The following discussion analyzes the financial condition and results of operations of The
Carlyle Group Inc. (the"Company"). Such analysis should be read in conjunction with the consolidated financial statements and the related notes included in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K for the year ended December 31, 2021.
We operate through three reportable segments: Global Private Equity, Global Credit and Global Investment Solutions.
•Global Private Equity - Our Global Private Equity segment advises our buyout, middle market and growth capital funds, our
U.S.and internationally focused real estate funds, our infrastructure and natural resources funds, and our Legacy Energy funds (as defined below). The segment also includes the NGP Predecessor Funds and NGP Carry Funds advised by NGP. As of March 31, 2022, our Global Private Equity segment had $169 billionin AUM and $107 billionin Fee-earning AUM. •Global Credit - Our Global Credit segment advises funds and vehicles that pursue investment strategies including loans and structured credit, direct lending, opportunistic credit, distressed credit, aircraft financing and servicing, infrastructure debt, insurance solutions and global capital markets. As of March 31, 2022, our Global Credit segment had $91 billionin AUM and $67 billionin Fee-earning AUM. •Global Investment Solutions - Our Global Investment Solutions segment advises fund of funds programs and related co-investment and secondary activities. As of March 31, 2022, our Global Investment Solutions segment had $65 billionin AUM and $37 billionin Fee-earning AUM. Our Investment Solutions segment also included Metropolitan Real Estate("MRE") prior to its sale on April 1, 2021. We earn management fees pursuant to contractual arrangements with the investment funds that we manage and fees for transaction advisory and oversight services provided to portfolio companies of these funds. We also typically receive a performance fee from an investment fund, which may be either an incentive fee or a special residual allocation of income, which we refer to as a performance allocation, or carried interest, in the event that specified investment returns are achieved by the fund. Under U.S.generally accepted accounting principles (" U.S.GAAP"), we are required to consolidate some of the investment funds that we advise. However, for segment reporting purposes, we present revenues and expenses on a basis that deconsolidates these investment funds. Accordingly, our segment revenues primarily consist of fund management and related transaction and portfolio advisory fees and other income, realized performance revenues (consisting of incentive fees and performance allocations), realized principal investment income, including realized gains on our investments in our funds and other trading securities, as well as interest income. Our segment expenses primarily consist of cash compensation and benefits expenses, including salaries, bonuses, and realized performance payment arrangements, and general and administrative expenses. While our segment expenses include depreciation and interest expense, our segment expenses exclude acquisition and disposition related charges and amortization of intangibles and impairment. Refer to Note 17 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on the differences between our financial results reported pursuant to U.S.GAAP and our financial results for segment reporting purposes.
Our family of funds
The following chart presents the name (acronym), total capital commitments (in the case of our carry funds, structured credit funds, and the NGP Predecessor Funds), assets under management (open-end products and non-carry Aviation vehicles), gross assets (in the case of our BDCs) and vintage year of the active funds in each of our segments, as of
March 31, 2022. We present total capital commitments (as opposed to assets under management) for our closed-end investment funds because we believe this metric provides the most useful information regarding the relative size and scale of such funds. In the case of our products which are open-ended and accordingly do not have committed capital, we generally believe the most useful metric regarding relative size and scale is assets under management. 60
Global Private Equity1 Global Credit Corporate Private Equity Real Estate Carry Funds Liquid Credit Carlyle Partners (U.S.) Carlyle Realty
Partners (U.S.) Cash CLOs CP VIII
$11.5 bn2021 CRP IX $8.0 bn2021 U.S. $37.6 bn2012-2021 CP VII $18.5 bn2018 CRP VIII $5.5 bn2017 Europe €10.1 bn 2013-2022 CP VI $13.0 bn2014 CRP VII $4.2 bn2014 Structured Credit Funds CP V $13.7 bn2007 CRP VI $2.3 bn2011 CREV $0.5 bn2020
Financial Services PartnersCRP V
$3.0 bn2006 CSC $0.8 bn2017 CGFSP III $1.0 bn2018 CRP IV $1.0 bn2005 Illiquid Credit CGFSP II $1.0 bn2013 Core Plus Real Estate (U.S.) Business Development Companies3 Carlyle Secured Lending Carlyle Europe Partners CPI4 $7.9 bn2016 III $0.2 bn2022 CEP V €6.4 bn 2018 International Real Estate Carlyle Credit Solutions7 $2.1 bn2017 CEP IV €3.8 bn 2014 CER II €0.3 bn 2021 Carlyle Secured Lending8 $2.0 bn2013 CEP III €5.3 bn 2007 CER I €0.5 bn 2017 Middle Market CLOs CEP II €1.8 bn 2003 CEREP III €2.2 bn 2007 U.S $0.7bn2017-2021 Carlyle Asia Partners Infrastructure & Natural Resources Funds Opportunistic Credit Carry Funds CAP V $6.6 bn2018 NGP Energy Carry Funds CCOF II $4.4 bn2020 CBPF II RMB 2.0 bn2017 NGP XII $4.3 bn2017 CCOF I $2.4 bn2017 CAP IV $3.9 bn2014 NGP XI $5.3 bn2014 Distressed Credit Carry Funds CAP III $2.6 bn2008 NGP X $3.6 bn2012 CSP IV $2.5 bn2016 Carlyle Japan Partners Other NGP Carry Funds CSP III $0.7 bn2011 CJP IV ¥258.0 bn 2020 NGP ETP IV $0.2 bn2022 CSP II $1.4 bn2007 CJP III ¥119.5 bn 2013 NGP Minerals $0.3 bn2020 Real Assets Credit Carlyle Global Partners NGP GAP $0.4 bn2014 Infrastructure Credit Carry Fund CGP II $1.8 bn2020 NGP Predecessor Funds CICF $0.4 bn2021 CGP I $3.6 bn2015 Various2 $5.7 bn2007-2008 Real Estate Credit Carry Fund Carlyle MENA Partners International Energy Carry Funds CNLI9 $0.5 bn
$0.5 bn2008 CIEP II $2.3 bn2019 Energy Credit Carry Funds Carlyle South American Buyout Fund CIEP I $2.5 bn2013 CEMOF II $2.8 bn2015 CSABF I $0.8 bn2009 Infrastructure Funds CEMOF I $1.4 bn2011 Carlyle Sub-Saharan Africa Fund CRSEF $0.7 bn2019 Carlyle Aviation Partners CSSAF I $0.7 bn2012 CGIOF $2.2 bn2019 SASOF V $1.0 bn2020 Carlyle Peru Fund CPP II $1.5 bn2014 SASOF IV $1.0 bn2018 CPF I $0.3 bn2012 CPOCP $0.5 bn2013 SASOF III $0.8 bn2015 Carlyle U.S. Venture/Growth Partners SASOF II $0.6 bn2012 CP Growth $1.1 bn2021 CALF $0.6 bn2020 CEOF II $2.4 bn2015 Securitization Vehicles4 $3.6 bnVarious CEOF I $1.1 bn2011 8 Other Vehicles4 $4.3 bnVarious CVP II $0.6 bn2001 Other Credit Carlyle Europe Technology Partners CTAC3 $1.5 bn2018 CETP V €1.6 bn 2022 Fortitude5 $5.2 bn2020 CETP IV €1.4 bn 2019 CETP III €0.7 bn 2014 Global Investment Solutions6 Carlyle Asia Venture/Growth Partners AlpInvest CAP Growth II $0.8 bn2021 Fund of Private Equity Funds CAP Growth I $0.3 bn2017 123 vehicles €48.2 bn 2000-2022 CAGP IV $1.0 bn2008 Secondary Investments Carlyle Cardinal Ireland 104 vehicles €26.2 bn 2002-2022 CCI €0.3 bn 2014 Co-Investments 92 vehicles €20.8 bn 2002-2022 61
