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Carlyle Group Earnings: Decline in Revenue and Profits Less Than Expected, but Headwinds Remain

Financial Services Sector artwork

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Greggory Warren

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Greggory Warren, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the traditional U.S.-and Canadian-based asset managers, as well as Berkshire Hathaway.

Before assuming his current role in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies. Before joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than seven years, covering consumer staples and consumer cyclicals.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago. During 2014-19, Warren was selected to participate on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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