Carlyle Swings to Second-Quarter Profit as Funds Gain

Carlyle Group LP, the world’s second-largest manager of alternative assets such as private equity and real estate, reported a second-quarter profit after a loss a year earlier as its fund holdings appreciated.

Economic net income after taxes, a measure of profit excluding some costs, was $123.2 million, or 39 cents a share, compared with a loss of $57.7 million, or 19 cents, a year earlier, Washington-based Carlyle said today in a statement. Earnings missed the 55-cents average estimate of 12 analysts in a Bloomberg survey. The shares fell as executives said the pace of dealmaking will slow.

Carlyle benefited from rising U.S. markets in the second quarter, selling shares in seven companies, including Hertz Global Holdings Inc. and Nielsen Holdings NV. Increased competition for deals globally prompted Carlyle’s co-chief executive officer, Bill Conway, to reverse his outlook for 2013, saying the firm will invest less than the $7.9 billion it did last year. Conway during the prior quarter predicted that deal activity this year would exceed that of 2012.

“The overall investment environment has grown more challenging, particularly in the U.S., for large transactions,” Conway said on a conference call today with investors. “With the world awash in liquidity, interest rates at rock-bottom levels and asset prices bid up, it has become increasingly difficult for us to compete when underwriting our investments to a 20 to 25 percent internal rate of return.”

Shares Fall

Carlyle fell 1.2 percent to $27.98 at the close of trading. The stock has gained 7.5 percent so far this year, rising above the $22 price at which it was first sold to the public on May 2,


Like competitors Blackstone Group LP and KKR & Co., Carlyle has diversified its business beyond traditional leveraged buyouts to bolster assets dedicated to real estate and credit investments. Together, Carlyle’s funds from which it can collect a slice of profits -- which include private equity, real estate, energy and other strategies -- gained 3 percent in the second quarter.

The firm’s private-equity funds rose 5 percent during the quarter, compared with 5.4 percent at Blackstone and 0.9 percent at KKR.

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, like its peers, reports profit that differs from U.S. generally accepted accounting principles. Under those rules, known as GAAP, Carlyle reported a loss of $3.3 million, or 7 cents a share, compared with a loss of $10.3 million, or 26 cents, a year earlier.

Carlyle said distributable earnings, a measure of cash profitability, rose 41 percent to $163 million from the second quarter last year. The company plans to pay a dividend of 16 cents a share on Aug. 30.

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 as a carried interest.

Assets Rise

Assets under management at Carlyle rose to $180.4 billion from $176.3 billion at the end of the first quarter as the firm raised $6.9 billion in the quarter and distributed money back to investors. Blackstone, the largest so-called alternative-asset manager, said last month its assets reached an industry record of $229.6 billion.

Carlyle in June agreed to buy the remaining 40 percent of Dutch funds-of-funds manager AlpInvest Partners NV, taking full control of the manager in which it took a 60 percent stake in 2011 as a strategic acquisition, rather than a fund investment. AlpInvest oversaw 37 billion euros ($49 billion) as of March 31.

Worldwide, the number of private-equity deals announced so far this year is down 20 percent to 3,144 from the same period last year, according to data compiled by Bloomberg.

“We expect deployment levels to remain muted over the back half of the year,” Credit Suisse Group AG analysts led by Howard Chen said in a note to clients after Carlyle’s results were announced.


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