-------------------------------------------------------------------------------- Note: All amounts shown represent total capital commitments as of
March 31, 2022unless otherwise noted. Certain of our recent vintage funds are currently in fundraising and total capital commitments are subject to change. In addition, certain carry funds included herein may be disclosed which are not included in fund performance if they have not made an initial capital call or commenced investment activity. The NGP funds are advised by NGP Energy Capital Management, LLC, a separately registered investment adviser, and we do not serve as an investment adviser to those funds. (1)Global Private Equity also includes funds which we jointly advise with Riverstone Holdings L.L.C.(the "Legacy Energy funds"). The impact of these funds is no longer significant to our results of operations. (2)Includes NGP M&R, NGP ETP II, and NGP IX, on which we are not entitled to a share of carried interest. (3)Amounts represent gross assets plus any available capital as of March 31, 2022. (4)Amounts represent Total AUM as of March 31, 2022. (5)Includes capital raised from a strategic third-party investor which directly invests in Fortitude alongside Carlyle FRL. (6)On April 1, 2021, we completed the sale of our interest in Metropolitan Real Estate. (7) Carlyle Credit Solutions, Inc., which was renamed from TCG BDC II, Inc.in March 2022. (8)Carlyle Secured Lending, Inc., which was renamed from TCG BDC, Inc. in April 2022. (9)Excludes $0.3 billionin capital commitments to CNLI made by a Carlyle-affiliated fund, as well as Carlyle's strategic investment of $0.2 billion.
Trends affecting our business
The first quarter of 2022 was characterized by volatile markets, steady
U.S.fundamentals, and slowing growth in Europeand Asia. Our proprietary portfolio data imply the U.S.economy grew at a 2.5% annualized rate in the first quarter, a solid pace given de facto fiscal contraction, monetary policy tightening, and high inflation. In March, consumer prices rose 8.5% from a year earlier, and outpaced wage growth by nearly 3 percentage points. Post the Covid-19 Omicron wave, data indicate that consumers had begun to realign their spending away from goods (and e-commerce in particular) and back towards services, a positive development for the alleviation of price pressures; in March 2022, U.S.hotel occupancy rates exceeded 2019 levels for the first time since the onset of the pandemic, and retail and dining foot traffic rose above 2019 comparisons in much of the country. However, Russia'sinvasion of Ukraineand related sanctions exacerbated already rising energy costs (gasoline prices rose 26% during the first quarter) and food input prices ( U.S.fertilizer prices are up nearly 200% year-over-year). Supply chains, which had also displayed tentative signs of recovering earlier in the quarter, have been disrupted anew as both the invasion and its associated sanctions impede the flow of critical exports from Russiaand Ukraine. Notably, Russiaand Ukraineare the largest and fifth-largest wheat exporters, and Russiais the largest supplier of key ingredients used in the production of fertilizer. The fallout of war is not only disrupting critical supply chains, but also supply itself, as harvest and planting seasons are jeopardized in Ukraineand energy and fertilizer costs squeeze margins for farmers globally. These impacts increase the risk of persistently elevated inflation into the latter half of the year. Europe'seconomy is most exposed to the Russian invasion of Ukraine, with a heavy reliance on Russian energy and Ukrainian and Russian goods as inputs into their production processes. Our proprietary portfolio data indicate that by the end of the first quarter of 2022, real GDP growth had slowed to a sub-1% annualized rate. In February 2022, producer prices rose 31% from a year earlier, the highest rate on record. The sharp rise in fuel and input prices has dented consumer demand and made some industrial production processes uneconomical. China, while more insulated from the effects of the Russia/ Ukraineconflict, faces significant headwinds from its zero-COVID policy. Economic growth in Chinain the beginning of the first quarter of 2022 was stronger than expected, as robust exports and domestic consumption buoyed the economy despite persistent turmoil in real estate development activity and sales. However, our proprietary portfolio data point to a contraction in March with the reimposition of significant lockdowns across the country, particularly in Shanghai. China'szero-COVID policy also has negative implications for global supply chains more broadly; factory shutdowns and transport backlogs reintroduce the risk of inventory shortfalls for automobiles, chips, smartphones, and other products with significant manufacturing operations in China. As of April 11, 2022, the number of container ships outside the port of Shanghaiwas 15% higher than in March. In 2021, corporate earnings exceeded expectations driven by large productivity gains stemming from investments in digitization and technology, which more than offset input price inflation and powered margin expansion. Current estimates anticipate S&P 500 constituents' Q1 2022 earnings grew more than 5% from a year ago, a steady reading given the unfavorable comparison to last year's robust level (the S&P 500 notched 90% earnings growth in Q1 2021). There is significant dispersion around this average across sectors. Financials and discretionary consumer goods companies are expected to see earnings decline over the quarter, while the energy, industrials, and materials sectors are projected to outperform strongly. Despite stable underlying growth on average, equity market volatility has risen with interest rate volatility. Year-to-date in 2022, 10-year Treasuryyields have risen 130 basis points (bps) as of April 15, 2022. The Federal Reserveraised the federal funds rate by 25bps in March and indicated that more aggressive hikes were possible going forward. Futures markets have now priced in eight additional 25bp rate increases in 2022 and three hikes in 2023; however, there is significant uncertainty around these expectations, which is contributing to the broader volatility in markets. The Dow Jones, S&P 500, and Nasdaq 100 fell 5.2%, 7.8%, and 14.9%, respectively, from December 31, 2021to April 15, 2022. Globally, the MSCI ACWI, EuroStoxx 600 and Shanghai Composite fell 8.5%, 5.7%, and 11.4%, respectively, over the same period. 