The Carlyle Group Inc (NASDAQ: CG)
Last Price: USD: 33.56|Fair Value: USD: 50.00
Business Strategy and Outlook
Carlyle Group has built a solid position in the alternative-asset management industry, using its reputation, broad product portfolio, investment performance track record and cadre of dedicated professionals to not only raise capital but to maintain its reputation as one of the go-to firms for institutional and high-net-worth investors looking for exposure to alternative assets. Unlike the more traditional asset managers, which have had to rely on investor inaction (driven by either good fund performance or investor inertia/uncertainty) to keep annual redemption rates low, the products offered by alternative asset managers can have lockup periods attached to them, which prevent investors from redeeming part or all of their investment for a prolonged period of time. Carlyle Group is one of the world’s largest alternative asset managers, with $376.4 billion in total assets under management, including $259.6 billion in fee-earning AUM, at the end of June 2022. The company’s portfolio is broadly diversified across business segments–private equity, which includes private equity, real estate, infrastructure and natural resources funds (accounting for 41% of fee-earning AUM and 65% of base management fees during 2021), global credit (45% and 24%) and investment solutions (14% and 11%)–and primarily serves clients in the institutional channel. With customer demand for alternatives increasing and investors in alternative assets attempting to limit the number of providers they use, larger-scale players like Carlyle Group are well positioned.
That said, investors in the firm are betting that the company’s solid investment track record and fundraising capabilities will continue. While Carlyle Group’s ability to earn excess returns over the next 10 years, it will become increasingly difficult for the company to do so longer term, as increased competition (including from more traditional asset managers like BlackRock), continued pressure on fees, and a general maturation of the segment (from a solid period of above average growth due to shifting investor demand for alternatives) weigh on results.
Financial Strength
Carlyle Group’s business model depends heavily on having fully functioning credit and equity markets that will allow its investment funds to not only arrange financing for leveraged buyouts and/or additional debt issuances for the companies it operates but cash out of them once they’ve run their course. While the company saved itself a lot of headaches during the collapse of the credit and equity markets during the 2008-09 financial crisis by having relatively little debt on its own books, debt levels have crept up over the past 10 years. Given that asset managers like Carlyle Group have a high degree of revenue cyclicality and operating leverage and are generally asset-light, they should not maintain more than low to moderate levels of financial leverage. The company entered 2022 with $2.1 billion in longer-term debt (on a principal basis), with close to 70% of that amount coming due during 2030-50. The company also has a $1 billion revolving credit facility that expires in April 2027, with no balance outstanding at the end of June 2022. Assuming the company closes out the year in line with the projections, Carlyle Group should enter 2023 with a debt/total capital ratio of 24%, debt/EBITDA at 1.9 times, and interest coverage of more than 10 times. On the distribution front, share repurchases have been rare over the past decade, with the company repurchasing far less stock than it issued. Dividend payments, meanwhile, exceeded $4.8 billion during 2012-21 but are expected to account for only around 30% of distributable earnings annually going forward.
Bulls Say’s
Company Profile
Carlyle Group is one of the world’s largest alternative asset managers, with $376.4 billion in total assets under management, including $259.6 billion in fee-earning AUM, at the end of June 2022. The company has three core business segments: private equity, which includes private equity, real estate, infrastructure and natural resources funds (accounting for 41% of fee-earning AUM and 65% of base management fees during 2021), global credit (45% and 24%) and investment solutions (14% and 11%). The firm primarily serves institutional investors and high-net-worth individuals. Carlyle operates through 29 offices across five continents, serving close to 2,700 active carry fund investors from 95 countries.
(Source: MorningStar)
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