Carlyle Group: Lowering Our Fair Value Estimate in the Face of Continued Market Headwinds

We’ve lowered our fair value estimate for narrow-moat Carlyle Group CG to $32 per share from $35 after updating our valuation model to include weaker fundraising and realizations, as well as heightened redemptions, in the near term, which will have a dampening effect on assets under management. Looking back over the first quarter of 2023, activity levels for investments, realizations, and fundraising were all more muted than expectations. 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 Group expects to raise more capital this year than they 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 in size that 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. What affects our fair value estimate more than this modest reduction in near-term results is the expectations for weaker fundraising and realizations beyond 2023, which affect future revenue and fee-related and distributable earnings. Overall, we expect Carlyle to generate adjusted organic assets under management growth of 1.6% annually during 2023-27 and produce adjusted operating margins of 38.1% on average annually the next five years (having produced margins of 42.3% in 2022). While realizations are difficult to predict, we believe the firm will continue to benefit from the fee-based components of its earnings (even with fees eventually being pressured) as fee-paying assets increase in size over time.