62 -------------------------------------------------------------------------------- Losses are concentrated at both ends of the risk spectrum where valuations have been richest. The prices of speculative equities most exposed to interest rate risk - namely, those of companies with cash flows weighted far into the future - are down over 25% year-to-date; at the same time, low risk investment grade bonds are down more than 10% as well. In general, higher rates have negative implications for (1) fixed rate bond markets and (2) tech and high growth sector assets. In both cases, higher discount rates negatively impact the value of future cash flow. Obtaining financing in the high yield bond market is currently challenging. Year-to-date through April 13, 2022, global bond funds experienced nearly $115 billionin outflows. In contrast, the strongest performers year-to-date have been assets with more moderate valuations that fall in the middle of the risk spectrum, such as equities of companies with large dividends and/or low enterprise value/sales ratios. Leveraged loans, which are floating rate and thus more appealing to investors when interest rates are rising, have also held up relatively well and were down modestly as of late-April. Financing and transaction volumes overall, however, saw a significant slowdown in the first quarter of 2022. Global M&A totaled roughly $900 billionfor the quarter, the lowest amount since Q2 2020, at the heart of the COVID crisis. Our carry fund portfolio appreciated 5% in the first quarter against this market backdrop characterized by higher-than-usual volatility, reflecting the strength of our diversified platform and our ability to mitigate risk in periods of uncertainty. Within our Global Private Equity segment, our infrastructure and natural resources funds appreciated 19%, boosted by strong commodity prices; our real estate funds appreciated 10% in the first quarter, led by continued strong performance in U.S.real estate; and our corporate private equity funds appreciated 3% in the first quarter driven by our U.S.and Europeportfolios. In our Global Credit segment, our carry funds (which represent approximately 15% of the total Global Credit remaining fair value) were flat for the quarter as appreciation in our energy credit carry funds was offset by depreciation in Carlyle Aviation Partners. Depreciation of 18% in our Aviation carry funds reflects the impact of the war in Ukraine, as approximately 5% of the aircraft leases in the portfolio are in the impacted region. We believe this is the only strategy across our portfolio where we have significant direct exposure to Russia, Belarusor Ukraine. Our Global Investment Solutions funds appreciated 4% in the first quarter, which generally reflects investment fair values on a one-quarter lag in the valuations of our primary and secondary fund of funds. Our publicly traded investments, which comprise 10% of the total fair value in our carry fund portfolio, depreciated 8% during the first quarter. Our non-carry fund Global Credit products also continue to perform well. Dividend yields on our business development companies as of March 31, 2022were approximately 9% to 10%, and approximately 7% for our interval fund. In our liquid credit strategy, our global CLO portfolio continues to have a default rate less than half that of the industry average. We generated $6.4 billionin realized proceeds from our carry funds in the first quarter of 2022, generally in line with a year ago, but down from the record levels of realizations seen in the third and fourth quarters of 2021. However, our net accrued performance revenues on our balance sheet reached a record high level at $4.3 billionat March 31, 2022, a 10% increase from December 31, 2021reflecting the positive impact from valuations across the portfolio. We expect this balance will deliver a high level of realized performance revenues in the coming years. During the first quarter, our carry funds invested $10.9 billionin new or follow-on transactions, and we have announced and/or signed more than $1.5 billionof new or follow-on transactions that are expected to close in the coming quarters. While high levels of industry dry powder and widely available financing are likely to foster an increasingly competitive market, we believe our investment platform will enable us to pivot quickly to pursue opportunities where we have identified dislocation, which we believe positions us to continue to deploy capital throughout 2022. We raised $9.2 billionin new capital in the first quarter, with $2.0 billionin additional third-party capital raised for our strategic investment in Fortitude, the first closing in our fifth Europetechnology fund and capital raised related to the March 2022acquisition of a diversified portfolio of triple net leases from iStar. The pace of capital deployment has resulted in fund products coming back to market faster than ever before, and limited partners have an increasing array of investment opportunities to consider. As a result, we anticipate the fundraising landscape to become increasingly competitive as limited partners balance allocation limits with more offerings. In addition to organic growth through fundraising, we have announced several transactions to drive accretive growth on an inorganic basis, including our acquisition of CLO management contracts from CBAM Partners LLCin March 2022, our recently announced agreement to acquire life sciences investment firm Abingworth, and our strategic advisory services agreement with Fortitude which was executed on April 1, 2022. The SEChas put forth several rule proposals in recent months, and we are currently evaluating the potential impacts to our business and operations, and those of our portfolio companies. These proposals include, but are not limited to, (i) new reporting requirements of material cybersecurity incidents and periodic reporting regarding a company's cybersecurity risk programs, (ii) new rules and amendments under the Investment Advisors Act of 1940 which expand compliance obligations and prohibit certain activities for private fund advisors, and (iii) extensive climate change disclosure regulations. We are also closely evaluating the financial, regulatory and other proposals put forth by the current Administration and Congressand their potential impacts on our business. While there may be changes to current tax and regulatory regimes, recent fiscal stimulus and 63
-------------------------------------------------------------------------------- proposed infrastructure packages could be followed by longer-term spending increases. The potential for policy changes may create regulatory uncertainty for our portfolio companies and our investment strategies and could adversely affect our profitability and the profitability of our portfolio companies. The Great Resignation continues to impact labor markets, making hiring more challenging and compensation more expensive as companies compete for talent. While our levels of attrition have been generally consistent with pre-pandemic levels, we have experienced increased turnover in our technology and finance functions. As we look to recruit qualified professionals to backfill existing positions and fill new roles, we may experience upward pressure on our compensation packages.
