THE CARLYLE GROUP INC. OnJanuary 1, 2020 , we completed our conversion from aDelaware limited partnership namedThe Carlyle Group L.P. into aDelaware corporation namedThe Carlyle Group Inc. Pursuant to the Conversion, at the specified effective time onJanuary 1, 2020 , each common unit ofThe Carlyle Group L.P. outstanding immediately prior to the effective time converted into one share of common stock ofThe Carlyle Group Inc. and each special voting unit and general partner unit was canceled for no consideration. In addition, holders of the partnership units inCarlyle Holdings I L.P. ,Carlyle Holdings II L.P. , andCarlyle Holdings III L.P. exchanged such units for an equivalent number of shares of common stock and certain other restructuring steps occurred (the conversion, together with such restructuring steps and related transactions, the "Conversion"). Unless the context suggests otherwise, references in this report to "Carlyle," the "Company," "we," "us" and "our" refer (i) prior to the consummation of the Conversion toThe Carlyle Group L.P. and its consolidated subsidiaries and (ii) from and after the consummation of the Conversion toThe Carlyle Group Inc. and its consolidated subsidiaries. References to our common stock in periods prior to the Conversion refer to the common units ofThe Carlyle Group L.P. The following discussion analyzes the financial condition and results of operations of TheCarlyle Group Inc. (the "Company"). Such analysis should be read in conjunction with the consolidated financial statements and the related notes included in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K for the year endedDecember 31, 2020 . Overview We conduct our operations through three reportable segments: Global Private Equity, Global Credit, and Global Investment Solutions. •Global Private Equity - Our Global Private Equity segment advises our buyout, middle market and growth capital funds, ourU.S. and internationally focused real estate funds, our natural resources funds, and our Legacy Energy funds (as defined below). The segment also includes the NGP Predecessor Funds and NGP Carry Funds advised by NGP. As ofSeptember 30, 2021 , our Global Private Equity segment had$161 billion in AUM and$90 billion in Fee-earning AUM. •Global Credit - Our Global Credit segment advises funds and vehicles that pursue investment strategies including loans and structured credit, direct lending, opportunistic credit, distressed credit, and aircraft financing and servicing. As ofSeptember 30, 2021 , our Global Credit segment had$66 billion in AUM and$48 billion in Fee-earning AUM. •Global Investment Solutions - Our Global Investment Solutions segment advises fund of funds programs and related co-investment and secondary activities. As ofSeptember 30, 2021 , our Global Investment Solutions segment had$66 billion in AUM and$38 billion in Fee-earning AUM. Our Investment Solutions segment also includedMetropolitan Real Estate ("MRE") prior to its sale onApril 1, 2021 . We earn management fees pursuant to contractual arrangements with the investment funds that we manage and fees for transaction advisory and oversight services provided to portfolio companies of these funds. We also typically receive from an investment fund either an incentive fee or a special residual allocation of income, which we refer to as a performance allocation, or carried interest, in the event that specified investment returns are achieved by the fund. UnderU.S. generally accepted accounting principles ("U.S. GAAP"), we are required to consolidate some of the investment funds that we advise. However, for segment reporting purposes, we present revenues and expenses on a basis that deconsolidates these investment funds. Accordingly, our segment revenues primarily consist of fund management and related advisory fees, realized performance revenues (consisting of incentive fees and performance allocations), realized principal investment income, including realized gains on our investments in our funds and other trading securities, as well as interest and other income. Our segment expenses primarily consist of compensation and benefits expenses, including salaries, bonuses, realized performance payment arrangements, and general and administrative expenses. While our segment expenses include depreciation and interest expense, our segment expenses exclude acquisition and disposition related charges and amortization of intangibles and impairment. Refer to Note 14 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on the differences between our financial results reported pursuant toU.S. GAAP and our financial results for segment reporting purposes. Our Family of Funds The following chart presents the name (acronym), total capital commitments (in the case of our carry funds, structured credit funds, and the NGP Predecessor Funds), assets under management (open-end products and non-carry Aviation vehicles), gross assets (in the case of our BDCs) and vintage year of the active funds in each of our segments, as ofSeptember 30, 2021 . We present total capital commitments (as opposed to assets under management) for our closed-end investment funds because 69
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we believe this metric provides the most useful information regarding the
relative size and scale of such funds. In the case of our products which are
open-ended and accordingly do not have permanent committed capital, we generally
believe the most useful metric regarding relative size and scale is assets under
management.
