Carlyle Profit Falls on Hedge Funds as Conway Cites Stumbles

  • Firm takes $175 million charges related to Vermillion, Claren
  • Carlyle has rare clawback tied to energy funds with Riverstone

Carlyle Group LP reported fourth-quarter profit that missed analysts’ estimates after taking a $175 million charge related to losses in its dwindling hedge fund business. The shares fell the most in 10 months.

Economic net income, which includes both realized and unrealized investment gains, was $6.4 million, or 2 cents a share, compared with $77.5 million a year earlier, Washington-based Carlyle said in a statement Wednesday. Analysts had expected earnings of 41 cents a share, the average of 12 estimates compiled by Bloomberg.

The slew of charges came from losses in its commodities hedge fund, Vermillion Asset Management, and a $25 million expense the firm incurred when selling its ownership stake in another hedge fund business, Claren Road Asset Management. Carlyle also said the $100 million it reserved for litigation in the third quarter was reflected in distributable earnings in the fourth quarter.

Shares of Carlyle, led by founders Bill Conway, David Rubenstein and Dan D’Aniello, declined 4.1 percent, the most since April 4, to $16.45 at the close of trading in New York. The slide pared the stock’s gain this year to 7.9 percent.

“Carlyle has for years been a business that is willing to try a lot of new things and do some experiments, and sometimes they work out great,” co-CEO Conway said on a conference call Wednesday with analysts and investors. “Sometimes it does not work out the way that we hoped and our investors had hoped. There’s no doubt we’ve stumbled.”

Energy Clawback

The hedge fund losses overshadowed a year when Carlyle sold and invested more than ever before. The firm said it deployed $17.9 billion and realized proceeds of $29.6 billion.

Distributable earnings, which reflect Carlyle’s cash profits on asset sales and fund management fees, were $2 million in the quarter, compared with $140.5 million a year earlier. Those earnings were reduced by $36 million in clawbacks, or profits the firm had to return to fund investors, related to two energy funds it used to oversee with investment manager Riverstone Holdings. Carlyle has additional clawback exposure of $22 million to $23 million, Chief Financial Officer Curt Buser said on the call.

From distributable earnings, Carlyle said it will pay shareholders a dividend of 16 cents a share on Feb. 28.

The value of Carlyle’s private equity investments rose 4 percent in the quarter, compared with a 5.9 percent jump for Apollo Global Management LLC and a 4.5 percent gain for Blackstone Group LP. The S&P 500 index of large U.S. companies appreciated 3.3 percent during the quarter. KKR & Co. is scheduled to report its results Thursday.

Publicly traded private equity firms must mark their holdings to the market each quarter, even though their typical strategy is to hold assets for years. That makes economic net income, which in part reflects these unrealized changes in value, merely a snapshot of assets that may have a long runway before being sold.

‘Transition Year’

Carlyle sold a string of public-company stakes during the quarter, including its final holdings in government consultant Booz Allen Hamilton Holding Corp. and telecommunications company CommScope Holding Co., and part of travel-services provider CVC Brasil Operadora e Agencia de Viagens SA.

The firm also completed the sale of its majority stake in the hedge fund Emerging Sovereign Group in October amid poor performance, paring its exposure to the asset class as competitors including KKR double down on their efforts. Carlyle is stepping back from hedge funds as it focuses on global credit opportunities, Conway said in October.

Conway, speaking Wednesday on the conference call, called 2017 a “transition year” for Carlyle as it pivots toward expanding its activities in credit and energy.

The firm oversaw $157.6 billion in private equity holdings, real estate and credit assets as of Dec. 31. It’s preparing to raise about $100 billion in the next four years, Rubenstein has said, including for its next buyout funds around the world, a global infrastructure fund, its next real estate private equity fund and its next North America energy fund.

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