Acquisition of the iStar Triple Net Lease portfolio
March 2022, Carlyle Net Leasing Income, L.P., a Carlyle-affiliated investment fund, acquired a diversified portfolio of triple net leases from iStar, Inc. for an enterprise value of $3 billion, which was funded using $2 billionin debt and $1 billionin equity. The portfolio includes properties spanning industrial, office and entertainment space across 18.3 million square feet located throughout the United States. The investment fund is not consolidated by us, and the debt is non-recourse to us. As general partner of the investment fund, we contributed $200 millionas a minority interest balance sheet investment, which is included in the our Global Credit principal equity method investments (see Note 6 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q).
Acquisition of CLO management contracts from
March 21, 2022, we acquired the management contracts related to a portfolio of assets primarily comprised of U.S.and European CLOs as well as other assets across private credit from CBAM Partners LLC("CBAM"). The purchase price of $812.9 millionconsisted of a combination of $618.4 millionin cash, approximately 4.2 million newly issued, fully vested common shares ( $194.5 millionbased on the value of the shares at closing), and approximately $3.4 millionof acquisition costs incurred by us in connection with the transaction. The portfolio of $15 billionin assets under management was integrated into our Global Credit platform. See Note 4 to the unaudited condensed consolidated financial statements for additional information regarding the acquisition.
Fortitude capital increase and strategic advisory services agreement
March 2022, we raised $2.0 billionin third-party equity capital for Fortitude, and committed up to $100 millionin additional capital to Carlyle FRL from our balance sheet. Fortitude is expected to call the capital in two drawdowns during 2022. In connection with the capital raise and subsequent funding, our indirect ownership of Fortitude will decrease from 19.9% to 10.5%. As a result of this dilution, we expect to record a reduction in the carrying value of our equity method investment and corresponding loss of approximately $277 millionin our U.S.GAAP results based on the carrying value as of March 31, 2022, subject to change based on the timing of the dilution and changes in the carrying value of our investment. On April 1, 2022, we entered into a new strategic advisory services agreement with certain subsidiaries of Fortitude through a newly-formed investment advisor, Carlyle Insurance Solutions Management L.L.C.("CISM"). Under the agreement, CISM will provide Fortitude with certain services, including M&A, transaction origination and execution, and capital management services in exchange for a recurring fee based on Fortitude's general account assets, which will adjust within an agreed range based on Fortitude's overall profitability. See Note 6 to the unaudited condensed consolidated financial statements for additional information regarding the strategic investment in Fortitude.
Acquisition of Abingworth
April 2022, we agreed to acquire Abingworth, a life sciences investment firm, which will expand our healthcare investment platform with the addition of over $2 billionin assets under management and a specialized team of over 20 investment professionals and advisors. Consideration for Abingworth includes a base purchase price of $187.5 million, of which up to $47.5 millionmay be settled with newly-issued shares of our common stock, as well as up to a further $130 millionin future incentive payments based on the achievement of certain performance targets. The acquisition includes the rights to 15% of performance revenues generated by Abingworth's two most recent active investment funds, Abingworth Bioventures 8 LP and Abingworth Clinical Co-Development Fund2 LP. The transaction is expected to close in 2022.
April 2022, the Company's Board of Directors declared a quarterly dividend of $0.325per share to common stockholders of record at the close of business on May 10, 2022, payable on May 17, 2022. 64 --------------------------------------------------------------------------------
Main financial measures
Our key financial measures are described on the following pages. Additional information regarding these key financial measures and our other significant accounting policies can be found in Note 3 to the unaudited condensed consolidated financial statements included with this Quarterly Report on Form 10-Q.