Global Private Equity1 Global Credit
Corporate Private Equity Real Estate Carry Funds Liquid Credit
Carlyle Partners (U.S.) Carlyle Realty
Partners (U.S.) Cash CLOs
CP VIII $10.5 bn 2021 CRP IX $7.3 bn 2021 U.S. $24.3 bn 2012-2021
CP VII $18.5 bn 2018 CRP VIII $5.5 bn 2017 Europe €8.1 bn 2013-2021
CP VI $13.0 bn 2014 CRP VII $4.2 bn 2014 Structured Credit Funds
CP V $13.7 bn 2007 CRP VI $2.3 bn 2011 CREV $0.5 bn 2020
Global Financial Services Partners CRP V $3.0 bn 2006 CSC $0.8 bn 2017
CGFSP III $1.0 bn 2018 CRP IV $1.0 bn 2005 Illiquid Credit
CGFSP II $1.0 bn 2013 Core Plus Real Estate (U.S.) Business Development Companies3
Carlyle Europe Partners CPI4 $6.4 bn 2016 TCG BDC II, Inc. $2.3 bn 2017
CEP V €6.4 bn 2018 International Real Estate TCG BDC, Inc. $2.0 bn 2013
CEP IV €3.8 bn 2014 CER II €0.3 bn 2021 Opportunistic Credit Carry Funds
CEP III €5.3 bn 2007 CER I €0.5 bn 2017 CCOF II $3.0 bn 2020
CEP II €1.8 bn 2003 CEREP III €2.2 bn 2007 CCOF $2.4 bn 2017
Carlyle Asia Partners Natural Resources Funds Distressed Credit Carry Funds
CAP V $6.6 bn 2018 NGP Energy Carry Funds CSP IV $2.5 bn 2016
CBPF II RMB 2.0 bn 2017 NGP XII $4.3 bn 2017 CSP III $0.7 bn 2011
CAP IV $3.9 bn 2014 NGP XI $5.3 bn 2014 CSP II $1.4 bn 2007
CAP III $2.6 bn 2008 NGP X $3.6 bn 2012 Real Assets Credit
Carlyle Japan Partners Other NGP Carry Funds Infrastructure Credit Carry Fund
CJP IV ¥258.0 bn 2020 NGP Minerals $0.3 bn 2020 CICF $0.1 bn 2021
CJP III ¥119.5 bn 2013 NGP GAP $0.4 bn 2014 Energy Credit Carry Funds
CJP II ¥165.6 bn 2006 NGP Predecessor Funds CEMOF II $2.8 bn 2015
Carlyle Global Partners Various2 $5.7 bn 2007-2008 CEMOF I $1.4 bn 2011
CGP II $1.8 bn 2020 International Energy Carry Funds Carlyle Aviation Partners
CGP I $3.6 bn 2015 CIEP II $2.3 bn 2019 SASOF V $1.0 bn 2020
Carlyle MENA Partners CIEP I $2.5 bn 2013 SASOF IV $1.0 bn 2018
MENA I $0.5 bn 2008 Infrastructure Funds SASOF III $0.8 bn 2015
Carlyle South American Buyout Fund CRSEF $0.7 bn 2019 SASOF II $0.6 bn 2012
CSABF I $0.8 bn 2009 CGIOF $2.2 bn 2019 CALF $0.6 bn 2020
Carlyle Sub-Saharan Africa Fund CPP II $1.5 bn 2014 Securitization Vehicles4 $3.1 bn Various
CSSAF I $0.7 bn 2012 CPOCP $0.5 bn 2013 9 Other Vehicles4 $2.7 bn Various
Carlyle Peru Fund Other Credit
CPF I $0.3 bn 2012 CTAC3 $0.5 bn 2018
Carlyle U.S. Venture/Growth Partners Fortitude5 $3.0 bn 2020
CP Growth $1.1 bn 2021
CEOF II $2.4 bn 2015 Global Investment Solutions6
CEOF I $1.1 bn 2011 AlpInvest
CVP II $0.6 bn 2001 Fund of Private Equity Funds
Carlyle Europe Technology Partners 112 vehicles €47.3 bn 2000-2021
CETP IV €1.4 bn 2019 Secondary Investments
CETP III €0.7 bn 2014 89 vehicles €25.5 bn 2002-2021
Carlyle Asia Venture/Growth Partners Co-Investments
CAP Growth II $0.7 bn 2021 83 vehicles €20.4 bn 2002-2021
CAP Growth I $0.3 bn 2017
CAGP IV $1.0 bn 2008
Carlyle Cardinal Ireland
CCI €0.3 bn 2014
Note: All amounts shown represent total capital commitments as of September 30,
2021 unless otherwise noted. Certain of our recent vintage funds are currently
in fundraising and total capital commitments are subject to change. In addition,
certain carry funds included herein may be disclosed which are not
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included in fund performance if they have not made an initial capital call or
commenced investment activity. The NGP funds are advised by NGP Energy Capital
Management, LLC , a separately registered investment adviser, and we do not serve
as an investment adviser to those funds.
(1)Global Private Equity also includes funds which we jointly advise with
Riverstone Holdings L.L.C. (the "Legacy Energy funds"). The impact of these
funds is no longer significant to our results of operations.
(2)Includes NGP M&R, NGP ETP II, and NGP IX, on which we are not entitled to a
share of carried interest.
(3)Amounts represent gross assets plus any available capital as of September 30,
2021 .
(4)Amounts represent Total AUM as of September 30, 2021 .
(5)Includes capital raised from a strategic third-party investor which directly
invests in Fortitude Holdings alongside Carlyle FRL.
(6)On April 1, 2021 , we completed the sale of our interest in Metropolitan Real
Estate .
Trends Affecting our Business
The pace of global growth weakened in the third quarter of 2021 due to the rise
of the COVID-19 Delta variant and persistence of global value chain disruptions.
The International Monetary Fund modestly reduced its forecast for global growth
in 2021 to 5.9%, down from its forecast of 6.0% earlier this year. Our
proprietary data suggest that U.S. gross domestic product (GDP) growth slowed as
the spread of the Delta variant depressed spending on travel, tourism, and live
events. Durable good spending growth moderated due to waning fiscal stimulus.
Our preliminary estimates suggest growth in much of the rest of the world also
decelerated relative to the second quarter amid renewed COVID safety protocols,
lockdowns in Asia , and virus-related disruptions to the global value chain.
Elevated levels of inflation have proven to be more persistent than previously
anticipated as health restrictions have slowed the normalization of spending
from durable goods to travel, tourism and live events. In the U.S. , CPI
inflation increased at a 5.4% annual rate in Q3 2021, up from 1.3% a year ago
and an average of 1.7% over the prior 10 years. The late-2020 and early 2021
boom in durable goods spending liquidated global manufacturing inventories of
finished and intermediate goods and restocking these items has proved difficult
due to inadequate capacity, complex and fragile production networks, and a
resurgent virus. Low inventory levels leave global value chains with little
margin for error, further stressing the system as late deliveries cause
downstream producers to scale back production. In addition, global supply
constraints and rising energy demand spurred sharp increases in global energy
prices and elevated shipping costs, further fueling inflationary pressures
around the world in the third quarter.
