarter, Carlyle’s major holdings performance was mixed. These holdings include Axalta Coating Systems (AXTA), which fell by 8.6%, Wesco Aircraft (WAIR), which fell by 6%, and CommScope Holdings (COMM), which rose by 12.5%.

Carlyle’s EPS (earnings per share) stood at -$0.30 in fiscal 2015. Let’s compare this to the EPS of Carlyle’s peers in fiscal 2015:

  • Blackstone (BX): $1.04
  • KKR (KKR): $1.01
  • Apollo Global Management (APO): $0.61

The company also faces competition from traditional asset managers, which make up part of the iShares Dow Jones US Financial ETF (IYF).

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Energy: a drag on performance

Carlyle’s global market strategies carry fund valuations fell by 12% in 1Q16 due to weak hedge fund performance. Natural resources and legacy energy segments continued in a downward spiral, falling by 2% and 3%, respectively. Some of CG’s energy funds, such as NGP X, Energy III, and Energy IV were negative contributors. The segment has collective AUM (assets under management) of $28.6 billion—about one-sixth of CG’s total AUM of $178.1 billion.

Given challenging energy markets, the company believes this decline to be modest compared to previous quarters. Legacy energy and GMs segments were -$34 million as of 1Q16.

Other investment funds

Carlyle’s carry funds include investment funds advised by the company, and these include buyout funds, growth capital funds, real estate funds, infrastructure funds, certain energy funds, and distressed debt and mezzanine funds. Carry funds don’t include structured credit funds, hedge funds, business development companies, mutual funds, or funds of funds vehicles. Carlyle receives a special residual allocation of income or carried interest.

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