Carlyle Group Inc. - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
FOR THE QUARTERLY PERIOD ENDED September 30, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 001-35538
The Carlyle Group Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 45-2832612 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
1001 Pennsylvania Avenue, NW
Washington, DC, 20004-2505
(Address of principal executive offices) (Zip Code)
(202) 729-5626
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock | CG | The Nasdaq Global Select Market | ||||||
| 4.625% Subordinated Notes due 2061 of Carlyle Finance L.L.C. | CGABL | The Nasdaq Global Select Market | ||||||
As of October 25, 2021, there were 356,527,526 shares of common stock of the registrant outstanding.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
TABLE OF CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
Unaudited Condensed Consolidated Financial Statements – September 30, 2021 and 2020: | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
1
Forward-Looking Statements
This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, contingencies, our dividend policy, and other non-historical statements. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements including, but not limited to, those described under the sections entitled “Risk Factors” in this report and in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the United States Securities and Exchange Commission (“SEC”) on February 11, 2021, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings with the SEC. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by applicable law.
Website and Social Media Disclosure
We use our website (www.carlyle.com), our corporate Facebook page (https://www.facebook.com/onecarlyle/), our corporate Twitter account (@OneCarlyle or www.twitter.com/onecarlyle), our corporate Instagram account (@onecarlyle or www.instagram.com/onecarlyle), our corporate LinkedIn account (www.linkedin.com/company/the-carlyle-group) and our corporate YouTube channel (www.youtube.com/user/onecarlyle) as channels of distribution of material company information. For example, financial and other material information regarding our company is routinely posted on and accessible at www.carlyle.com. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about Carlyle when you enroll your email address by visiting the “Email Alert Subscription” section at http://ir.carlyle.com/email-alerts. The contents of our website and social media channels are not, however, a part of this Quarterly Report on Form 10-Q and are not incorporated by reference herein.
On January 1, 2020, we completed our conversion from a Delaware limited partnership named The Carlyle Group L.P. into a Delaware Corporation named The Carlyle Group Inc. Pursuant to the Conversion, at the specified effective time on January 1, 2020, each common unit of The Carlyle Group L.P. outstanding immediately prior to the effective time converted into one share of common stock of The Carlyle Group Inc. and each special voting unit and general partner unit was canceled for no consideration. In addition, holders of the partnership units in Carlyle Holdings I L.P., Carlyle Holdings II L.P., and Carlyle 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 to The Carlyle Group L.P. and its consolidated subsidiaries and (ii) from and after the consummation of the Conversion to The Carlyle Group Inc. and its consolidated subsidiaries. References to our common stock or shares in periods prior to the Conversion refer to the common units of The Carlyle Group L.P. When we refer to our “senior Carlyle professionals,” we are referring to the partner-level personnel of our firm. References in this report to the ownership of the senior Carlyle professionals include the ownership of personal planning vehicles of these individuals. When we refer to the “Carlyle Holdings partnerships” or “Carlyle Holdings”, we are referring to Carlyle Holdings I L.P., Carlyle Holdings II L.P., and Carlyle Holdings III L.P., which prior to the Conversion were the holding partnerships through which the Company and our senior Carlyle professionals and other holders of Carlyle Holdings partnership units owned their respective interests in our business.
“Carlyle funds,” “our funds” and “our investment funds” refer to the investment funds and vehicles advised by Carlyle.
“Carry funds” generally refers to closed-end investment vehicles, in which commitments are drawn down over a specified investment period, and in which the general partner receives a special residual allocation of income from limited partners, which we refer to as carried interest, in the event that specified investment returns are achieved by the fund. Disclosures referring to carry funds will also include the impact of certain commitments which do not earn carried interest, but are either part of, or associated with our carry funds. The rate of carried interest, as well as the share of carried interest allocated
2
to Carlyle, may vary across the carry fund platform. Carry funds generally include the following investment vehicles across our three business segments:
•Global Private Equity: Buyout, middle market and growth capital, real estate, and natural resources funds advised by Carlyle, as well as certain energy funds advised by our strategic partner NGP Energy Capital Management (“NGP”) in which Carlyle is entitled to receive a share of carried interest (“NGP Carry Funds”)
•Global Credit: Distressed credit, energy credit, opportunistic credit, corporate mezzanine funds, aircraft financing and servicing, and other closed-end credit funds advised by Carlyle
•Global Investment Solutions (previously referred to as “Investment Solutions”): Funds and vehicles advised by AlpInvest Partners B.V. (“AlpInvest”), which include primary fund, secondary and co-investment strategies
Carry funds specifically exclude certain funds advised by NGP in which Carlyle is not entitled to receive a share of carried interest (or “NGP Predecessor Funds”), collateralized loan obligation vehicles (“CLOs”), business development companies and direct lending managed accounts, as well as capital raised from a strategic third-party investor which directly invests in Fortitude Holdings alongside a carry fund.
For an explanation of the fund acronyms used throughout this Quarterly Report, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Our Family of Funds.”
“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, for AlpInvest carry funds during the commitment fee 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, as well as one of our business development companies;
(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;
(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;
(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; or
(f)the lower of cost or fair value of invested capital, generally for AlpInvest carry funds where the commitment fee period has expired and certain carry funds where the investment period has expired.
“Assets under management” or “AUM” refers to the assets we manage or advise. Our AUM generally equals the sum of the following:
(a) the aggregate fair value of our carry funds and related co-investment vehicles, NGP Predecessor Funds and separately managed accounts, plus the capital that Carlyle is entitled to call from investors in those funds and vehicles (including Carlyle commitments to those funds and vehicles and those of senior Carlyle professionals and employees) pursuant to the terms of their capital commitments to those funds and vehicles;
(b) the amount of aggregate collateral balance and principal cash or aggregate principal amount of the notes of our CLOs and other structured products (inclusive of all positions);
(c) the net asset value (pre-redemptions and subscriptions) of our open-ended funds; and
(d) the gross assets (including assets acquired with leverage) of our business development companies, plus the capital that Carlyle is entitled to call from investors in those vehicles pursuant to the terms of their capital commitments to those vehicles.