Labor shortages continue to be observed across our portfolio, as the U.S. labor
force participation rate remains approximately 2% below its pre-pandemic peak,
leading to a 4.5 million shortfall of eligible workers. Despite slowing demand
for labor observed in August and September, the Federal Reserve signaled that it
is still on track to begin tapering its purchase of assets by the end of the
year with Federal Open Market Committee members divided on whether the first
interest rate hike will be in 2022 or 2023.
The Chinese economy slowed in the third quarter of 2021 to year-over-year GDP
growth of 4.9%, down from 7.9% in the second quarter of 2021. The slowdown is
partially attributable to a sharp decline in real estate development activity
and sales, which has contributed to solvency concerns at China Evergrande Group ,
a large developer of multifamily residential properties. While Carlyle's current
exposure to the real estate sector in China and its constituent businesses is
insignificant, these challenges follow closely on the heels of changes to the
regulatory treatment of the technology and for-profit education sectors that had
previously increased China -specific market volatility. China remains an
important component of Carlyle's investment platform and market adjustments
to-date mainly reflect increases in the risk premium investors earn for China
exposure rather than deterioration in company-specific fundamentals.
In equity markets, the third quarter began much like the second quarter with
major indices reaching record highs in July and August. Markets became volatile
in September, however, as "stagflationary" signs emerged: growth slowed even as
commodity prices rose and inflation remained elevated. Third quarter corporate
earnings are expected to increase 30% from year-ago levels but are expected to
be down 5% quarter-over-quarter from strong second quarter 2021 results. In the
third quarter, the Dow Jones declined 1.9%, while the S&P 500 and NASDAQ 100
gained by 0.2% and 0.9%, respectively. Globally, over the third quarter of 2021,
the MSCI All Country World Index (ACWI) and Shanghai Composite declined 1.5% and
0.6% respectively, while the EuroStoxx 600 rose 0.4%.
At the end of the third quarter U.S. Ten Year Treasury note yields rose 45 basis
points to 1.58% from mid-third quarter lows of 1.14% as bond markets reacted to
more persistent inflation and the looming end of Federal Reserve asset
purchases. Despite the increase, the 10-year yield remains roughly 20 basis
points below (already historically low) levels that prevailed at the onset of
the pandemic. Single B-rated and sub-investment grade U.S corporate spreads rose
19 and 16 basis points, respectively, but remain near all-time lows.
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During the third quarter, our carry fund portfolio extended the strong positive
trend experienced since the first quarter of 2020, appreciating 7% in the third
quarter and 33% year-to-date. Within our Global Private Equity segment, our
corporate private equity funds appreciated 4% in the third quarter driven by
strong gains in our U.S. and Europe portfolios, our real estate funds
appreciated 9% in the third quarter, continuing their attractive performance,
and our natural resources funds appreciated 7%, boosted by the strong commodity
prices. In our Global Credit segment, our carry funds (which represent
approximately 18% of the total Global Credit remaining fair value) appreciated
3% in the third quarter, reflecting continued positive portfolio company
performance. While the publicly traded investments in our Global Private Equity
and Global Credit segments depreciated 1% in the third quarter, they have
experienced appreciation of 30% year to date. Our Global Investment Solutions
funds appreciated 10% in the third quarter, which generally reflects investment
fair values on a one-quarter lag in the valuations of our primary and secondary
fund of funds.
With continued positive impact from valuations across the portfolio, net accrued
performance revenues on our balance sheet remained at a near record high level
at $3.9 billion at September 30, 2021 despite the realization of $533.5 million
in net performance revenues during the third quarter. The portion of our
traditional carry funds attributable to publicly traded companies is 16% of fair
value as of September 30, 2021 , compared to 15% as of December 31, 2020 and 6%
as of December 31, 2019 . While our publicly traded investments have performed
well to date overall, this shift may result in an increasing correlation to
public market performance and a significant concentration of investment gains in
individual investments for certain funds. To the extent that there is volatility
in public equity markets and/or the prices of our publicly-traded portfolio
companies, there may be elevated volatility in our performance revenue accrual
in the coming quarters. For example, as of September 30, 2021 , approximately 34%
of our net accrued performance revenues were generated by Carlyle Partners VI,
L.P. ("CP VI"), which has nearly 65% of its remaining fair value in
publicly-traded portfolio companies.
We reached record levels of realized proceeds, generating $13.9 billion in
realized proceeds from our carry funds in the third quarter and $29.0 billion
year to date. This contributed to the record realized net performance revenues
as well as record realized investment income recognized in the quarter. We
believe that the strong underlying performance of many of our portfolio
companies and our maturing portfolio position us well to deliver higher levels
of both realized proceeds and realized performance revenue over the long term.
Additionally, we have announced several exit transactions that we expect will
close over the next two quarters, which we anticipate will generate at least
$450 million of net realized performance revenues, including Atotech and
Pharmaceutical Product Development in CP VI.
During the third quarter, our carry funds invested $6.3 billion in new or
follow-on transactions, and we have announced and/or signed more than $6 billion
of new or follow-on transactions that are expected to close in the coming
quarters. We have deployed capital at a record pace, investing more than $29
billion over the last twelve months, and we anticipate the high level of market
activity and opportunities for large buyouts will facilitate strong deployment
activity throughout the remainder of 2021 and into 2022, particularly in the
healthcare, technology, and consumer sectors.
