Carlyle Group LP (CG), the world’s second-largest manager of alternative assets such as private equity and real estate, fell the most in 13 months after first-quarter profit fell 14 percent as real estate investments suffered losses and credit funds gained less than a year ago.
Economic net income after taxes, a measure of profit excluding some costs, decreased to $275.5 million, or 85 cents a share, from $319.6 million, or $1.02 a share, reported a year earlier, Washington-based Carlyle said today in a statement. The results missed the $1.04 average estimate of 11 analysts in a Bloomberg survey.
Carlyle, like peers Blackstone Group LP (BX) and KKR & Co. (KKR), has diversified its business beyond traditional leveraged buyouts by bolstering assets dedicated to real estate and credit investments. The firm’s private-equity and funds-of-funds businesses posted higher first-quarter earnings, while its real estate business reported a loss, which Carlyle said was driven by declines in certain Latin American and European investments. The firm in the fourth quarter named Adam Metz as head of international real estate to turn around the group’s results.
“There’s nothing yet that we can cite that is going to immediately be a turnaround that will reverse some of the problems we’ve had,” David Rubenstein, Carlyle’s co-chief executive officer, said on a call today with analysts and investors, adding that investments in the firm’s second European real estate fund, a 763 million euro ($1.1 billion) pool raised in 2005, need the most improvements. “I think we will see improvements in the not-too-distant future, but nothing immediately.”
Carlyle fell 6.2 percent to $32.08 at the close of trading in New York, the most since March 2013. The shares have declined 9.9 percent this year, after gaining 37 percent in 2013 as Carlyle and its peers took advantage of rising stock markets to sell holdings and return money to shareholders.
Together, all of Carlyle’s funds from which it can collect a slice of profits, which in addition to buyouts include real estate, energy and certain Global Market Strategies pools, appreciated 6 percent in the quarter. The firm’s private-equity portfolio gained 8 percent, compared with 7 percent at New York-based Blackstone, 4.5 percent at New York-based KKR and 1.3 percent in the Standard & Poor’s 500 index of large U.S. companies.
The value of buyout holdings at private-equity firms affects economic net income, or ENI, 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 sold shares during the quarter in Allison Transmission Holdings Inc. (ALSN), CommScope Holding Co., media-ratings company Nielsen Holdings NV and consulting firm Booz Allen Hamilton Holding Corp., among others, according to Credit Suisse Group AG research.
Carlyle and its executives have committed $88 million of their own money to one particular struggling real estate deal, trying to salvage Brazilian real estate developer Urbplan Desenvolvimento Urbano SA. Carlyle funds spent at least $100 million to buy a majority stake in Urbplan in 2007 and to continue funding it through 2011, and that investment was worthless as of the end of 2012. The company needs as much as $200 million to carry out Carlyle’s turnaround plan after an overly ambitious expansion left it burdened with high-cost debt, according to regulatory filings.
Carlyle, like other alternative-asset firms, reports profit that differs from U.S. generally accepted accounting principles. The quarterly profit under those rules, known as GAAP, was $24.6 million, or 41 cents per diluted share, compared with $33.8 million, or 66 cents, in the first quarter of 2013.
Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, sell them and return the funds with a profit in a cycle lasting about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1 percent to 2 percent of committed funds and keep 20 percent of profit from investments as a carried interest.
Assets under management at Carlyle rose 5.3 percent to $198.9 billion from $188.8 billion at the end of the fourth quarter, driven by the firm’s acquisition of Diversified Global Asset Management Co., an investor in hedge funds. Blackstone, the largest manager of alternatives to stocks and bonds, earlier this month said its assets under management reached an industry record $272 billion as of March 31.
Carlyle’s distributable earnings, a measure of cash profitability, rose to $183 million in the quarter from $171 million a year earlier. The company plans to pay a dividend of 16 cents a share on May 22.
“We believe today’s weaker stock price performance overlooks the fact that current investment spend should generate superior long-term cash earnings for the firm,” Credit Suisse analyst Christian Bolu said in a note to clients.
The firm in March said Mike Cavanagh will join as co-president starting in June, sharing the title with Glenn Youngkin, a 19-year veteran of Carlyle. Cavanagh was previously co-chief of investment banking at JPMorgan Chase & Co.
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