We include in our calculation of AUM and Fee-earning AUM certain energy and renewable resources funds that we jointly advise with Riverstone Holdings L.L.C. (“Riverstone”), the NGP Predecessor Funds and NGP Carry Funds (collectively, the “NGP Energy Funds”) that are advised by NGP, as well as capital raised from a strategic third-party investor which directly invests in Fortitude Holdings alongside a carry fund.
3
For most of our carry funds, total AUM includes the fair value of the capital invested, whereas Fee-earning AUM includes the amount of capital commitments or the remaining amount of invested capital, depending on whether the original investment period for the fund has expired. As such, Fee-earning AUM may be greater than total AUM when the aggregate fair value of the remaining investments is less than the cost of those investments.
Our calculations of AUM and Fee-earning AUM may differ from the calculations of other asset managers. As a result, these measures may not be comparable to similar measures presented by other asset managers. In addition, our calculation of AUM (but not Fee-earning AUM) includes uncalled commitments to, and the fair value of invested capital in, our investment funds from Carlyle and our personnel, regardless of whether such commitments or invested capital are subject to management fees, incentive fees or performance allocations. Our calculations of AUM or Fee-earning AUM are not based on any definition of AUM or Fee-earning AUM that is set forth in the agreements governing the investment funds that we manage or advise.
“Metropolitan” refers to Metropolitan Real Estate Management, LLC, which was included in the Global Investment Solutions business segment prior to its sale on April 1, 2021.
4
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
The Carlyle Group Inc.
Condensed Consolidated Balance Sheets
(Dollars in millions)
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 2,399.0 | $ | 987.6 | |||||||
| Cash and cash equivalents held at Consolidated Funds | 134.8 | 148.6 | |||||||||
| Restricted cash | 6.9 | 2.0 | |||||||||
Investments, including accrued performance allocations of $8,100.3 million and $4,968.6 million as of September 30, 2021 and December 31, 2020, respectively | 10,678.5 | 7,380.9 | |||||||||
| Investments of Consolidated Funds | 6,469.7 | 6,056.9 | |||||||||
| Due from affiliates and other receivables, net | 293.4 | 272.5 | |||||||||
| Due from affiliates and other receivables of Consolidated Funds, net | 173.7 | 89.1 | |||||||||
| Fixed assets, net | 139.2 | 149.2 | |||||||||
| Lease right-of-use assets, net | 364.4 | 361.1 | |||||||||
| Deposits and other | 72.4 | 51.7 | |||||||||
| Intangible assets, net | 36.9 | 48.7 | |||||||||
| Deferred tax assets | 19.8 | 96.5 | |||||||||
| Total assets | $ | 20,788.7 | $ | 15,644.8 | |||||||
| Liabilities and equity | |||||||||||
| Debt obligations | $ | 2,370.7 | $ | 1,970.9 | |||||||
| Loans payable of Consolidated Funds | 5,955.1 | 5,563.0 | |||||||||
| Accounts payable, accrued expenses and other liabilities | 374.5 | 286.3 | |||||||||
| Accrued compensation and benefits | 4,710.2 | 3,222.6 | |||||||||
| Due to affiliates | 391.2 | 436.7 | |||||||||
| Deferred revenue | 334.0 | 89.0 | |||||||||
| Deferred tax liabilities | 433.4 | 57.8 | |||||||||
| Other liabilities of Consolidated Funds | 619.5 | 556.1 | |||||||||
| Lease liabilities | 542.4 | 513.5 | |||||||||
| Accrued giveback obligations | 24.7 | 18.7 | |||||||||
| Total liabilities | 15,755.7 | 12,714.6 | |||||||||
| Commitments and contingencies | |||||||||||
Common stock, $0.01 par value, 100,000,000,000 shares authorized (356,527,526 and 353,520,576 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively) | 3.6 | 3.5 | |||||||||
| Additional paid-in-capital | 2,671.7 | 2,546.2 | |||||||||
| Retained earnings | 2,324.1 | 348.2 | |||||||||
| Accumulated other comprehensive loss | (240.2) | (208.7) | |||||||||
| Non-controlling interests in consolidated entities | 273.8 | 241.0 | |||||||||
| Total equity | 5,033.0 | 2,930.2 | |||||||||
| Total liabilities and equity | $ | 20,788.7 | $ | 15,644.8 | |||||||
See accompanying notes.