At our Investor Day in February 2021 , we announced our goal of raising at least
$130 billion by the end of 2024. Fundraising has been strong during the first
three quarters of this year, and we are attracting significant amounts of new
capital for some of our large successor funds. We raised $21.7 billion in new
capital in the third quarter, with the first closing in our eighth U.S. Buyout
fund, the closing of several new CLOs in Global Credit, and continued strength
in Global Investment Solutions. We have raised $39.9 billion year to date. Much
of this recently raised capital is included in pending Fee-earning AUM for which
fees have not yet been activated, the balance of which was $29.8 billion as of
September 30, 2021 , and we expect much of it to move into Fee-earning AUM in the
fourth quarter as we activate fees on this capital.
We are closely evaluating the financial and other proposals put forth by the
current Administration and Congress and their potential impacts on our business.
While there may be changes to current tax and regulatory regimes, recent fiscal
stimulus and proposed infrastructure packages could be followed by longer-term
spending increases. The potential for policy changes may create regulatory
uncertainty for our portfolio companies and our investment strategies and could
adversely affect our profitability and the profitability of our portfolio
companies.
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Recent Transactions
Sale of Brazilian Management Entity
On August 31, 2021 , we sold 100% of our interest in our local Brazilian
management entity and entered into a sub-advisory agreement with the acquiring
company, which will provide advisory services with respect to Carlyle's
Brazilian portfolio. We recorded a loss on the sale and related transaction
costs of $4.7 million , which are included in other non-operating expenses
(income) on the unaudited condensed consolidated statements of operations, as
well as a foreign currency translation loss of $14.7 million related to amounts
previously recorded in accumulated other comprehensive income, which is
primarily included in general, administrative and other expenses on the
unaudited condensed consolidated statements of operations. We exclude these
amounts from our Non-GAAP financial measures, based on our definitions of
Distributable Earnings and Fee Related Earnings.
Dividends
In October 2021 , the Company's Board of Directors declared a quarterly dividend
of $0.25 per share to common stockholders of record at the close of business on
November 9, 2021 , payable on November 17, 2021 .
Key Financial Measures
Our key financial measures are discussed in the following pages. Additional
information regarding these key financial measures and our other significant
accounting policies can be found in Note 2 to the unaudited condensed
consolidated financial statements included in this Quarterly Report on Form
10-Q.
Revenues
Revenues primarily consist of fund management fees, incentive fees, investment
income (including performance allocations), realized and unrealized gains of our
investments in our funds and other principal investments, as well as interest
and other income.
Fund Management Fees. Fund management fees include management fees and
transaction and portfolio advisory fees. We earn management fees for advisory
services we provide to funds in which we hold a general partner interest or with
which we have an investment advisory or investment management agreement.
Additionally, management fees include catch-up management fees, which are
episodic in nature and represent management fees charged to fund investors in
subsequent closings of a fund which apply to the time period between the fee
initiation date and the subsequent closing date. Approximately 90% of our fee
revenue is in the form of management fees from traditional closed-end,
long-dated funds, which are highly predictable and stable, and do not have
significant exposure to the underlying fund valuations. Approximately 98% of our
Fee-earning AUM is in fund structures with contractual lives of generally ten
years, and is not subject to redemption without cause.
Management fees attributable to Carlyle Partners VII, L.P. ("CP VII"), our
seventh U.S. buyout fund with $17.5 billion of Fee-earning AUM as of
September 30, 2021 were approximately 15% and 16% of fund management fees
recognized during the three and nine months ended September 30, 2021 ,
respectively, and 17% of fund management fees recognized during both the three
and nine months ended September 30, 2020 . No other fund generated over 10% of
fund management fees in the periods presented.
Fund management fees exclude the reimbursement of any partnership expenses paid
by the Company on behalf of the Carlyle funds pursuant to the limited
partnership agreements, including amounts related to the pursuit of actual,
proposed, or unconsummated investments, professional fees, expenses associated
with the acquisition, holding and disposition of investments, and other fund
administrative expenses.
Transaction and Portfolio Advisory Fees. Transaction and portfolio advisory fees
generally include fees we receive for the transaction and portfolio advisory
services we provide to our portfolio companies. When covered by separate
contractual agreements, we recognize transaction and portfolio advisory fees for
these services when the performance obligation has been satisfied and collection
is reasonably assured. We are required to offset our fund management fees earned
by a percentage of the transaction and advisory fees earned, which we refer to
as the "rebate offsets." Historically, such rebate offset percentages generally
approximated 80% of the fund's portion of the transaction and advisory fees
earned. However, the percentage of transaction and portfolio advisory fees we
share with our investors on our recent vintage funds has generally increased,
and as such the rebate offset percentages generally range from 80% to 100% of
the fund's portion of the transaction and advisory fees earned, such that a
larger share of the transaction fee revenue we retain is driven by co-investment
activity. In addition, Carlyle Global Capital Markets ("GCM") generates capital
markets fees in connection with activities related to the underwriting, issuance
and placement of debt and equity securities, and loan syndication for our
portfolio companies and third-party clients, which are generally not subject to
rebate offsets with respect to our most recent vintages (but are subject to the
rebate offsets set forth above for older funds). Underwriting fees include
gains, losses and fees arising from securities offerings in which we participate
in the underwriter syndicate. The recognition of portfolio advisory fees,
transactions fees, and capital markets fees
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can be volatile as they are primarily generated by investment activity within
our funds, and therefore are impacted by our investment pace.