Revenues primarily consist of fund management fees, incentive fees, investment income (including performance allocations, realized and unrealized gains of our investments in our funds and other principal investments), as well as interest and other income. Fund Management Fees. Fund management fees include management fees and transaction and portfolio advisory fees. We earn management fees for advisory services we provide to funds in which we hold a general partner interest or with which we have an investment advisory or investment management agreement. Additionally, management fees include catch-up management fees, which are episodic in nature and represent management fees charged to fund investors in subsequent closings of a fund which apply to the time period between the fee initiation date and the subsequent closing date. Approximately 90% of our fee revenue is in the form of management fees from traditional closed-end, long-dated funds, which are highly predictable and stable, and do not have significant exposure to the underlying fund valuations. More than 95% of our Fee-earning AUM is in fund structures with contractual lives of generally ten years, and is not subject to redemption without cause. Management fees attributable to
Carlyle Partners VII, L.P.("CP VII"), our seventh U.S.buyout fund with $15.6 billionof Fee-earning AUM as of March 31, 2022were approximately 10% and 16% of fund management fees recognized during the three months ended March 31, 2022and 2021, respectively. No other fund generated over 10% of fund management fees in the periods presented. Fund management fees exclude the reimbursement of any partnership expenses paid by the Company on behalf of the Carlyle funds pursuant to the limited partnership agreements, including amounts related to the pursuit of actual, proposed, or unconsummated investments, professional fees, expenses associated with the acquisition, holding and disposition of investments, and other fund administrative expenses. Transaction and Portfolio Advisory Fees. Transaction and portfolio advisory fees generally include fees we receive for the transaction and portfolio advisory services we provide to our portfolio companies. When covered by separate contractual agreements, we recognize transaction and portfolio advisory fees for these services when the performance obligation has been satisfied and collection is reasonably assured. We are required to offset our fund management fees earned by a percentage of the transaction and advisory fees earned, which we refer to as the "rebate offsets." Historically, such rebate offset percentages generally approximated 80% of the fund's portion of the transaction and advisory fees earned. However, the percentage of transaction and portfolio advisory fees we share with our investors on our recent vintage funds has generally increased, and as such the rebate offset percentages generally range from 80% to 100% of the fund's portion of the transaction and advisory fees earned, such that a larger share of the transaction fee revenue we retain is driven by co-investment activity. In addition, Carlyle Global Capital Markets("GCM") generates capital markets fees in connection with activities related to the underwriting, issuance and placement of debt and equity securities, and loan syndication for our portfolio companies and third-party clients, which are generally not subject to rebate offsets with respect to our most recent vintages (but are subject to the rebate offsets set forth above for older funds). Underwriting fees include gains, losses and fees arising from securities offerings in which we participate in the underwriter syndicate. The recognition of portfolio advisory fees, transactions fees, and capital markets fees can be volatile as they are primarily generated by investment activity within our funds, and therefore are impacted by our investment pace. Incentive Fees. Incentive fees consist of performance-based incentive arrangements pursuant to management contracts, primarily from certain of our Global Credit funds, when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, incentive fees are recognized when the performance benchmark has been achieved. Investment Income. Investment income consists of our performance allocations as well as the realized and unrealized gains and losses resulting from our equity method investments and other principal investments. Performance allocations consist principally of the performance-based capital allocation from fund limited partners to us, commonly referred to as carried interest, from certain of our investment funds, which we refer to as the "carry funds." Carried interest revenue is recognized by Carlyle upon appreciation of the valuation of our funds' investments above certain return hurdles as set forth in each respective partnership agreement and is based on the amount that would be due to us pursuant to the fund partnership agreement at each period end as if the funds were liquidated at such date. Accordingly, the amount of carried interest recognized as performance allocations reflects our share of the fair value gains and losses of the associated funds' underlying investments measured at their then-current fair values relative to the fair values as of the end of the prior period. As 65
-------------------------------------------------------------------------------- a result, the performance allocations earned in an applicable reporting period are not indicative of any future period, as fair values are based on conditions prevalent as of the reporting date. Refer to "- Trends Affecting our Business" for further discussion. In addition to the performance allocations from our Global Private Equity funds and closed-end carry funds in the Global Credit segment, we are also entitled to receive performance allocations from our Global Investment Solutions,
Carlyle Aviationand NGP Carry Funds. We also retained our interest in the net accrued performance allocations of existing funds at the time of the sale of MRE. The timing of performance allocations realizations for these funds is typically later than in our other carry funds based on the terms of such arrangements.
Our performance allocations are generated by a diverse set of funds with different vintages, geographic focus, investment strategies and sector specialties. For an explanation of the fund acronyms used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section, see “- Our family of funds”.
The table below presents funds which generated performance allocations in excess of 10% of the total for the three months ended