5
The Carlyle Group Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in millions, except share and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Fund management fees | $ | 407.5 | $ | 363.8 | $ | 1,182.9 | $ | 1,091.5 | |||||||||||||||
| Incentive fees | 13.1 | 9.1 | 33.0 | 27.0 | |||||||||||||||||||
| Investment income (loss) | |||||||||||||||||||||||
| Performance allocations | 974.5 | 477.4 | 4,841.3 | 731.6 | |||||||||||||||||||
| Principal investment income (loss) | 160.4 | 106.7 | 477.2 | (659.2) | |||||||||||||||||||
| Total investment income | 1,134.9 | 584.1 | 5,318.5 | 72.4 | |||||||||||||||||||
| Interest and other income | 21.9 | 21.3 | 63.3 | 64.5 | |||||||||||||||||||
| Interest and other income of Consolidated Funds | 62.1 | 56.3 | 185.3 | 164.5 | |||||||||||||||||||
| Total revenues | 1,639.5 | 1,034.6 | 6,783.0 | 1,419.9 | |||||||||||||||||||
| Expenses | |||||||||||||||||||||||
| Compensation and benefits | |||||||||||||||||||||||
| Cash-based compensation and benefits | 224.9 | 222.2 | 685.2 | 639.0 | |||||||||||||||||||
| Equity-based compensation | 42.4 | 18.7 | 122.0 | 78.3 | |||||||||||||||||||
| Performance allocations and incentive fee related compensation | 495.2 | 250.6 | 2,355.8 | 343.7 | |||||||||||||||||||
| Total compensation and benefits | 762.5 | 491.5 | 3,163.0 | 1,061.0 | |||||||||||||||||||
| General, administrative and other expenses | 99.6 | 91.1 | 300.4 | 240.9 | |||||||||||||||||||
| Interest | 27.9 | 23.0 | 76.4 | 72.8 | |||||||||||||||||||
| Interest and other expenses of Consolidated Funds | 44.6 | 37.2 | 133.5 | 122.1 | |||||||||||||||||||
| Other non-operating expenses | 3.5 | 0.6 | 1.0 | 1.3 | |||||||||||||||||||
| Total expenses | 938.1 | 643.4 | 3,674.3 | 1,498.1 | |||||||||||||||||||
| Other income (loss) | |||||||||||||||||||||||
| Net investment income (loss) of Consolidated Funds | (0.1) | 23.9 | 9.6 | (38.9) | |||||||||||||||||||
| Income (loss) before provision for income taxes | 701.3 | 415.1 | 3,118.3 | (117.1) | |||||||||||||||||||
| Provision for income taxes | 153.9 | 82.4 | 733.5 | 54.7 | |||||||||||||||||||
| Net income (loss) | 547.4 | 332.7 | 2,384.8 | (171.8) | |||||||||||||||||||
| Net income (loss) attributable to non-controlling interests in consolidated entities | 14.6 | 37.2 | 57.7 | (1.2) | |||||||||||||||||||
| Net income (loss) attributable to The Carlyle Group Inc. | $ | 532.8 | $ | 295.5 | $ | 2,327.1 | $ | (170.6) | |||||||||||||||
| Net income (loss) attributable to The Carlyle Group Inc. per common share (see Note 11) | |||||||||||||||||||||||
| Basic | $ | 1.50 | $ | 0.84 | $ | 6.56 | $ | (0.49) | |||||||||||||||
| Diluted | $ | 1.46 | $ | 0.82 | $ | 6.42 | $ | (0.49) | |||||||||||||||
| Weighted-average common shares | |||||||||||||||||||||||
| Basic | 355,954,734 | 351,567,631 | 354,903,371 | 349,468,329 | |||||||||||||||||||
| Diluted | 364,740,675 | 358,405,845 | 362,471,998 | 349,468,329 | |||||||||||||||||||
Substantially all revenue is earned from affiliates of the Company. See accompanying notes.
6
The Carlyle Group Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | 547.4 | $ | 332.7 | $ | 2,384.8 | $ | (171.8) | |||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Foreign currency translation adjustments | (18.0) | 27.0 | (41.2) | 16.3 | |||||||||||||||||||
| Unrealized losses on Fortitude Re available-for-sale securities | — | — | — | (20.0) | |||||||||||||||||||
| Defined benefit plans | |||||||||||||||||||||||
| Unrealized gain (loss) for the period | 0.4 | (0.4) | 2.3 | (2.2) | |||||||||||||||||||
| Less: reclassification adjustment for gain during the period, included in cash-based compensation and benefits expense | 0.5 | 0.4 | 1.6 | 1.3 | |||||||||||||||||||
| Other comprehensive income (loss) | (17.1) | 27.0 | (37.3) | (4.6) | |||||||||||||||||||
| Comprehensive income (loss) | 530.3 | 359.7 | 2,347.5 | (176.4) | |||||||||||||||||||
| Comprehensive income (loss) attributable to non-controlling interests in consolidated entities | 9.4 | 42.4 | 51.9 | (8.8) | |||||||||||||||||||
| Comprehensive income (loss) attributable to The Carlyle Group Inc. | $ | 520.9 | $ | 317.3 | $ | 2,295.6 | $ | (167.6) | |||||||||||||||
See accompanying notes.
7
The Carlyle Group Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
(Dollars and shares in millions)
| Common Shares | Common Stock | Additional Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interests in Consolidated Entities | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | 354.5 | $ | 3.5 | $ | 2,621.7 | $ | 1,940.1 | $ | (228.3) | $ | 285.0 | $ | 4,622.0 | ||||||||||||||||||||||||||||
| Shares repurchased | (1.2) | — | — | (59.5) | — | — | (59.5) | ||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | 0.1 | 50.0 | — | — | — | 50.1 | ||||||||||||||||||||||||||||||||||
| Shares issued for equity-based awards | 3.2 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | 12.8 | 12.8 | ||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | (89.3) | — | (33.4) | (122.7) | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 532.8 | — | 14.6 | 547.4 | ||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | (12.8) | (5.2) | (18.0) | ||||||||||||||||||||||||||||||||||
| Defined benefit plans, net | — | — | — | — | 0.9 | — | 0.9 | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 356.5 | $ | 3.6 | $ | 2,671.7 | $ | 2,324.1 | $ | (240.2) | $ | 273.8 | $ | 5,033.0 | ||||||||||||||||||||||||||||
| Common Shares | Common Stock | Additional Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interests in Consolidated Entities | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 353.5 | $ | 3.5 | $ | 2,546.2 | $ | 348.2 | $ | (208.7) | $ | 241.0 | $ | 2,930.2 | ||||||||||||||||||||||||||||
| Shares repurchased | (1.9) | — | — | (84.5) | — | — | (84.5) | ||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | 0.1 | 125.5 | — | — | — | 125.6 | ||||||||||||||||||||||||||||||||||
| Shares issued for equity-based awards | 4.9 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | 57.2 | 57.2 | ||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | (266.7) | — | (76.3) | (343.0) | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 2,327.1 | — | 57.7 | 2,384.8 | ||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | (35.4) | (5.8) | (41.2) | ||||||||||||||||||||||||||||||||||
| Defined benefit plans, net | — | — | — | — | 3.9 | — | 3.9 | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 356.5 | $ | 3.6 | $ | 2,671.7 | $ | 2,324.1 | $ | (240.2) | $ | 273.8 | $ | 5,033.0 | ||||||||||||||||||||||||||||
8
The Carlyle Group Inc.
