Carlyle Group Inc. grew its credit business and boosted fee streams in the second quarter, softening some of the blow from the market tumult as Chief Executive Officer Kewsong Lee pushed to diversify revenue.
Distributable earnings rose 34 percent to $528.8 million, or $1.17 a share, from a year earlier, the company said in a statement. That exceeded the $1.06 average estimate of analysts surveyed by Bloomberg.
Carlyle’s private-equity unit — its biggest business by assets — cashed in on bets such as those of packaging company Novolex and started collecting fees from key flagship funds. The credit business, which provides financing to companies, more than doubled assets under management after taking new insurance money in the second quarter.
Muted investment performance on the back of a market rout contributed to net income falling about 73 percent to $245.4 million from a year earlier. Returns were flat for the firm’s traditional buyout funds compared with 12 percent appreciation a year earlier, when markets boomed.
Flagship private credit funds gained 2 percent. Carlyle has expanded further into the business of facilitating lending to companies to become one of the largest managers of the big bundles of debt known as collateralized loan obligations. That exposure to leveraged loans tipped liquid credit into the red in the second quarter.
The industry faces an uncertain environment as the Federal Reserve moves to hike rates and tamp down inflation, Lee said in an interview.
“This is the type of market where one needs to be more appreciative of how complex it is and how challenging it could be,” he said.
Since taking charge as sole CEO in 2020, Lee has been trying to diversify revenues, make profits less tied to stock markets’ boom-and-bust cycles and lift the stock price.
That push is more crucial then ever. Volatile markets have made it harder for buyout firms to take companies public or sell them at lofty valuations. Higher borrowing costs, spurred by the Fed’s interest-rate hikes, have slowed dealmaking. Lee said valuations will need to reset before deal activity picks up across the industry.
There are signs Lee is leaving his mark at the Washington-based firm.
Assets rose 16 percent to $376 billion, after locking in about $48 billion from Fortitude Re. Carlyle has a stake in the reinsurer and advises it on how to steer its cash reserves. Such deals are part of a drive for permanent pools of money to grow new products.
The influx of cash boosted Carlyle’s credit arm. Credit is now 38 percent of the firm’s assets, up from 22 percent in the second quarter of last year. Lee said the firm has a chance to step in as traditional banks pull back from lending.
In a sign of the growing pains at the credit arm, the increase in fee revenue over the quarter was mitigated by higher costs of launching new strategies. This year, Carlyle helped raised equity for Fortitude Re from various investors, diluting its stake and taking a loss as a result.
The firm faces a squeeze from a tough fundraising environment, raising $9.8 billion across funds in the second quarter, down from $10.4 billion a year ago. Carlyle told investors at a June client meeting that fundraising for its flagship private equity fund, targeted for $22 billion, would be slower than expected.
Lee said in the interview that firm is on track to hit and potentially even exceed its goal to raise $130 billion across its different arms between 2021 and 2024.
“We’re growing, and more diversified and more profitable,” he said.
On Wednesday, US Senator Joe Manchin and fellow Democrat Chuck Schumer, the Senate majority leader, struck a surprise deal on a tax, energy and climate bill. That could result in higher taxes on carried interest — profits tied to deals — for the private equity industry. Carried interest has long been a target of Washington, with many lawmakers saying its favorable tax treatment is a loophole that benefits Wall Street.
On an earnings conference call, Carlyle said it was too early to know the impact. The firm pays corporate tax rates – not preferential rates on investment income — on carried interest. If the tax rate on carried interest rises, the additional burden would generally be shouldered by dealmakers and executives, not the company itself.