March 31, 2022and 2021. No other fund generated over 10% of performance allocations in the periods presented. Three Months Ended March 31, 2022 2021 (Dollars in millions) CRP VIII $ 135.2CP VI $ 535.6CP VII 73.3 CEP IV 405.3 CIEP I 71.0 CEP IV 70.2 Under our arrangements with the historical owners and management team of AlpInvest, we generally do not retain any carried interest in respect of the historical investments and commitments to our fund vehicles that existed as of July 1, 2011(including any options to increase any such commitments exercised after such date). We are entitled to 15% of the carried interest in respect of commitments from the historical owners of AlpInvestfor the period between 2011 and 2020, except in certain instances, and 40% of the carried interest in respect of all other commitments (including all future commitments from third parties). In certain instances, carried interest associated with the AlpInvestfund vehicles is subject to entity level income taxes in the Netherlands. We record our equity income allocation from NGP performance allocations in principal investment income (loss) from equity method investments rather than performance allocations in our unaudited condensed consolidated statements of operations. We recognized $250.4 millionof net investment earnings related to these performance allocations for the three months ended March 31, 2022. Realized carried interest may be clawed back or given back to the fund if the fund's investment values decline below certain return hurdles, which vary from fund to fund. When the fair value of a fund's investments remains constant or falls below certain return hurdles, previously recognized performance allocations are reversed. In all cases, each investment fund is considered separately in evaluating carried interest and potential giveback obligations. For any given period, performance allocations revenue on our statement of operations may include reversals of previously recognized performance allocations due to a decrease in the value of a particular fund that results in a decrease of cumulative performance allocations earned to date. Since fund return hurdles are cumulative, previously recognized performance allocations also may be reversed in a period of appreciation that is lower than the particular fund's hurdle rate. Additionally, unrealized performance allocations reverse when performance allocations are realized, and unrealized performance allocations can be negative if the amount of realized performance allocations exceed total performance allocations generated in the period. For the three months ended March 31, 2022and 2021, the reversals of performance allocations were $96.5 millionand $20.1 million, respectively. As of March 31, 2022, accrued performance allocations and accrued giveback obligations were $8.5 billionand $40.4 million, respectively. Each balance assumes a hypothetical liquidation of the funds' investments at March 31, 2022at their then current fair values. These assets and liabilities will continue to fluctuate in accordance with the fair values of the funds' investments until they are realized. As of March 31, 2022, $18.7 millionof the accrued giveback obligation is the responsibility of various current and former senior Carlyle professionals and other limited partners of the Carlyle Holdingspartnerships, and the net accrued giveback obligation attributable to the Company is $21.7 million. The Company uses "net accrued performance revenues" to refer to the aggregation of the accrued performance allocations and incentive fees net of (i) accrued giveback obligations, (ii) accrued performance allocations and incentive fee-related compensation, (iii) performance allocations and incentive fee-related tax obligations, and (iv) accrued performance allocations and incentive fees attributable to non-controlling 66 -------------------------------------------------------------------------------- interests. Net accrued performance revenues excludes any net accrued performance allocations and incentive fees that have been realized but will be collected in subsequent periods, as well as net accrued performance revenues which are presented as fee related performance revenues when realized in our non-GAAP financial measures. Net accrued performance revenues as of March 31, 2022are $4.3 billion. In addition, realized performance allocations may be reversed in future periods to the extent that such amounts become subject to a giveback obligation. If, at March 31, 2022, all investments held by our carry funds were deemed worthless, the amount of realized and previously distributed performance allocations subject to potential giveback would be approximately $1.6 billionon an after-tax basis where applicable, of which approximately $0.7 billionwould be the responsibility of current and former senior Carlyle professionals. See the related discussion of "Contingent Obligations (Giveback)" within "- Liquidity and Capital Resources." The following table summarizes the total amount of aggregate giveback obligations that we have realized since Carlyle's inception. Given various current and former senior Carlyle professionals and other limited partners of the Carlyle Holdingspartnerships are responsible for paying the majority of the realized giveback obligation, the table below also summarizes the amount that was attributable to the Company: Inception
Giveback Attributable to Total Giveback Carlyle (Dollars in millions) Various Legacy Energy Funds $ 158.0 $ 55.0 All other Carlyle Funds 80.2 12.7 Aggregate Giveback since Inception $ 238.2 $ 67.7 The funding for employee obligations and givebacks related to carry realized pre-IPO is primarily through a collection of employee receivables related to giveback obligations and from non-controlling interests for their portion of the obligation. The realization of giveback obligations for the Company's portion of such obligations reduces Distributable Earnings in the period realized and negatively impacts earnings available for distributions to shareholders in the period realized. Further, each individual recipient of realized carried interest typically signs a guarantee agreement or partnership agreement that personally obligates such person to return his/her pro rata share of any amounts of realized carried interest previously distributed that are later clawed back. Accordingly, carried interest as performance allocation compensation is subject to return to the Company in the event a giveback obligation is funded. Generally, the actual giveback liability, if any, does not become due until the end of a fund's life. Each investment fund is considered separately in evaluating carried interest and potential giveback obligations. As a result, performance allocations within funds will continue to fluctuate primarily due to certain investments within each fund constituting a material portion of the carry in that fund. Additionally, the fair value of investments in our funds may have substantial fluctuations from period to period.
In addition, in our analysis of our non-GAAP results, we use the term “net realized performance income” to refer to realized performance allocations and incentive fees from our funds, net of the portion allocated to our performance professionals. investment, if any, and certain tax charges associated with deferred interest attributable to certain partners and employees, which are reflected as realized performance allowances and compensation expense related to incentive awards. See “- Non-GAAP Financial Measures” for the amount of net realized performance income recognized each period. See “- Segment Analysis” for net performance revenue realized by segment and related discussion for each period.
Investment income also represents the realized and unrealized gains and losses on our principal investments, including our investments in Carlyle funds that are not consolidated, as well as any interest and other income. As it relates to our investments in NGP, investment income also includes our equity income allocation in NGP performance allocations, the amortization of the basis difference between the carrying value of our investment and our share of the underlying net assets of the investee, as well as the compensation expense associated with compensatory arrangements provided by us to employees of our equity method investee. Realized principal investment income (loss) is recorded when we redeem all or a portion of our investment or when we receive or are due cash income, such as dividends or distributions. A realized principal investment loss is also recorded when an investment is deemed to be worthless. Unrealized principal investment income (loss) results from changes in the fair value of the underlying investment, as well as the reversal of previously recognized unrealized gains (losses) at the time an investment is realized. Fair Value Measurement.