Incentive Fees. Incentive fees consist of performance-based incentive
arrangements pursuant to management contracts, primarily from certain of our
Global Credit funds, when the return on assets under management exceeds certain
benchmark returns or other performance targets. In such arrangements, incentive
fees are recognized when the performance benchmark has been achieved.
Investment Income. Investment income consists of our performance allocations as
well as the realized and unrealized gains and losses resulting from our equity
method investments and other principal investments.
Performance allocations consist principally of the performance-based capital
allocation from fund limited partners to us, commonly referred to as carried
interest, from certain of our investment funds, which we refer to as the "carry
funds." Carried interest revenue is recognized by Carlyle upon appreciation of
the valuation of our funds' investments above certain return hurdles as set
forth in each respective partnership agreement and is based on the amount that
would be due to us pursuant to the fund partnership agreement at each period end
as if the funds were liquidated at such date. Accordingly, the amount of carried
interest recognized as performance allocations reflects our share of the fair
value gains and losses of the associated funds' underlying investments measured
at their then-current fair values relative to the fair values as of the end of
the prior period. As a result, the performance allocations earned in an
applicable reporting period are not indicative of any future period, as fair
values are based on conditions prevalent as of the reporting date. Refer to "-
Trends Affecting our Business" for further discussion.
In addition to the performance allocations from our Global Private Equity funds
and closed-end carry funds in the Global Credit segment, we are also entitled to
receive performance allocations from our Global Investment Solutions, Carlyle
Aviation and NGP Carry Funds. We also retained our interest in the net accrued
performance allocations of existing funds at the time of the sale of MRE. The
timing of performance allocations realizations for these funds is typically
later than in our other carry funds based on the terms of such arrangements.
Our performance allocations are generated by a diverse set of funds with
different vintages, geographic concentration, investment strategies and industry
specialties. For an explanation of the fund acronyms used throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations section, refer to "- Our Family of Funds."
Performance allocations in excess of 10% of the total for the three and nine
months ended September 30, 2021 and 2020 were generated from the following
funds:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars in millions)
CP VI $ 109.9 CP VI $ 118.4 CP VI $ 1,177.7 CP VI $ 686.0
CRP VIII 105.9 CAP IV 99.5 CEP IV 538.2 CAP IV 290.0
CIEP (160.1)
No other fund generated over 10% of performance allocations in the periods
presented above. Performance allocations from CP VI during the three and nine
months ended September 30, 2021 were driven by appreciation across the
portfolio, with notable increases in the values of the publicly traded
investments in the portfolio and private investments with pending sale
transactions.
Under our arrangements with the historical owners and management team of
AlpInvest , we generally do not retain any carried interest in respect of the
historical investments and commitments to our fund vehicles that existed as of
July 1, 2011 (including any options to increase any such commitments exercised
after such date). We are entitled to 15% of the carried interest in respect of
commitments from the historical owners of AlpInvest for the period between 2011
and 2020, except in certain instances, and 40% of the carried interest in
respect of all other commitments (including all future commitments from third
parties). In certain instances, carried interest associated with the AlpInvest
fund vehicles is subject to entity level income taxes in the Netherlands .
Realized carried interest may be clawed back or given back to the fund if the
fund's investment values decline below certain return hurdles, which vary from
fund to fund. When the fair value of a fund's investments remains constant or
falls below certain return hurdles, previously recognized performance
allocations are reversed. In all cases, each investment fund is considered
separately in evaluating carried interest and potential giveback obligations.
For any given period, performance allocations revenue on our statement of
operations may include reversals of previously recognized performance
allocations due to a decrease in the value of a particular fund that results in
a decrease of cumulative performance allocations earned to date.
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Since fund return hurdles are cumulative, previously recognized performance
allocations also may be reversed in a period of appreciation that is lower than
the particular fund's hurdle rate. Additionally, unrealized performance
allocations reverse when performance allocations are realized, and unrealized
performance allocations can be negative if the amount of realized performance
allocations exceed total performance allocations generated in the period. For
the three months ended September 30, 2021 and 2020, the reversals of performance
allocations were $73.4 million and $30.1 million , respectively. For the nine
months ended September 30, 2021 and 2020, the reversals of performance
allocations were $23.3 million and $487.7 million , respectively.
As of September 30, 2021 , accrued performance allocations and accrued giveback
obligations were $8.1 billion and $24.7 million , respectively. Each balance
assumes a hypothetical liquidation of the funds' investments at September 30,
2021 at their then current fair values. These assets and liabilities will
continue to fluctuate in accordance with the fair values of the funds'
investments until they are realized. As of September 30, 2021 , $11.6 million of
the accrued giveback obligation is the responsibility of various current and
former senior Carlyle professionals and other limited partners of the Carlyle
Holdings partnerships, and the net accrued giveback obligation attributable to
the Company is $13.1 million . The Company uses "net accrued performance
revenues" to refer to the aggregation of the accrued performance allocations and
incentive fees net of (i) accrued giveback obligations, (ii) accrued performance
allocations and incentive fee-related compensation, (iii) performance
allocations and incentive fee-related tax obligations, and (iv) accrued
performance allocations and incentive fees attributable to non-controlling
interests and excludes any net accrued performance allocations and incentive
fees that have been realized but will be collected in subsequent periods. Net
accrued performance revenues as of September 30, 2021 are $3.9 billion .
In addition, realized performance allocations may be reversed in future periods
to the extent that such amounts become subject to a giveback obligation. If, at
September 30, 2021 , all investments held by our carry funds were deemed
worthless, the amount of realized and previously distributed performance
allocations subject to potential giveback would be approximately $1.0 billion on
an after-tax basis where applicable, of which approximately $0.5 billion would
be the responsibility of current and former senior Carlyle professionals. See
the related discussion of "Contingent Obligations (Giveback)" within "-
Liquidity and Capital Resources."