Condensed Consolidated Statements of Changes in Equity
(Continued) (Unaudited)
(Dollars and shares in millions)
| Common Units | Common Shares | Partners’ Capital | Common Stock | Additional Paid-in- Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interests in Consolidated Entities | Non- controlling Interests in Carlyle Holdings | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | — | 348.7 | $ | — | $ | 3.5 | $ | 2,679.8 | $ | (466.1) | $ | (258.9) | $ | 184.4 | $ | — | $ | 2,142.7 | |||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | 24.2 | — | — | — | — | 24.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for equity-based awards | — | 4.6 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | — | — | 10.2 | — | 10.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | (88.3) | — | — | (18.3) | — | (106.6) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 295.5 | — | 37.2 | — | 332.7 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | — | — | 21.8 | 5.2 | — | 27.0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | — | 353.3 | $ | — | $ | 3.5 | $ | 2,615.7 | $ | (170.6) | $ | (237.1) | $ | 218.7 | $ | — | $ | 2,430.2 | |||||||||||||||||||||||||||||||||||||||||
| Common Units | Common Shares | Partners’ Capital | Common Stock | Additional Paid-in- Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interests in Consolidated Entities | Non- controlling Interests in Carlyle Holdings | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 117.8 | — | $ | 703.8 | $ | — | $ | — | $ | — | $ | (85.2) | $ | 333.5 | $ | 2,017.5 | $ | 2,969.6 | |||||||||||||||||||||||||||||||||||||||||
| Reclassification resulting from Conversion - Partners' Capital | (117.8) | 117.8 | (703.8) | 1.2 | 702.6 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification resulting from Conversion - Non-controlling Interest in Carlyle Holdings | — | 229.4 | — | 2.3 | 2,180.9 | — | (165.7) | — | (2,017.5) | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares repurchased | — | (1.1) | — | — | (26.4) | — | — | — | — | (26.4) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Tax effects resulting from Conversion | — | — | — | — | (64.4) | — | 10.8 | — | — | (53.6) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | 85.9 | — | — | — | — | 85.9 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for equity-based awards | — | 7.2 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | — | — | 24.2 | — | 24.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | (262.9) | — | — | (53.5) | — | (316.4) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (170.6) | — | (1.2) | — | (171.8) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Deconsolidation of Consolidated Entities | — | — | — | — | — | — | — | (76.7) | — | (76.7) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | — | — | 23.9 | (7.6) | — | 16.3 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on Fortitude Re available-for-sale securities | — | — | — | — | — | — | (20.0) | — | — | (20.0) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Defined benefit plans, net | — | — | — | — | — | — | (0.9) | — | — | (0.9) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | — | 353.3 | $ | — | $ | 3.5 | $ | 2,615.7 | $ | (170.6) | $ | (237.1) | $ | 218.7 | $ | — | $ | 2,430.2 | |||||||||||||||||||||||||||||||||||||||||
See accompanying notes.
9
The Carlyle Group Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income (loss) | $ | 2,384.8 | $ | (171.8) | |||||||
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | |||||||||||
| Depreciation and amortization | 40.5 | 38.9 | |||||||||
| Right-of-use asset impairment, net of broker fees | 24.8 | — | |||||||||
| Equity-based compensation | 122.0 | 78.3 | |||||||||
| Non-cash performance allocations and incentive fees | (1,662.3) | (239.6) | |||||||||
| Non-cash principal investment (income) loss | (458.3) | 646.3 | |||||||||
| Other non-cash amounts | 20.7 | (3.5) | |||||||||
| Consolidated Funds related: | |||||||||||
| Realized/unrealized (gain) loss on investments of Consolidated Funds | (100.3) | 219.2 | |||||||||
| Realized/unrealized (gain) loss from loans payable of Consolidated Funds | 90.7 | (180.3) | |||||||||
| Purchases of investments by Consolidated Funds | (3,864.4) | (2,049.1) | |||||||||
| Proceeds from sale and settlements of investments by Consolidated Funds | 3,631.7 | 1,571.4 | |||||||||
| Non-cash interest income, net | (9.0) | (4.6) | |||||||||
| Change in cash and cash equivalents held at Consolidated Funds | 43.5 | (258.2) | |||||||||
| Change in other receivables held at Consolidated Funds | (78.7) | (20.0) | |||||||||
| Change in other liabilities held at Consolidated Funds | 43.4 | 149.4 | |||||||||
| Other non-cash amounts of Consolidated Funds | — | 0.4 | |||||||||
| Purchases of investments | (178.0) | (293.7) | |||||||||
| Proceeds from the sale of investments | 533.8 | 233.6 | |||||||||
| Payments of contingent consideration | (50.0) | — | |||||||||
| Changes in deferred taxes, net | 449.1 | 4.7 | |||||||||
| Change in due from affiliates and other receivables | (21.4) | (8.3) | |||||||||
| Change in deposits and other | (23.3) | (1.3) | |||||||||
| Change in accounts payable, accrued expenses and other liabilities | 90.9 | (57.5) | |||||||||
| Change in accrued compensation and benefits | 17.3 | 73.0 | |||||||||
| Change in due to affiliates | 1.4 | (31.5) | |||||||||
| Change in lease right-of-use assets and lease liabilities | 5.9 | (6.7) | |||||||||
| Change in deferred revenue | 247.6 | 200.3 | |||||||||
| Net cash provided by (used in) operating activities | 1,302.4 | (110.6) | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of fixed assets, net | (27.0) | (37.3) | |||||||||
| Proceeds from sale of MRE, net of cash sold | 5.9 | — | |||||||||
| Proceeds from sale of Brazil management entity, net of cash sold | 3.3 | — | |||||||||
| Net cash used in investing activities | (17.8) | (37.3) | |||||||||
| Cash flows from financing activities | |||||||||||
| Borrowings under credit facilities | 70.0 | 287.1 | |||||||||
| Repayments under credit facilities | — | (300.6) | |||||||||
Issuance of 4.625% subordinated notes due 2061, net of financing costs | 484.1 | — | |||||||||
| Payments on debt obligations | (231.5) | (2.7) | |||||||||
