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Carlyle Group Earnings: Weaker-Than-Expected Forward Guidance Tanks the Company’s Shares

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The Carlyle Group Inc
(CG)

Following a weaker-than-expected first quarter from Carlyle Group CG, as well as a fairly dire projection for results over the remainder of 2023, we expect to lower our fair value estimate for the narrow-moat firm by more than 10% (which is our best guess right now as we’ve yet to fully integrate these results and expectations into our valuation). The shares have sold off heavily May 4, but even with them trading at a moderate discount to our expected revised fair value estimate, we would recommend that shareholders wait for a much deeper discount before considering buying the shares.

Looking back over the March quarter, activity levels for investments, realizations, and fundraising were all more muted than expectations, with management expecting these headwinds to persist for the remainder of the year, impacting both fee-related earnings and distributable earnings (which remove the effects of unrealized activity). While Carlyle Group 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 be smaller in size than their predecessors).

Capital markets activity is also likely 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. Even so, management expects fee-related earnings to be only modestly lower this year than in 2022, as long as they remain disciplined on cost controls. Impacting our fair value estimate more than this modest reduction in near-term results are the expectations for weaker fundraising and realizations beyond 2023, which impact future revenue and fee-related and distributable earnings.

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

Strategist
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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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