Carlyle Group Earnings: Decline in Revenue and Profits Less Than Expected, but Headwinds Remain
There was little in narrow-moat-rated Carlyle Group’s CG third-quarter results to alter our long-term view of the firm, and we expect to leave our $32 fair value estimate in place. We view the shares as slightly undervalued.
Activity levels for investments, realizations, and fundraising remained muted in the September quarter, and management expects these headwinds to persist for the remainder of the year, affecting fee-related earnings as well as distributable earnings, which remove the effects of unrealized activity.
Fundraising for the full year seems to be skewing more toward global investment solutions (40% of year-to-date inflows) than global credit (31%) or private equity (30%). While management has noted that future buyout funds would be smaller in size than their predecessors, we have been a bit surprised by the muted inflows for the global credit unit. That said, with risk-free rates at elevated levels, there seems to be more competition for investor capital that might have previously gone into private debt funds in search of yield.
Given where interest rates are right now, capital markets activity is likely to remain low in the near term, resulting in a more muted level of near-term realizations, with transaction fees and performance-related earnings suffering as a result.
Management had expected fee-related earnings to be only modestly lower this year than in 2022, as long as it remained disciplined on cost controls. Results from the third quarter indicate that earnings are likely to be down by midsingle digits this year, as fee-related earnings declined 3.7% during the quarter and 4.9% year to date.
Revenue declined 44.6% in the third quarter and 24.9% year to date, slightly better than our projections for the full year, but top-line results have been weakening as the year has progressed, and we expect that to continue as we move through the final quarter of the year.
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