| Proceeds from debt obligations, net of financing costs | 87.5 | 20.5 | |||||||||
| Net borrowings (payments) on loans payable of Consolidated Funds | 165.2 | 594.6 | |||||||||
| Payments of contingent consideration | (0.1) | (0.3) | |||||||||
| Dividends to common stockholders | (266.7) | (262.9) | |||||||||
| Payment of deferred consideration for Carlyle Holdings units | (68.8) | (68.8) | |||||||||
| Contributions from non-controlling interest holders | 57.2 | 24.2 | |||||||||
| Distributions to non-controlling interest holders | (76.3) | (53.5) | |||||||||
| Common shares repurchased | (84.5) | (26.4) | |||||||||
| Change in due to/from affiliates financing activities | 21.8 | 40.9 | |||||||||
| Net cash provided by financing activities | 157.9 | 252.1 | |||||||||
| Effect of foreign exchange rate changes | (26.2) | 6.6 | |||||||||
| Increase in cash, cash equivalents and restricted cash | 1,416.3 | 110.8 | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 989.6 | 828.0 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 2,405.9 | $ | 938.8 | |||||||
| Supplemental non-cash disclosures | |||||||||||
| Tax effects from the conversion to a Corporation recorded in equity | $ | — | $ | 53.9 | |||||||
| Net asset impact of deconsolidation of Consolidated Funds | $ | (34.4) | $ | — | |||||||
Reconciliation of cash, cash equivalents and restricted cash, end of period: | |||||||||||
| Cash and cash equivalents | $ | 2,399.0 | $ | 938.4 | |||||||
| Restricted cash | 6.9 | 0.4 | |||||||||
| Total cash, cash equivalents and restricted cash, end of period | $ | 2,405.9 | $ | 938.8 | |||||||
| Cash and cash equivalents held at Consolidated Funds | $ | 134.8 | $ | 377.8 | |||||||
See accompanying notes.
10
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
Effective on January 1, 2020, The Carlyle Group L.P. converted from a Delaware limited partnership to a Delaware corporation named The Carlyle Group Inc. (the “Conversion”). As a result of the Conversion, each common unit was converted into a share of common stock. Under the laws of its incorporation, The Carlyle Group Inc. is deemed to be the same entity as The Carlyle Group L.P. (the “Partnership”). Unless the context suggests otherwise, references to “Carlyle” or the “Company,” refer to (i) The Carlyle Group Inc. and its consolidated subsidiaries following the Conversion and (ii) The Carlyle Group L.P. and its consolidated subsidiaries prior to the Conversion.
Prior to the Conversion, the Company recorded significant non-controlling interests in Carlyle Holdings I L.P., Carlyle Holdings II L.P. and Carlyle Holdings III L.P. (collectively, “Carlyle Holdings”), the holdings partnerships through which the Company and senior Carlyle professionals and other holders of Carlyle Holdings partnership units owned their respective interests in the business. In the Conversion, the limited partners of the Carlyle Holdings partnerships exchanged their Carlyle Holdings partnership units for an equivalent number of shares of common stock of The Carlyle Group Inc. As a result, in periods following the Conversion, the consolidated balance sheet and statement of operations of The Carlyle Group Inc. does not reflect any non-controlling interests in Carlyle Holdings, and net income (loss) attributable to Carlyle Holdings refers to the net income (loss) of The Carlyle Group Inc. and its consolidated subsidiaries, net of non-controlling interests in consolidated entities. Additionally, at the time of the exchange, certain senior Carlyle professionals and certain of the other former limited partners of Carlyle Holdings who became holders of shares of common stock in connection with the Conversion were generally required to grant an irrevocable proxy to Carlyle Group Management L.L.C., which is wholly owned by our founders and other senior Carlyle professionals. As a result, we were a “controlled company” and qualified for exceptions from certain corporate governance and other requirements of the rules of The Nasdaq Global Select Market (“Nasdaq”). As of August 5, 2021, the Company no longer qualifies as a “controlled company” under the Nasdaq rules.
Carlyle is one of the world’s largest global investment firms that originates, structures, and acts as lead equity investor in management-led buyouts, strategic minority equity investments, equity private placements, consolidations and buildups, growth capital financings, real estate opportunities, bank loans, high-yield debt, distressed assets, mezzanine debt, and other investment opportunities. Carlyle provides investment management services to, and has transactions with, various private equity funds, real estate funds, private credit funds, collateralized loan obligations (“CLOs”), and other investment products sponsored by the Company for the investment of client assets in the normal course of business. Carlyle typically serves as the general partner, investment manager or collateral manager, making day-to-day investment decisions concerning the assets of these products. Carlyle operates its business through three reportable segments: Global Private Equity, Global Credit, and Global Investment Solutions (see Note 14).
On August 31, 2021, the Company sold 100% of its interest in its 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. The Company 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. These amounts are excluded from the Company’s segment reporting.
Basis of Presentation
The accompanying financial statements include the accounts of the Company and its consolidated subsidiaries. In addition, certain Carlyle-affiliated funds, related co-investment entities and certain CLOs managed by the Company (collectively the “Consolidated Funds”) have been consolidated in the accompanying financial statements pursuant to accounting principles generally accepted in the United States (“U.S. GAAP”), as described in Note 2. The consolidation of the Consolidated Funds generally has a gross-up effect on assets, liabilities and cash flows, and generally has no effect on the net income attributable to the Company. The economic ownership interests of the other investors in the Consolidated Funds are reflected as non-controlling interests in consolidated entities in the accompanying consolidated financial statements (see Note 2).
