Carlyle Group LP (CG:US), the world’s second-largest manager of investment alternatives to stocks and bonds, said second-quarter profit rose 92 percent as the firm earned more money from selling holdings.
Economic net income after taxes, a measure of profit excluding some costs, increased to $236.6 million, or 73 cents a share, from $123.2 million, or 39 cents, reported a year earlier, Washington-based Carlyle said today in a statement. Analysts had expected earnings of 74 cents a share, according to the average of 13 estimates in a Bloomberg survey.
Carlyle, like peers Blackstone Group LP (BX:US) and KKR & Co. (KKR:US), has diversified its business beyond traditional leveraged buyouts by bolstering assets dedicated to real estate and credit investments, reducing reliance on volatile LBO earnings. The firm seized on rallying stock markets during the quarter to sell shares in at least 10 companies, including government contractor Booz Allen Hamilton Holding Corp. (BAH:US) and construction supplier HD Supply Holdings Inc. (HDS:US)
“We will continue to aggressively realize gains in our portfolio and be selective on new deals,” Bill Conway, Carlyle’s co-founder and chief investment officer, said on a conference call today with investors and analysts. “The low interest rates and the abundant amount of credit have raised valuations.”
Carlyle rose 0.9 percent to $34.71 at the close of trading in New York, paring the stock’s loss this year (CG:US) to 2.6 percent. The company sold shares to the public in May 2012 for $22 apiece.
All of Carlyle’s funds from which it can collect a slice of profits, including buyouts, real estate, energy and certain Global Market Strategies pools, appreciated 5 percent in the quarter. The firm’s private-equity portfolio gained 5 percent, compared with 8.4 percent at New York-based Blackstone, 5 percent at New York-based KKR and 4.7 percent for the Standard & Poor’s 500 index of large U.S. companies.
The value of buyout holdings at private-equity firms affects economic net income, or ENI, because the metric depends on quarterly “mark-to-market” valuations of those investments. Accounting rules require the firms to value their portfolio holdings every quarter.
Carlyle sold shares during the quarter in vehicle supplier Allison Transmission Holdings Inc. (ALSN:US) and media-ratings company Nielsen Holdings NV, among others. The firm also sold some shares of Applus Services SA (APPS), a Spanish business that provides industrial inspection and certification services, in the company’s May IPO.
European investments helped boost Carlyle’s earnings, with the firm collecting carried interest, or its share of deal profits, from its third buyout fund dedicated to the continent. The fund, which closed with 5.35 billion euros in 2007 and struggled during the global financial crisis, gained 47 percent in the past 12 months and is valued at 1.7 times cost.
“We struggled early,” Conway said, noting Applus and French telecommunications company Numericable Group SA (NUM) as companies bought at high prices. “When the recession hit, business slowed and multiples contracted.”
Numericable and Applus are now the firm’s second and eighth biggest publicly traded holdings, respectively, according to today’s statement.
“This quarter was characterized by solid fund performance and a healthy environment for private-equity realizations, especially in Europe,” said Craig Siegenthaler, an analyst at Credit Suisse Group AG in New York.
Carlyle, like other publicly traded buyout firms, reports profit that differs from U.S. generally accepted accounting principles. The quarterly profit under those rules, known as GAAP, was $19.5 million, or 27 cents per diluted share, compared with a loss of $3.3 million, or a 7-cent loss, in the second quarter of 2013.
Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, sell them and return the funds with a profit in a cycle lasting about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1 percent to 2 percent of committed funds and keep 20 percent of profit from investments as a carried interest.
Carlyle completed the highest volume of deals among global buyout firms in the second quarter, according to Credit Suisse research, investing $3.4 billion of its funds’ equity. They included the $4.15 billion carve-out of Johnson & Johnson (JNJ:US)’s blood-diagnostics unit, announced in January, and the $1.93 billion acquisition of Tyco International Ltd. (TYC:US)’s fire and security business in South Korea, which Carlyle announced in March.
Worldwide, the value of private-equity deals announced in the second quarter rose 62 percent to $168 billion from the same period last year, according to data compiled by Bloomberg. The number of deals rose 8.7 percent to 1,831 in the same period, the data show.
Earlier in the year, Carlyle closed a $3.2 billion deal for Illinois Tool Works Inc. (ITW:US)’s industrial-packaging business. The firm is investing its sixth fund dedicated to U.S. leveraged buyouts, a $13 billion pool that finished gathering capital in November.
Assets under management at Carlyle rose to $202.7 billion from $198.8 billion at the end of the first quarter as the firm raised $7.4 billion and distributed some money back to clients. Blackstone, the largest alternative-asset manager, earlier this month said its assets reached an industry record $279 billion as of June 30.
David Rubenstein, who shares Carlyle’s chief executive officer title with Conway, said he expects to finish raising the firm’s fourth Asia buyout fund and its first international energy fund above their targets in the third quarter. Bloomberg News has reported that the Asia fund is seeking about $3.5 billion and the energy fund is targeting $1.5 billion, according to people familiar with the plans. The energy pool will be Carlyle’s biggest first-time fund ever, Rubenstein said on the conference call today.
“We expect reasonably strong fundraising performance for the remainder of the year,” said Rubenstein. Conway added: “Europe and Japan are both priced about 20 percent lower than the U.S. That is too big a discount.”
Carlyle’s distributable earnings, a measure of cash profitability, rose to $324 million in the quarter, compared with $163 million a year earlier. The company plans to pay stockholders a dividend (CG:US) of 16 cents a share on Aug. 22.
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