Carlyle Profit Falls, But it is Closing in on $10B Fund Target: UPDATED

The Carlyle Group delivered a surprise Thursday. The alternative asset manager, which went public just last May, reported that fourth quarter profit fell 28 percent.

Washington D.C.-based Carlyle said economic net income (ENI), a measure of profitability that takes into account market valuation of its assets, came in at $182 million, down from $254 million a year earlier, Reuters reported. Carlyle’s reported revenue of $505 million for the quarter ended Dec. 31, down from $666 million for the same time period in 2011. The firm’s assets under management grew to $170.2 billion in fourth quarter, up from $147 billion in 2011.

In 2012, Carlyle realized proceeds of $18.7 billion, including $6.8 billion from 155 investments during fourth quarter. This compares to $17.6 billion in all of 2011, the firm said.

The recently public Carlyle invested $7.9 billion equity in 2012, which is down from the $11.3 billion Carlyle invested in 2011. Carlyle, in fourth quarter, put to work $3.3 billion in equity in 96 investments. Carlyle said it also raised $14 billion in new capital in 2012, including $4.6 billion during fourth quarter. The $14 billion in capital is more than double the $6.6 billion Carlyle raised in 2011.

Carlyle’s results differ from other major buyout shops. KKR, the Blackstone Group and Apollo each reported earnings that surpassed expectations. Blackstone’s Tony James even said 2012 was the best year for that firm since it went public in 2007. Carlyle, in mid-day trading Thursday, saw its stock drop 8.59%, or $3.15, to $33.52.

“Strong fundraising and realizations, which produced distributable earnings in line with consensus, though ENI missed due to lower-than consensus unrealized performance fees partly offset by better expenses (so just a timing issue with the realizations),” wrote Glenn Schorr, a Nomura analyst in a research note Thursday.

David Rubenstein, a Carlyle co-CEO and co-founder, said on a conference call discussing the results that fundraising remains “a challenge for everyone.” Institutional investors, he said, are at a “tipping point” of wanting to deploy more capital into alternatives. Carlyle also continues to see growing interest from high net worth investors, he said.

Carlyle is currently out marketing for its latest U.S. buyout fund, Carlyle Partners VI, which has a $10 billion target. Carlyle continues to make progress on this pool and is 60% of the way to its target, Rubenstein said on the call. Funds in general are taking 16 to 17 months to close, he said, and he expects CP VI will likely take that amount of time.”Very few $10 billion funds have closed since the great recession,” he said.

Fund VI is coming in lower than the firm’s last U.S. buyout fund, Carlyle Partners V, which collected $13 billion in 2007. The firm has delayed “reaping carried interest” from CP V, which weighed on distributable earnings, the New York Times said.

William Conway, a Carlyle co-CEO, said the firm has invested $11 billion of CP V. Deals include TCW, Hamilton Sundstrand and Getty Images. “We have enormous profit built into that fund so far. The accrued carry on CP V was in excess of $800 million alone,” he said on the call.

Rubenstein said the firm has seen lots of interest for $1 billion funds. In November, Carlyle raised a $1 billion middle market fund. Carlyle, that month, also collected $1.38 billion for a new fund focused on energy credit investments. “This is best time I have seen for fundraising in last 5 years,” Rubenstein said. “It’s not easy and it still takes a long time to get funds done.”

Carlyle will also launch a new fund focused on Japan this year, Rubenstein said. “I don’t know what size it will be,” he said.

UPDATE: Rubenstein, on the call, mentioned individual investors several times. peHUB has since learned that Carlyle is working on products geared to this group. We’re just not sure what that is. One source says that the products would allow investors to access PE deals at a “much lower commitment level.” A Carlyle spokesman declined comment.

Carlyle is one of the most active buyout shops, having bought Getty Images in 2012. It recently closed buys of TCW and DuPont Performance Coatings. Conway, on the call, said he was “stunned” strategics have not been more active in M&A. “It’s a good thing in that strategics don’t compete with us for deals,” he said. “We buy Hamilton Sundstrand…and I wonder ‘Where are the strategics?’… They’ve not been aggressive acquirers of assets we own.”

Conway later added that many strategics “may be still reeling from 2008 to 2009 situation. We were all looking down into the abyss then.” He expects strategic M&A to increase this year, due to low interest rates and more confidence in the U.S. and China.

Photo courtesy of Shutterstock of Reuters/Fred Prouser