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. These statements, including notes, have not been audited, exclude some of the disclosures required for annual financial statements, and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”). The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. In the opinion of management, the condensed
11
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Company consolidates all entities that it controls either through a majority voting interest or as the primary beneficiary of variable interest entities (“VIEs”).
The Company evaluates (1) whether it holds a variable interest in an entity, (2) whether the entity is a VIE, and (3) whether the Company’s involvement would make it the primary beneficiary. In evaluating whether the Company holds a variable interest, fees (including management fees, incentive fees and performance allocations) that are customary and commensurate with the level of services provided, and where the Company does not hold other economic interests in the entity that would absorb more than an insignificant amount of the expected losses or returns of the entity, are not considered variable interests. The Company considers all economic interests, including indirect interests, to determine if a fee is considered a variable interest.
For those entities where the Company holds a variable interest, the Company determines whether each of these entities qualifies as a VIE and, if so, whether or not the Company is the primary beneficiary. The assessment of whether the entity is a VIE is generally performed qualitatively, which requires judgment. These judgments include: (a) determining whether the equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) evaluating whether the equity holders, as a group, can make decisions that have a significant effect on the economic performance of the entity, (c) determining whether two or more parties’ equity interests should be aggregated, and (d) determining whether the equity investors have proportionate voting rights to their obligations to absorb losses or rights to receive returns from an entity.
For entities that are determined to be VIEs, the Company consolidates those entities where it has concluded it is the primary beneficiary. The primary beneficiary is defined as the variable interest holder with (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly or indirectly by the Company.
As of September 30, 2021, assets and liabilities of the consolidated VIEs reflected in the unaudited condensed consolidated balance sheets were $6.8 billion and $6.6 billion, respectively. Except to the extent of the consolidated assets of the VIEs, the holders of the consolidated VIEs’ liabilities generally do not have recourse to the Company.
Substantially all of the Company’s Consolidated Funds are CLOs, which are VIEs that issue loans payable that are backed by diversified collateral asset portfolios consisting primarily of loans or structured debt. In exchange for managing the collateral for the CLOs, the Company earns investment management fees, including in some cases subordinated management fees and contingent incentive fees. In cases where the Company consolidates the CLOs (primarily because of a retained interest that is significant to the CLO), those management fees have been eliminated as intercompany transactions. As of September 30, 2021, the Company held $172.8 million of investments in these CLOs which represents its maximum risk of loss. The Company’s investments in these CLOs are generally subordinated to other interests in the entities and entitle the Company to receive a pro rata portion of the residual cash flows, if any, from the entities. Investors in the CLOs have no recourse against the Company for any losses sustained in the CLO structure.
Entities that do not qualify as VIEs are generally assessed for consolidation as voting interest entities. Under the voting interest entity model, the Company consolidates those entities it controls through a majority voting interest.
All significant inter-entity transactions and balances of entities consolidated have been eliminated.
Investments in Unconsolidated Variable Interest Entities
The Company holds variable interests in certain VIEs that are not consolidated because the Company is not the primary beneficiary, including its investments in certain Global Investment Solutions carry funds, certain CLOs and its strategic investment in NGP Management Company, L.L.C. (“NGP Management” and, together with its affiliates, “NGP”). Refer to Note 4 for information on the strategic investment in NGP. The Company’s involvement with such entities is in the form of direct or indirect equity interests and fee arrangements. The maximum exposure to loss represents the loss of assets recognized by the Company relating to its variable interests in these unconsolidated entities.
12
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The assets recognized in the Company’s consolidated balance sheets related to the Company’s variable interests in these non-consolidated VIEs were as follows:
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Dollars in millions) | |||||||||||
| Investments | $ | 882.7 | $ | 988.6 | |||||||
| Accrued performance revenues | 330.0 | 177.1 | |||||||||
| Management fee receivables | 27.9 | 26.5 | |||||||||
| Total | $ | 1,240.6 | $ | 1,192.2 | |||||||
These amounts represent the Company’s maximum exposure to loss related to the unconsolidated VIEs as of September 30, 2021 and December 31, 2020.
Basis of Accounting
The accompanying financial statements are prepared in accordance with U.S. GAAP. Management has determined that the Company’s Funds are investment companies under U.S. GAAP for the purposes of financial reporting. U.S. GAAP for an investment company requires investments to be recorded at estimated fair value and the unrealized gains and/or losses in an investment’s fair value are recognized on a current basis in the statements of operations. Additionally, the Funds do not consolidate their majority-owned and controlled investments (the “Portfolio Companies”). In the preparation of these unaudited condensed consolidated financial statements, the Company has retained the specialized accounting for the Funds.
All of the investments held and notes issued by the Consolidated Funds are presented at their estimated fair values in the Company’s condensed consolidated balance sheets. Interest and other income of the Consolidated Funds as well as interest expense and other expenses of the Consolidated Funds are included in the Company’s unaudited condensed consolidated statements of operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates are based on historical experiences and other factors, including expectations of future events that management believes to be reasonable under the circumstances. It also requires management to exercise judgment in the process of applying the Company’s accounting policies. Assumptions and estimates regarding the valuation of investments and their resulting impact on performance allocations involve a higher degree of judgment and complexity and these assumptions and estimates may be significant to the consolidated financial statements and the resulting impact on performance allocations and incentive fees. Actual results could differ from these estimates and such differences could be material.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, under which the purchase price of the acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Contingent consideration obligations that are elements of consideration transferred are recognized as of the acquisition date as part of the fair value transferred in exchange for the acquired business. Acquisition-related costs incurred in connection with a business combination are expensed as incurred.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. Revenue is recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. ASC 606 includes a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, which includes assessing the collectibility of the consideration to which it will be entitled in exchange for the goods or services transferred to the customer, (ii) identify the
13
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when the entity satisfies a performance obligation.