U.S.GAAP establishes a hierarchical disclosure framework which ranks the observability of market price inputs used in measuring financial instruments at fair value. The observability of inputs is impacted by a number 67
-------------------------------------------------------------------------------- of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices, or for which fair value can be measured from quoted prices in active markets, will generally have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value. The table below summarizes the valuation of investments and other financial instruments included within our AUM, by segment and fair value hierarchy levels, as of
March 31, 2022: As of March 31, 2022 Global Private Global Equity Credit Global Investment Solutions Total Consolidated Results (Dollars in millions) Level I $ 5,733 $ 307$ 1,646 $ 7,686Level II 5,583 1,658 176 7,417 Level III 112,731 70,372 42,224 225,327 Fair Value of Investments 124,047 72,337 44,046 240,430 Available Capital 45,039 18,477 21,220 84,736 Total AUM $ 169,086 $ 90,814$ 65,266 $ 325,166Interest and Other Income of Consolidated Funds. Interest and other income of Consolidated Funds primarily represents the interest earned on CLO assets. The Consolidated Funds are not the same entities in all periods presented. The Consolidated Funds in future periods may change due to changes in fund terms, formation of new funds, and terminations of funds. Net Investment Gains (Losses) of Consolidated Funds. Net investment gains (losses) of Consolidated Funds measures the change in the difference in fair value between the assets and the liabilities of the Consolidated Funds. A gain (loss) indicates that the fair value of the assets of the Consolidated Funds appreciated more (less), or depreciated less (more), than the fair value of the liabilities of the Consolidated Funds. A gain or loss is not necessarily indicative of the investment performance of the Consolidated Funds and does not impact the management or incentive fees received by Carlyle for its management of the Consolidated Funds. The portion of the net investment gains (losses) of Consolidated Funds attributable to the limited partner investors is allocated to non-controlling interests. Therefore a gain or loss is not expected to have a material impact on the revenues or profitability of the Company. Moreover, although the assets of the Consolidated Funds are consolidated onto our balance sheet pursuant to U.S.GAAP, ultimately we do not have recourse to such assets and such liabilities are generally non-recourse to us. Therefore, a gain or loss from the Consolidated Funds generally does not impact the assets available to our common stockholders. Expenses Compensation and Benefits. Compensation includes salaries, bonuses, equity-based compensation, and performance payment arrangements. Bonuses are accrued over the service period to which they relate. We recognize as compensation expense the portion of performance allocations and incentive fees that are due to our employees, senior Carlyle professionals, advisors, and operating executives in a manner consistent with how we recognize the performance allocations and incentive fee revenue. These amounts are accounted for as compensation expense in conjunction with the related performance allocations and incentive fee revenue and, until paid, are recognized as a component of the accrued compensation and benefits liability. Compensation in respect of performance allocations and incentive fees is paid when the related performance allocations and incentive fees are realized, and not when such performance allocations and incentive fees are accrued. The funds do not have a uniform allocation of performance allocations and incentive fees to our employees, senior Carlyle professionals, advisors, and operating executives. Therefore, for any given period, the ratio of performance allocations and incentive fee compensation to performance allocations and incentive fee revenue may vary based on the funds generating the performance allocations and incentive fee revenue for that period and their particular allocation percentages. In addition, we have implemented various equity-based compensation arrangements that require senior Carlyle professionals and other employees to vest ownership of a portion of their equity interests over a service period of generally one to four years, which under U.S.GAAP will result in compensation charges over current and future periods. During 2019 and 2020, we granted fewer equity awards than we have previously. In 2021, we granted approximately 7.1 million in long-term strategic restricted stock units to certain senior professionals, the majority of which are subject to vesting based on the achievement of annual performance targets over four years, with a larger proportion of the awards vesting based on the 2024 performance year. As a result, combined with a higher share price than in prior periods, equity-based compensation expense 68 --------------------------------------------------------------------------------
will be higher in the coming years than it has been. Compensation expense associated with all stock-based compensation awards is excluded from fee-related revenue and distributable earnings.
We may hire additional individuals and overall compensation levels may correspondingly increase, which could result in an increase in compensation and benefits expense. As a result of prior acquisitions, we have charges associated with contingent consideration taking the form of earn-outs and profit participation, some of which are reflected as compensation expense. General, Administrative and Other Expenses. General, administrative and other expenses include occupancy and equipment expenses and other expenses, which consist principally of professional fees, including those related to our global regulatory compliance program, external costs of fundraising, travel and related expenses, communications and information services, depreciation and amortization (including intangible asset amortization and impairment) and foreign currency transactions. We expect that general, administrative and other expenses will vary due to infrequently occurring or unusual items, such as impairment of intangible assets or lease right-of-use assets and expenses or insurance recoveries associated with litigation and contingencies. Also, in periods of significant fundraising, to the extent that we use third parties to assist in our fundraising efforts, our general, administrative and other expenses may increase accordingly. Similarly, our general, administrative and other expenses may increase as a result of professional and other fees incurred as part of due diligence related to strategic acquisitions and new product development. Additionally, we anticipate that general, administrative and other expenses will fluctuate from period to period due to the impact of foreign exchange transactions.
Interest and other expenses of consolidated funds. Interest and other expenses of the consolidated funds consist primarily of interest expense related primarily to our CLO loans, professional fees and other third party expenses.
Income Taxes. Income taxes are accounted for using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized. The interim provision for income taxes is calculated using the discrete effective tax rate method as allowed by ASC 740, Accounting for Income Taxes. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year-to-date period as if it was the annual period and determines the income tax expense or benefit on that basis. In the normal course of business, we are subject to examination by federal and certain state, local and foreign tax regulators. With a few exceptions, as of
March 31, 2022, our U.S.federal income tax returns for the years 2018 through 2020 are open under the normal three-year statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2016 to 2020. Foreign tax returns are generally subject to audit from 2011 to 2020. Certain of our affiliates are currently under audit by federal, state and foreign tax authorities. Non-controlling Interests in Consolidated Entities. Non-controlling interests in consolidated entities represent the component of equity in consolidated entities not held by us. These interests are adjusted for general partner allocations. Earnings Per Common Share. We compute earnings per common share in accordance with ASC 260, Earnings Per Share. Basic earnings per common share is calculated by dividing net income (loss) attributable to the common shares of the Company by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the assumed conversion of all dilutive securities. We apply the treasury stock method to determine the dilutive weighted-average common shares represented by unvested restricted stock units. For certain equity-based compensation awards that contain performance or market conditions, the number of contingently issuable common shares is included in diluted earnings per common share based on the number of common shares, if any, that would be issuable under the terms of the awards if the end of the reporting period were the end of the contingency period, if the result is dilutive.
Non-GAAP Financial Measures
Distributable Earnings. Distributable Earnings, or "DE", is a key performance benchmark used in our industry and is evaluated regularly by management in making resource deployment and compensation decisions, and in assessing the performance of our three segments. We also use DE in our budgeting, forecasting, and the overall management of our segments. We believe that reporting DE is helpful to understanding our business and that investors should review the same supplemental financial measure that management uses to analyze our segment performance. DE is intended to show the amount of net realized earnings without the effects of consolidation of the Consolidated Funds. DE is derived from our segment reported results and is an additional measure to assess performance.
