Carlyle Third-Quarter Profit Falls 21% on Investment Fees

Carlyle Group LP, the world’s second-largest manager of alternative assets such as private equity and real estate, said third-quarter profit decreased 21 percent as it earned less for investment performance and sold fewer assets than a year ago.

Economic net income after taxes, a measure of profit excluding some costs, fell to $160.2 million, or 51 cents a share, compared with $203.6 million, or 66 cents, a year earlier, Washington-based Carlyle said today in a statement. Earnings missed the 60-cent average estimate of 14 analysts in a Bloomberg survey.

Carlyle, like peers Blackstone Group LP and KKR & Co., has diversified its business beyond traditional leveraged buyouts to bolster assets dedicated to real estate and credit investments, reducing its reliance on volatile LBO earnings. The firm is seeking money for 14 funds and raised $6.5 billion in the third quarter, putting Carlyle on track for the second-best fundraising year in its 26-year history, co-founder David Rubenstein said on a call with analysts and investors today.

“We have been in the process of reloading our capital,” Bill Conway, Carlyle’s co-chief executive officer, said on the call. “Notwithstanding the present challenges of finding the right assets at the right prices, we have been doing what we should be doing. While we are far from perfect, our job is to generate attractive absolute returns.”

Carlyle rose 1.4 percent to close at $30.54 in New York. Carlyle, which held its initial public offering last year, has gained 17 percent this year.

Fund Gains

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 4 percent in the quarter and 13 percent this year through September. That compares with gains of 4.7 percent in the third quarter and 24 percent in the first nine months of the year for the Standard & Poor’s 500 Index of large U.S. companies.

The firm’s private-equity portfolio rose 5 percent in the third quarter, compared with 10 percent at Fortress Investment Group LLC, 5.9 percent at KKR and 4.2 percent at Blackstone.

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.

Flagship Fund

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, fell 88 percent to $2.3 million, or 4 cents a share, compared with $18.6 million, or 40 cents, a year earlier.

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.

Carlyle expects to close its newest U.S. buyout fund, Carlyle Partners VI, in the next few weeks with at least $12.9 billion, Rubenstein said on the call today. The fund, which exceeded its $10 billion target, follows a $13.7 billion pool raised in 2007, which was generating a 13 percent net internal rate of return as of Sept. 30.

Distributable Earnings

Carlyle said distributable earnings, a measure of cash profitability, were $105 million in the quarter, compared with $207 million in the third quarter last year. The company plans to pay shareholders a dividend of 16 cents a share on Nov. 27.

Assets under management climbed to $185 billion from $180.4 billion at the end of the second quarter, Carlyle said. Blackstone, the largest manager of alternatives to stocks and bonds, last month said its assets under management reached an industry record of $248 billion.

Carlyle, like Blackstone, is selling real estate holdings as the industry recovers post-recession. The firm is considering apartment sales as rent growth slows and a wave of multifamily-housing construction adds to supply, Robert Stuckey, Carlyle’s head of U.S. real estate investing, said in an interview last month.

The firm, meanwhile, plans to invest in real estate through its fund-of-funds business. In September it agreed to acquire Metropolitan Real Estate Equity Management LLC, which invests in more than 80 asset managers, as a strategic purchase.

Carlyle earlier this week said it hired veteran deal maker Kewsong Lee from Warburg Pincus LLC to become its No. 2 buyout executive. Lee, who spent 21 years at New York-based Warburg Pincus, will become deputy chief investment officer, reporting to Conway, who acts as chief investment officer.

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