Carlyle Falls Most Since May as Earnings Miss Estimates

Carlyle Group LP (CG), the second-largest U.S. private-equity company, tumbled the most since going public in May after reporting fourth-quarter profit that fell short of analysts’ estimates.

Economic net income, a measure of profit excluding some costs tied to the firm’s initial public offering, declined 28 percent to $182.2 million from $254.2 million a year earlier, as fund holdings appreciated at a slower pace, Washington-based Carlyle said today in a statement. After-tax economic net income was 47 cents a share, missing the 68 cents-a-share average estimate of 12 analysts in a Bloomberg survey.

Carlyle, like competitors Blackstone Group LP (BX) and Apollo Global Management LLC (APO), is diversifying into areas such as commodities, real estate and credit as it seeks to reduce its reliance on traditional leveraged buyouts, which tend to produce volatile earnings. Fourth-quarter profit was held down because holdings appreciated 4 percent during the quarter, compared with 7 percent in the prior year, Carlyle executives said today on a conference call with investors and analysts.

Some of the decrease in economic net income was also because of “differences in the composition of our funds experiencing appreciation,” William Conway, Carlyle’s co-chief executive officer, said during the call. “Our funds not yet accruing carry experienced greater appreciation in 2012,” he said, referring to carried interest, or the firm’s share of profits generated by its funds.

Shares Fall

Carlyle fell 7.8 percent, the most since its IPO last year, to close at $33.80 in New York trading after losing as much as 13 percent earlier in the day. The shares have gained 54 percent since the May 2 public offering, which raised $671 million by selling 30.5 million shares for $22 each, below the proposed range.

Carlyle said it hasn’t started collecting carried interest from its flagship buyout fund, the $13.7 billion Carlyle Partners V pool that began investing in 2007, even though it has generated 1.5 times its invested capital and delivered a net internal rate of return of 10 percent as of Dec. 31.

“It isn’t science; it’s a little bit art,” Conway said regarding the decision of when to book a fund’s profits. “We have an enormous profit built in so far. Accrued carry on the fund is in excess of $800 million.”

Fund Values

The value of the firm’s corporate private-equity funds increased 5 percent during the quarter, compared with 9 percent at Apollo, 7 percent at Blackstone and 4 percent at KKR & Co. (KKR), the firm run by Henry Kravis and George Roberts. Together, the 4 percent gain in all of Carlyle’s so-called carry funds, which also include real estate and the firm’s hedge funds-of-funds, compared with a 1 percent decline for the Standard & Poor’s 500 index during the fourth quarter.

The value of buyout holdings at private-equity firms affects economic net income because the metric depends on quarterly mark-to-market valuations of those investments. Accounting rules require the firms to value their portfolio holdings every quarter.

Carlyle’s distributable earnings, which measure the availability of funds to return to private and public investors, fell 24 percent to $188 million from $247 million a year earlier. The company said it will pay a distribution of 85 cents a share to public investors on March 13.

Active Buyer

The firm was the most active U.S. private-equity buyer in 2012, taking part in deals worth at least $19 billion, according to data compiled by Bloomberg.

“When it comes to our activity in 2012, I would say I am pleased but not satisfied,” said Conway. The firm deployed $7.9 billion into deals last year, below its five-year average of $9 billion a year, he said.

Total assets under management rose to $170 billion from $157 billion at the end of the third quarter, driven by Carlyle’s acquisition of stakes in commodities hedge-fund manager Vermillion Asset Management LLC and energy investor NGP Energy Capital Management LLC. Blackstone, the largest so-called alternative-asset manager, said last month its assets under management reached a record $210 billion.

Carlyle raised $4.6 billion during the quarter, including for its latest flagship buyout fund, Carlyle Partners VI. The fund has gathered $6 billion on its way to a target of $10 billion, co-CEO David Rubenstein said on the conference call.

Dividend Recaps

Carlyle, like other alternative-asset managers, reports profit that differs from U.S. generally accepted accounting principles. Fourth-quarter profit under those rules, known as GAAP, was $12 million, or 25 cents a share.

Carlyle has benefited from low interest rates, tapping the favorable debt markets to put its portfolio companies on healthier standing. Conway said 25 of the firm’s portfolio companies have taken advantage of cheap credit to refinance debt, fund deals and perform dividend recapitalizations, or the process of borrowing money and paying a dividend to the owners.

“In the current environment, a big source of distributions has been the dividend recaps that we’ve done,” Conway said. “I think for a while that’s likely to continue.”

Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, then sell them and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments.

Carlyle during the quarter bought 55 percent of Vermillion, adding $2.2 billion in commodities assets to Carlyle’s Global Market Strategies business. The firm also acquired a 47.5 percent revenue interest in NGP for $424 million, after which Rubenstein said energy is the “single most attractive global area in which to invest today.”

To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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