Distributable profit differs from profit (loss) before provision for income taxes calculated in accordance with
69 -------------------------------------------------------------------------------- allocations and incentive fees), and does not include unrealized performance allocations and related compensation expense, unrealized principal investment income, equity-based compensation expense, net income (loss) attributable to non-Carlyle interest in consolidated entities, or charges (credits) related to Carlyle corporate actions and non-recurring items. Charges (credits) related to Carlyle corporate actions and non-recurring items include: charges associated with acquisitions, dispositions, or strategic investments, changes in the tax receivable agreement liability, amortization and any impairment charges associated with acquired intangible assets, transaction costs associated with acquisitions and dispositions, charges associated with earnouts and contingent consideration including gains and losses associated with the estimated fair value of contingent consideration issued in conjunction with acquisitions or strategic investments, impairment charges associated with lease right-of-use assets, gains and losses from the retirement of debt, charges associated with contract terminations and employee severance. We believe the inclusion or exclusion of these items provides investors with a meaningful indication of our core operating performance. This measure supplements and should be considered in addition to and not in lieu of the results of operations discussed further under "Consolidated Results of Operations" prepared in accordance with
U.S.GAAP. Fee Related Earnings. Fee Related Earnings, or "FRE", is a component of DE and is used to assess the ability of the business to cover direct base compensation and operating expenses from total fee revenues. FRE differs from income (loss) before provision for income taxes computed in accordance with U.S.GAAP in that it adjusts for the items included in the calculation of DE and also adjusts DE to exclude net realized performance revenues, realized principal investment income from investments in Carlyle funds, net interest (interest income less interest expense), and certain general, administrative and other expenses when the timing of any future payment is uncertain. Fee Related Earnings includes fee related performance revenues and related compensation expense. Fee related performance revenues represent the realized portion of performance revenues that are measured and received on a recurring basis, are not dependent on realization events, and which have no risk of giveback.
We monitor certain operating metrics common to the asset management industry.
Fee-earning Assets under Management. Fee-earning assets under management or Fee-earning AUM refers to the assets we manage or advise from which we derive recurring fund management fees. Our Fee-earning AUM is generally based on one of the following, once fees have been activated: (a)the amount of limited partner capital commitments, generally for carry funds where the original investment period has not expired, for
AlpInvestcarry funds during the commitment fee period (see "Fee-earning AUM based on capital commitments" in the table below for the amount of this component at each period); (b)the remaining amount of limited partner invested capital at cost, generally for carry funds and certain co-investment vehicles where the original investment period has expired and one of our business development companies (see "Fee-earning AUM based on invested capital" in the table below for the amount of this component at each period);
(c) the amount of the total balance of the commission-generating guarantees at par of our CLOs and other special purpose vehicles, as defined in the trust indentures (generally excluding shares and positions in default) at the date of quarterly closing;
(d) the share of the external investor in the net asset value of certain carry funds (see “AUM under management remunerated on the basis of the net asset value” in the table below for the amount of this component in each period);
(e)the gross assets (including assets acquired with leverage), excluding cash and cash equivalents, of one of our business development companies and certain carry funds (see "Fee-earning AUM based on lower of cost or fair value and other" in the table below for the amount of this component at each period); and (f)the lower of cost or fair value of invested capital, generally for
AlpInvestcarry funds where the commitment fee period has expired and certain carry funds where the investment period has expired, (see "Fee-earning AUM based on lower of cost or fair value and other" in the table below for the amount of this component at each period). 70
-------------------------------------------------------------------------------- The table below details Fee-earning AUM by its respective components at each period. As of March 31, 2022 2021 Consolidated Results (Dollars in millions) Components of Fee-earning AUM Fee-earning AUM based on capital commitments (1)
$ 72,933 $ 78,362Fee-earning AUM based on invested capital (2) 63,311 39,622 Fee-earning AUM based on collateral balances, at par (3) 43,406 27,617 Fee-earning AUM based on net asset value (4) 9,942 8,084
Assets under management remunerated at the lower of cost or fair value and other (5) 21,468
19,447 Balance, End of Period (6) (7) (8) $
(1)Reflects limited partner capital commitments where the original investment period, weighted-average investment period, or commitment fee period has not expired.
(2)Reflects the capital invested by the limited partner at cost and includes amounts committed or reserved for the investments of certain Global Private Equity funds and Global Investment Solutions.
(3) Represents the total amount of fee-bearing collateral balances and principal balances, at par, for our CLOs/structured products.
(4) Reflects the net asset value of certain other carry funds.
(5) Includes funds whose fees are based on gross asset value.
(6)Energy III, Energy IV, and Renew II (collectively, the "Legacy Energy Funds"), are managed with
Riverstone Holdings LLCand its affiliates. Affiliates of both Carlyle and Riverstone act as investment advisors to each of the Legacy Energy Funds. Carlyle has a minority representation on the management committees of Energy IV and Renew II. Carlyle and Riverstone each hold half of the seats on the management committee of Energy III, but the investment period for this fund has expired and the remaining investments in such fund are being disposed of in the ordinary course of business. As of March 31, 2022, the Legacy Energy Funds had, in the aggregate, approximately $0.2 billionin AUM and $0.4 billionin Fee-earning AUM. We are no longer raising capital for the Legacy Energy Funds and expect these balances to continue to decrease over time as the funds wind down. (7)Ending balances as of March 31, 2022and 2021 exclude $14.3 billionand $12.7 billion, respectively, of pending Fee-earning AUM for which fees have not yet been activated.
(8) The closing balance at
The table below shows the period-to-period rollforward of remunerated assets under management.
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