The following table summarizes the total amount of aggregate giveback
obligations that we have realized since Carlyle's inception. Given various
current and former senior Carlyle professionals and other former limited
partners of the Carlyle Holdings partnerships are responsible for paying the
majority of the realized giveback obligation, the table below also summarizes
the amount that was attributable to the Company:
Inception
through
Giveback Attributable to
Total Giveback Carlyle
(Dollars in millions)
Various Legacy Energy Funds $ 158.0 $ 55.0
All other Carlyle Funds 58.1 0.6
Aggregate Giveback since Inception $ 216.1 $ 55.6
The funding for employee obligations and givebacks related to carry realized
pre-IPO is primarily through a collection of employee receivables related to
giveback obligations and from non-controlling interests for their portion of the
obligation. The realization of giveback obligations for the Company's portion of
such obligations reduces Distributable Earnings in the period realized and
negatively impacts earnings available for distributions to unitholders in the
period realized. Further, each individual recipient of realized carried interest
typically signs a guarantee agreement or partnership agreement that personally
obligates such person to return his/her pro rata share of any amounts of
realized carried interest previously distributed that are later clawed back.
Accordingly, carried interest as performance allocation compensation is subject
to return to the Company in the event a giveback obligation is funded.
Generally, the actual giveback liability, if any, does not become due until the
end of a fund's life.
Each investment fund is considered separately in evaluating carried interest and
potential giveback obligations. As a result, performance allocations within
funds will continue to fluctuate primarily due to certain investments within
each fund constituting a material portion of the carry in that fund.
Additionally, the fair value of investments in our funds may have substantial
fluctuations from period to period.
In addition, in our discussion of our non-GAAP results, we use the term
"realized net performance revenues" to refer to realized performance allocations
and incentive fees from our funds, net of the portion allocated to our
investment professionals, if any, and certain tax expenses associated with
carried interest attributable to certain partners and employees, which are
reflected as realized performance allocations and incentive fees related
compensation expense. See "- Non-GAAP Financial
75
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Measures" for the amount of realized net performance revenues recognized each
period. See "- Segment Analysis" for the realized net performance revenues by
segment and related discussion for each period.
Investment income also represents the realized and unrealized gains and losses
on our principal investments, including our investments in Carlyle funds that
are not consolidated, as well as any interest and other income. Investment
income also includes the related amortization of the basis difference between
the carrying value of our investment and our share of the underlying net assets
of the investee, as well as the compensation expense associated with
compensatory arrangements provided by us to employees of our equity method
investee, as it relates to our investments in NGP. Principal investment income
also included our proportionate share of U.S. GAAP earnings from our strategic
investment in Fortitude Holdings prior to the contribution of our investment to
a Carlyle-affiliated investment fund (see Note 4). Realized principal investment
income (loss) is recorded when we redeem all or a portion of our investment or
when we receive or are due cash income, such as dividends or distributions. A
realized principal investment loss is also recorded when an investment is deemed
to be worthless. Unrealized principal investment income (loss) results from
changes in the fair value of the underlying investment, as well as the reversal
of previously recognized unrealized gains (losses) at the time an investment is
realized.
Fair Value Measurement. U.S. GAAP establishes a hierarchical disclosure
framework which ranks the observability of market price inputs used in measuring
financial instruments at fair value. The observability of inputs is impacted by
a number of factors, including the type of financial instrument, the
characteristics specific to the financial instrument and the state of the
marketplace, including the existence and transparency of transactions between
market participants. Financial instruments with readily available quoted prices,
or for which fair value can be measured from quoted prices in active markets,
will generally have a higher degree of market price observability and a lesser
degree of judgment applied in determining fair value.
The table below summarizes the valuation of investments and other financial
instruments included within our AUM, by segment and fair value hierarchy levels,
as of September 30, 2021 :
As of September 30, 2021
Global
Private Global
Equity Credit Global Investment Solutions Total
Consolidated Results (Dollars in millions)
Level I $ 12,197 $ 260 $ 1,856 $ 14,313
Level II 4,960 1,315 237 6,512
Level III 89,532 54,036 39,809 183,377
Fair Value of Investments 106,689 55,611 41,902 204,202
Available Capital 54,464 10,727 23,684 88,875
Total AUM $ 161,153 $ 66,338 $ 65,586 $ 293,077
Interest and Other Income of Consolidated Funds. Interest and other income of
Consolidated Funds primarily represents the interest earned on CLO assets.
However, the Consolidated Funds are not the same entities in all periods
presented. The Consolidated Funds in future periods may change due to changes in
fund terms, formation of new funds, and terminations of funds.
Net Investment Gains (Losses) of Consolidated Funds. Net investment gains
(losses) of Consolidated Funds measures the change in the difference in fair
value between the assets and the liabilities of the Consolidated Funds. A gain
(loss) indicates that the fair value of the assets of the Consolidated Funds
appreciated more (less), or depreciated less (more), than the fair value of the
liabilities of the Consolidated Funds. A gain or loss is not necessarily
indicative of the investment performance of the Consolidated Funds and does not
impact the management or incentive fees received by Carlyle for its management
of the Consolidated Funds. The portion of the net investment gains (losses) of
Consolidated Funds attributable to the limited partner investors is allocated to
non-controlling interests. Therefore a gain or loss is not expected to have a
material impact on the revenues or profitability of the Company. Moreover,
although the assets of the Consolidated Funds are consolidated onto our balance
sheet pursuant to U.S. GAAP, ultimately we do not have recourse to such assets
and such liabilities are generally non-recourse to us. Therefore, a gain or loss
from the Consolidated Funds generally does not impact the assets available to
our equity holders.
