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 second-quarter results to alter our long-term view of the firm. We expect to leave our $32 per share fair value estimate in place and view the shares as being fairly valued right now.

Looking back over the June quarter, activity levels for investments, realizations, and fundraising remained muted. Management expects these headwinds to persist for the remainder of the year, affecting both fee-related earnings and distributable earnings (which remove the effects of unrealized activity). While Carlyle expects to raise more capital this year than it did in 2022, fundraising is likely to skew more heavily toward global credit and investment solutions than private equity (with future buyout funds expected to smaller than their predecessors).

Given where interest rates are right now, capital markets activity is also likely to be lower in the near term than previously expected, resulting in a more muted level of near-term realizations, with transaction fees and performance-related earnings suffering as a result.

While 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 second quarter hint that this may no longer be the case, as fee-related earnings declined 12.3% year over year (with the firm’s fee-related earnings declining 4.5% during the first half of the year).

Total revenue declined 15.8% year over year during the June quarter, offset somewhat by a 2.2% increase in management and advisory fees. This left first-half revenue down 10.7% relative to the year-ago period, slightly better than our projections for the full year, but we would note that results for the firm have been weakening as we’ve moved through the first six months of the 2023, and we expect that to continue as we move through the back half of the year.