The Company accounts for performance allocations that represent a performance-based capital allocation from fund limited partners to the Company (commonly known as “carried interest”, which comprises substantially all of the Company’s previously reported performance fee revenues) as earnings from financial assets within the scope of ASC 323, Investments - Equity Method and Joint Ventures, and therefore are not in the scope of ASC 606. In accordance with ASC 323, the Company records equity method income (losses) as a component of investment income based on the change in its proportionate claim on net assets of the investment fund, including performance allocations, assuming the investment fund was liquidated as of each reporting date pursuant to each fund’s governing agreements. See Note 4 for additional information on the components of investments and investment income. Performance fees that do not meet the definition of performance-based capital allocations are in the scope of ASC 606 and are included in incentive fees in the unaudited condensed consolidated statements of operations. The calculation of unrealized performance revenues utilizes investment valuations of the funds’ underlying investments, which are derived using the policies, methodologies and templates prepared by the Company’s valuation group, as described in Note 3, Fair Value Measurement.
While the determination of who is the customer in a contractual arrangement will be made on a contract-by-contract basis, the customer will generally be the investment fund for the Company’s significant management and advisory contracts. The customer determination impacts the Company’s analysis of the accounting for contract costs. Also, the recovery of certain costs incurred on behalf of Carlyle funds, primarily travel and entertainment costs, are presented gross in the unaudited condensed consolidated statements of operations, as the Company controls the inputs to its investment management performance obligation.
Fund Management Fees
The Company provides management services to funds in which it holds a general partner interest or has a management agreement. The Company considers the performance obligations in its contracts with its funds to be the promise to provide (or to arrange for third parties to provide) investment management services related to the management, policies and operations of the funds.
As it relates to the Company’s performance obligation to provide investment management services, the Company typically satisfies this performance obligation over time as the services are rendered, since the funds simultaneously receive and consume the benefits provided as the Company performs the service. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised services to the funds. Management fees earned from each investment management contract over the contract life represent variable consideration because the consideration the Company is entitled to varies based on fluctuations in the basis for the management fee, for example fund net asset value (“NAV”) or assets under management (“AUM”). Given that the management fee basis is susceptible to market factors outside of the Company’s influence, management fees are constrained and, therefore, estimates of future period management fees are generally not included in the transaction price. Revenue recognized for the investment management services provided is generally the amount determined at the end of the period because that is when the uncertainty for that period is resolved.
For closed-end carry funds in the Global Private Equity and Global Credit segments, management fees generally range from 1.0% to 2.0% of commitments during the fund’s investment period based on limited partners’ capital commitments to the funds. Following the expiration or termination of the investment period, management fees generally are based on the lower of cost or fair value of invested capital and the rate charged may also be reduced to between 0.5% and 2.0%. For certain separately managed accounts, longer-dated carry funds, and other closed-end funds, management fees generally range from 0.2% to 1.0% based on contributions for unrealized investments, the current value of the investment, or adjusted book value. The Company will receive management fees during a specified period of time, which is generally ten years from the initial closing date, or, in some instances, from the final closing date, but such termination date may be earlier in certain limited circumstances or later if extended for successive one-year periods, typically up to a maximum of two years. Depending upon the contracted terms of investment advisory or investment management and related agreements, these fees are generally called semi-annually in advance and are recognized as earned over the subsequent six month period. For certain longer-dated carry funds and certain other closed-end funds, management fees are called quarterly over the life of the funds.
Within the Global Credit segment, for CLOs and other structured products, management fees generally range from 0.4% to 0.5% based on the total par amounts of assets or the aggregate principal amount of the notes in the CLO and are due quarterly based on the terms and recognized over the respective period. Management fees for the CLOs and other structured products are governed by indentures and collateral management agreements. The Company will receive management fees for
14
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
the CLOs until redemption of the securities issued by the CLOs, which is generally to ten years after issuance. Management fees for the business development companies are due quarterly in arrears at annual rates that range from 1.25% of invested capital to 1.5% of gross assets, excluding cash and cash equivalents.
Management fees for the Company’s carry fund vehicles in the Global Investment Solutions segment generally range from 0.25% to 1.0% of the vehicle’s capital commitments during the commitment fee period of the relevant fund or the weighted-average investment period of the underlying funds. Following the expiration of the commitment fee period or weighted-average investment period of such funds, the management fees generally range from 0.25% to 1.0% on (i) the lower of cost or fair value of the capital invested, (ii) the net asset value for unrealized investments, or (iii) the contributions for unrealized investments; however, certain separately managed accounts earn management fees at all times on contributions for unrealized investments or on the initial commitment amount. Management fees for the Global Investment Solutions carry fund vehicles are generally due quarterly and recognized over the related quarter.
As of September 30, 2021 and December 31, 2020, management fee receivables, net of allowances for credit losses, were $135.5 million and $102.7 million, respectively, and are included in due from affiliates and other receivables, net, in the unaudited condensed consolidated balance sheets.
The Company also provides transaction advisory and portfolio advisory services to the portfolio companies, and where covered by separate contractual agreements, recognizes fees for these services when the performance obligation has been satisfied and collection is reasonably assured. The Company also recognizes underwriting fees from the Company’s loan syndication and capital markets business, Carlyle Global Capital Markets. Fund management fees include transaction and portfolio advisory fees, as well as capital markets fees, of $21.9 million and $3.9 million for the three months ended September 30, 2021 and 2020, respectively, and $54.3 million and $25.5 million for the nine months ended September 30, 2021 and 2020, respectively, net of any offsets as defined in the respective partnership agreements.
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. For the professional fees that the Company arranges for the investment funds, the Company concluded that the nature of its promise is to arrange for the services to be provided and it does not control the services provided by third parties before they are transferred to the customer. Therefore, the Company concluded it is acting in the capacity of an agent. Accordingly, the reimbursement for these professional fees paid on behalf of the investment funds is presented on a net basis in general, administrative and other expenses in the unaudited condensed consolidated statements of operations.