Expenses
Compensation and Benefits. Compensation includes salaries, bonuses, equity-based
compensation, and performance payment arrangements. Bonuses are accrued over the
service period to which they relate.
We recognize as compensation expense the portion of performance allocations and
incentive fees that are due to our employees, senior Carlyle professionals,
advisors, and operating executives in a manner consistent with how we recognize
the
76-------------------------------------------------------------------------------- performance allocations and incentive fee revenue. These amounts are accounted for as compensation expense in conjunction with the related performance allocations and incentive fee revenue and, until paid, are recognized as a component of the accrued compensation and benefits liability. Compensation in respect of performance allocations and incentive fees is paid when the related performance allocations and incentive fees are realized, and not when such performance allocations and incentive fees are accrued. The funds do not have a uniform allocation of performance allocations and incentive fees to our employees, senior Carlyle professionals, advisors, and operating executives. Therefore, for any given period, the ratio of performance allocations and incentive fee compensation to performance allocations and incentive fee revenue may vary based on the funds generating the performance allocations and incentive fee revenue for that period and their particular allocation percentages. In addition, we have implemented various equity-based compensation arrangements that require senior Carlyle professionals and other employees to vest ownership of a portion of their equity interests over a service period of generally one to four years, which underU.S. GAAP will result in compensation charges over current and future periods. During 2019 and 2020, we granted fewer equity awards than we had previously. For example, in 2018, 2019 and 2020, we granted approximately 13.3 million, 6.7 million and 3.7 million of restricted stock units and other awards, respectively. In 2021, we granted 7.0 million long-term strategic restricted stock units to certain senior professionals, the majority of which are subject to vesting based on the achievement of annual performance targets over four years, with a larger proportion of the awards vesting based on the 2024 performance year. As a result, the number of restricted stock units granted in 2021 is higher than in 2020, which, combined with a higher share price than in prior periods, will result in higher equity-based compensation expense in the coming years. Compensation charges associated with all equity-based compensation grants are excluded from Fee Related Earnings and Distributable Earnings. We may hire additional individuals and overall compensation levels may correspondingly increase, which could result in an increase in compensation and benefits expense. As a result of acquisitions, we have charges associated with contingent consideration taking the form of earn-outs and profit participation, some of which are reflected as compensation expense. General, Administrative and Other Expenses. General, administrative and other expenses include occupancy and equipment expenses and other expenses, which consist principally of professional fees, including those related to our global regulatory compliance program, external costs of fundraising, travel and related expenses, communications and information services, depreciation and amortization (including intangible asset amortization and impairment) and foreign currency transactions. We expect that general, administrative and other expenses will vary due to infrequently occurring or unusual items, such as impairment of intangible assets and expenses or insurance recoveries associated with litigation and contingencies. Also, in periods of significant fundraising, to the extent that we use third parties to assist in our fundraising efforts, our general, administrative and other expenses may increase accordingly. Additionally, we anticipate that general, administrative and other expenses will fluctuate from period to period due to the impact of foreign exchange transactions. Interest and Other Expenses of Consolidated Funds. The interest and other expenses of Consolidated Funds consist primarily of interest expenses related primarily to our CLO loans, professional fees and other third-party expenses. Income Taxes. Following the Conversion onJanuary 1, 2020 , all of the income before provision for income taxes attributable toThe Carlyle Group Inc. is subject toU.S. federal, state, and local corporate income taxes. Prior to the Conversion, the Company was generally organized as a series of pass through entities pursuant to the United States Internal Revenue Code. As such, the Company was not responsible for the tax liability due on certain income earned during the year. Such income was taxed at the unitholder and non-controlling interest holder level, and any income tax was the responsibility of the unitholders and is paid at that level. See Note 9 to the accompanying unaudited condensed consolidated financial statements for more information regarding the impact of the Conversion. Income taxes are accounted for using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized. The interim provision for income taxes is calculated using the discrete effective tax rate method as allowed by ASC 740, Accounting for Income Taxes. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year to date period as if it was the annual period and determines the income tax expense or benefit on that basis. In the normal course of business, we are subject to examination by federal and certain state, local and foreign tax regulators. With a few exceptions, as ofSeptember 30, 2021 , ourU.S. federal income tax returns for tax years 2017 through 2020 are open under the normal three-year statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit for tax years 2015 to 2020. Foreign tax returns are generally subject to audit for tax years 2011 to 2020. Certain of our affiliates are currently under audit by federal, state and foreign tax authorities. We do not believe the outcome of any future audit will have a material impact on our consolidated financial statements. 77 -------------------------------------------------------------------------------- Non-controlling Interests in Consolidated Entities. Non-controlling interests in consolidated entities represent the component of equity in consolidated entities not held by us. These interests are adjusted for general partner allocations. Earnings Per Common Share. We compute earnings per common share in accordance with ASC 260, Earnings Per Share. Basic earnings per common share is calculated by dividing net income (loss) attributable to the common shares of the Company by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the assumed conversion of all dilutive securities. We apply the treasury stock method to determine the dilutive weighted-average common shares represented by unvested restricted stock units. Non-GAAP Financial Measures Distributable Earnings. Distributable Earnings, or "DE", is a key performance benchmark used in our industry and is evaluated regularly by management in making resource deployment and compensation decisions, and in assessing the performance of our three segments. We also use DE in our budgeting, forecasting, and the overall management of our segments. We believe that reporting DE is helpful to