Churning of holdings
Limited partners or investors in alternative funds seek higher returns and quick distribution of returns. Distributable income depends largely on liquidity in the markets and monetization of current holdings at attractive valuations. Carlyle Group (CG) is expected to see its distributable income rise in the current quarter on monetizations through the IPO process, private sales, and placements. However, in the June quarter, Carlyle’s distributable income fell 20% to $288 million on a year-over-year basis due to relatively lower liquidity and assets under management.
Carlyle Group realized a total of $5.3 billion in the June quarter, which included $2.5 billion resulting from secondary or blocked transactions on eight investments. The company’s fee-related earnings fell 5% on a YoY (year-over-year) basis largely due to lower transaction fees.
Carlyle Group’s operating margin was 13% in the last fiscal year. Let’s compare this with the operating margins for Carlyle’s peers:
Together, these companies make up ~1.4% of the Financial Select Sector SPDR ETF (XLF).
Carlyle Group’s performance has been impacted over the past few quarters due to a decline in its Global Market Strategies segment. Credit markets and collateralized loan obligations have been affected by lower interest rates and weak performance in the energy space. Carlyle’s global market strategies saw its performance fees fall to $233 million in the June quarter as compared to $333 million in the prior-year quarter. Carlyle Group anticipates further losses in the fee-related fees for 2H16 mainly due to expected losses in the Claren Road Asset Management and the Vermillion hedge funds and associated commodities products.
In the next article, we’ll examine Carlyle Group’s margins and expense management.