The Carlyle Group Inc. navigated to a profit in the third quarter despite the abrupt departure of its former top executive and economic conditions that interim CEO William Conway described as the most challenging in a decade.
"All of you see the same things we do: rising interest rates, high levels of inflation, geopolitical uncertainty — each of which lead to increased market volatility and headwinds for investors and operators. This is unlikely to resolve in the short term, though our teams are not sitting back and waiting for better days," said Conway, co-founder and co-chairman of the firm's board whose previous term as co-CEO ended in 2018.
Carlyle reported income of $280.8 million for the quarter, or 77 cents per diluted share, down by nearly half from the $532.8 million in income it reported for the same period a year ago, equivalent to $1.46 per share. Several of its large, publicly traded peers, including Apollo Global Management Inc., KKR & Co. Inc. and Ares Management Corp., recorded a third-quarter loss, while Blackstone Inc. reported profits down significantly from the same quarter a year ago.
The value of the firm's corporate private equity portfolio appreciated 1% during the quarter, a slight improvement from the flat results of the second quarter. The portfolio had a 3% appreciation in third quarter 2021.
Assets under management totaled $369 billion as of Sept. 30, up 23% since the start of the year.
Dry powder at quarter's end was $74 billion, including $42 billion committed to private equity strategies, the largest share of the total.
Private equity slowdown
Carlyle during the third quarter deployed $6.9 billion into new investments across its private equity strategies, including $4.8 billion through its corporate private equity business line, making it the busiest quarter of the year so far.
But the pace of entries is expected to slow through 2023, said Peter Clare, chief investment officer of corporate private equity, who cited as one of the primary factors the impact of higher interest rates on the cost and availability of debt for dealmaking.
The higher cost of debt, in turn, pressures private equity fund managers to pay less for acquisitions. Clare said managers aiming to maintain the same rate of return they have achieved on previous private equity investments need to buy new companies at a lower price to offset the higher cost of financing.
Additionally, the uncertain economic outlook is making it hard for buyers and sellers to agree on a price, Clare said.
Private equity's fundraising landscape in 2022 is crowded with managers targeting ambitious fund sizes, a dynamic that is contributing to an industrywide slowdown in new investor commitments.
Carlyle is currently in market with Carlyle Partners VIII, the latest edition of its flagship buyout fund with a target range of $22 billion to $26 billion. The predecessor fund, Carlyle Partners VII LP, closed at $18.5 billion in 2018.
"Even though the market is clearly congested [and] fundraising for large buyouts has slowed down, we do expect that, ultimately, all of our funds we're currently raising now will, in aggregate, come at a similar size to the current vintages," Clare said.
Conway said the cloudy macroeconomic outlook was "tougher for some parts of [Carlyle's] business than others," adding that its private credit and global investment solutions businesses were expected to benefit from a more uncertain, risk-off environment.
CFO Curtis Buser said there has been "significant demand" for private credit. The firm originated $1.6 billion in direct loans in the 90 days ended Sept. 30, its highest quarterly total of the year.
"Our investment teams are active across the liquidity spectrum, taking advantage of market dislocations to invest in opportunities with increasingly desirable risk-reward characteristics," Buser said, adding that Carlyle was at the same time "actively positioning" its credit portfolio to withstand a potential uptick in loan defaults due to the global economic challenges.
Still, the head of global credit, Mark Jenkins, said Carlyle remains "quite bullish" on the outlook for the business over the next 12 to 24 months. Investors committed $3.3 billion to the global credit business in the third quarter, topping the $2.5 billion in quarterly inflows to the firm's private equity strategies.
"There is a sense of opportunity when we talk to our investors about what's going on in the credit markets, in particular, as they've seen a repricing of risk. And we're taking advantage of that," Jenkins said.
Executives also described a bright outlook for the firm's secondaries program. Head of Global Investment Solutions Ruulke Bagijn said challenging market conditions were bringing both private equity limited partners and general partners to the secondaries market, with the former seeking to rebalance private equity-heavy portfolios and the latter looking for options to skirt a difficult exit environment, including continuation vehicles.
Carlyle continues to search for a new permanent CEO following the Aug. 7 departure of Kewsong Lee, who left before the end of his five-year contract. Lee's decision came less than two weeks after the firm reported second-quarter earnings, and reportedly followed the board's silence on Lee's proposal for a new contract.
Conway said the CEO search committee was "making good progress," but he deflected questions that attempted to dig deeper into the selection process. Asked whether the question mark at the top of the firm's organizational chart was hindering fundraising, Conway said it was not.