understanding our business and that investors should review the same supplemental financial measure that management uses to analyze our segment performance. DE is intended to show the amount of net realized earnings without the effects of consolidation of the Consolidated Funds. DE is derived from our segment reported results and is an additional measure to assess performance and determine amounts potentially available for distribution to the Company's common stockholders. Distributable Earnings differs from income (loss) before provision for income taxes computed in accordance withU.S. GAAP in that it includes tax expenses associated with certain foreign performance revenues (comprised of performance allocations and incentive fees), and does not include unrealized performance allocations and related compensation expense, unrealized principal investment income, equity-based compensation expense, net income (loss) attributable to non-Carlyle interest in consolidated entities, or charges (credits) related to Carlyle corporate actions and non-recurring items. Charges (credits) related to Carlyle corporate actions and non-recurring items include: charges (credits) associated with acquisitions, dispositions, or strategic investments, changes in the tax receivable agreement liability, corporate conversion costs, amortization and any impairment charges associated with acquired intangible assets, transaction costs associated with acquisitions and dispositions, charges associated with earnouts and contingent consideration including gains and losses associated with the estimated fair value of contingent consideration issued in conjunction with acquisitions or strategic investments, impairment charges associated with lease right-of-use assets, gains and losses from the retirement of debt, charges associated with contract terminations and employee severance. We believe the inclusion or exclusion of these items provides investors with a meaningful indication of our core operating performance. This measure supplements and should be considered in addition to and not in lieu of the results of operations discussed further under "Consolidated Results of Operations" prepared in accordance withU.S. GAAP. Fee Related Earnings. Fee Related Earnings, or "FRE", is a component of DE and is used to assess the ability of the business to cover direct base compensation and operating expenses from total fee revenues. FRE differs from income (loss) before provision for income taxes computed in accordance withU.S. GAAP in that it adjusts for the items included in the calculation of DE and also adjusts DE to exclude net realized performance revenues, realized principal investment income from investments in Carlyle funds, net interest (interest income less interest expense), and certain general, administrative and other expenses when the timing of any future payment is uncertain. Operating Metrics We monitor certain operating metrics that are common to the asset management industry. Fee-earning Assets under Management. Fee-earning assets under management or Fee-earning AUM refers to the assets we manage or advise from which we derive recurring fund management fees. Our Fee-earning AUM is generally based on one of the following, once fees have been activated: (a)the amount of limited partner capital commitments, generally for carry funds where the original investment period has not expired, forAlpInvest carry funds during the commitment fee period (see "Fee-earning AUM based on capital commitments" in the table below for the amount of this component at each period); (b)the remaining amount of limited partner invested capital at cost, generally for carry funds and certain co-investment vehicles where the original investment period has expired and one of our business development companies (see "Fee-earning AUM based on invested capital" in the table below for the amount of this component at each period); (c)the amount of aggregate fee-earning collateral balance of our CLOs and other securitization vehicles, as defined in the fund indentures (typically exclusive of equities and defaulted positions) as of the quarterly cut-off date; 78 -------------------------------------------------------------------------------- (d)the external investor portion of the net asset value of our open-ended funds (pre redemptions and subscriptions), as well as certain carry funds (see "Fee-earning AUM based on net asset value" in the table below for the amount of this component at each period); (e)the gross assets (including assets acquired with leverage), excluding cash and cash equivalents, of one of our business development companies and certain carry funds (see "Fee-earning AUM based on lower of cost or fair value and other" in the table below for the amount of this component at each period); and (f)the lower of cost or fair value of invested capital, generally forAlpInvest carry funds where the commitment fee period has expired and certain carry funds where the investment period has expired, (see "Fee-earning AUM based on lower of cost or fair value and other" in the table below for the amount of this component at each period). The table below details Fee-earning AUM by its respective components at each period. As of September 30, 2021 2020 Consolidated Results (Dollars in millions) Components of Fee-earning AUM Fee-earning AUM based on capital commitments (1)$ 76,794 $ 74,761 Fee-earning AUM based on invested capital (2) 41,581 38,378 Fee-earning AUM based on collateral balances, at par (3) 29,191 26,326 Fee-earning AUM based on net asset value (4) 8,990 7,341
Fee-earning AUM based on lower of cost or fair value and other (5) 19,819
19,764
Balance, End of Period (6) (7) $
176,375
(1)Reflects limited partner capital commitments where the original investment period, weighted-average investment period, or commitment fee period has not expired. (2)Reflects limited partner invested capital at cost and includes amounts committed to or reserved for investments for certain Global Private Equity and Global Investment Solutions funds. (3)Represents the amount of aggregate Fee-earning collateral balances and principal balances, at par, for our CLOs/structured products. (4)Reflects the net asset value of certain other carry funds. (5)Includes funds with fees based on gross asset value. (6)Energy III, Energy IV, and Renew II (collectively, the "Legacy Energy Funds"), are managed withRiverstone Holdings LLC and its affiliates. Affiliates of both Carlyle and Riverstone act as investment advisors to each of the Legacy Energy Funds. Carlyle has a minority representation on the management committees of Energy IV and Renew II. Carlyle and Riverstone each hold half of the seats on the management committee of Energy III, but the investment period for this fund has expired and the remaining investments in such fund are being disposed of in the ordinary course of business. As ofSeptember 30, 2021 , the Legacy Energy Funds had, in the aggregate, approximately$0.3 billion in AUM and$0.4 billion in Fee-earning AUM. We are no longer raising capital for the Legacy Energy Funds and expect these balances to continue to decrease over time as the funds wind down. (7)Ending balances as ofSeptember 30, 2021 and 2020 exclude$29.8 billion and$9.9 billion , respectively, of pending Fee-earning AUM for which fees have not yet been activated. 79
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The table below provides the period to period rollforward of Fee-earning AUM.
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