The Company also incurs certain costs, primarily employee travel and entertainment costs, employee compensation and systems costs, for which it receives reimbursement from the investment funds in connection with its performance obligation to provide investment and management services. For reimbursable travel, compensation and systems costs, the Company concluded it controls the services provided by its employees and the resources used to develop applicable systems before they are transferred to the customer and therefore is a principal. Accordingly, the reimbursement for these costs incurred by the Company to manage the fund limited partnerships are presented on a gross basis in interest and other income in the unaudited condensed consolidated statements of operations and the expense in general, administrative and other expenses or cash-based compensation and benefits expenses in the unaudited condensed consolidated statements of operations.
Incentive Fees
In connection with management contracts from certain of its Global Credit funds, the Company is also entitled to receive performance-based incentive fees 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. Incentive fees are variable consideration because they are contingent upon the investment vehicle achieving stipulated investment return hurdles. Investment returns are highly susceptible to market factors outside of the Company’s influence. Accordingly, incentive fees are constrained until the uncertainty is resolved. Estimates of future period incentive fees are generally not included in the transaction price because these estimates are constrained. The transaction price for incentive fees is generally the amount determined at the end of each accounting period to which they relate because that is when the uncertainty for that period is resolved, as these fees are not subject to clawback.
15
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Investment Income (Loss), including Performance Allocations
Investment income (loss) represents the unrealized and realized gains and losses resulting from the Company’s equity method investments, including any associated general partner performance allocations, and other principal investments, including CLOs.
General partner performance allocations consist of the allocation of profits from certain of the funds to which the Company is entitled (commonly known as carried interest).
For closed-end carry funds in the Global Private Equity and Global Credit segments, the Company is generally entitled to a 20% allocation (or 10% to 20% on certain longer-dated carry funds, certain credit funds, and external co-investment vehicles, up to 25% on certain Global Private Equity funds in the event performance benchmarks are achieved, or approximately 2% to 12.5% for most of the Global Investment Solutions segment carry fund vehicles) of the net realized income or gain as a carried interest after returning the invested capital, the allocation of preferred returns of generally 7% to 9% (or 4% to 7% for certain longer-dated carry funds) and return of certain fund costs (generally subject to catch-up provisions as set forth in the fund limited partnership agreement). Carried interest is recognized upon appreciation of the funds’ investment values above certain return hurdles set forth in each respective partnership agreement. The Company recognizes revenues attributable to performance allocations based upon the amount that would be due pursuant to the fund partnership agreement at each period end as if the funds were terminated at that date. Accordingly, the amount recognized as investment income for performance allocations reflects the Company’s share of the 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. Because of the inherent uncertainty, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is reasonably possible that the difference could be material.
Carried interest is ultimately realized when: (i) an underlying investment is profitably disposed of, (ii) certain costs borne by the limited partner investors have been reimbursed, (iii) the fund’s cumulative returns are in excess of the preferred return and (iv) the Company has decided to collect carry rather than return additional capital to limited partner investors. Realized carried interest may be required to be returned by the Company in future periods if the funds’ investment values decline below certain levels. 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 fund is considered separately in this regard, and for a given fund, performance allocations can never be negative over the life of a fund. If upon a hypothetical liquidation of a fund’s investments at their then-current fair values, previously recognized and distributed carried interest would be required to be returned, a liability is established for the potential giveback obligation.
Principal investment income (loss) is realized when the Company redeems all or a portion of its investment or when the Company receives or is due cash income, such as dividends or distributions. Principal investment income (loss) also includes the Company’s allocation of earnings from its investment in Fortitude Re through June 2, 2020 (see Note 4). As it relates to the Company’s investments in NGP (see Note 4), principal investment income includes the related amortization of the basis difference between the Company’s carrying value of its investment and the Company’s share of underlying net assets of the investee, as well as the compensation expense associated with compensatory arrangements provided by the Company to employees of its equity method investee. Unrealized principal investment income (loss) results from the Company’s proportionate share of the investee’s unrealized earnings, including changes in the fair value of the underlying investment, as well as the reversal of unrealized gain (loss) at the time an investment is realized.
Interest Income
Interest income is recognized when earned. For debt securities representing non-investment grade beneficial interests in securitizations, the effective yield is determined based on the estimated cash flows of the security. Changes in the effective yield of these securities due to changes in estimated cash flows are recognized on a prospective basis as adjustments to interest income in future periods. Interest income earned by the Company is included in interest and other income in the accompanying unaudited condensed consolidated statements of operations. Interest income of the Consolidated Funds was $56.9 million and $50.8 million for the three months ended September 30, 2021 and 2020, respectively, and $170.4 million and $155.0 million for the nine months ended September 30, 2021 and 2020, respectively, and is included in interest and other income of Consolidated Funds in the accompanying unaudited condensed consolidated statements of operations.
Credit Losses
Under ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), the Company measures all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable
16
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
forecasts. As part of its adoption process, the Company assessed the collection risk characteristics of the outstanding amounts in its due from affiliates balance to define the following pools of receivables:
•Reimbursable fund expenses receivables,
•Management fee receivables,
•Incentive fee receivables,
•Transaction fee receivables,
•Portfolio fee receivables, and
•Notes receivable.
The Company generally utilizes either historical credit loss information or discounted cash flows to calculate expected credit losses for each pool. The Company’s receivables are predominantly with its investment funds, which have low risk of credit loss based on the Company’s historical experience. Historical credit loss data may be adjusted for current conditions and reasonable and supportable forecasts, including the Company’s expectation of near-term realization based on the liquidity of the affiliated investment funds.
Compensation and Benefits
Cash-based Compensation and Benefits – Cash-based compensation and benefits includes salaries, bonuses (discretionary awards and guaranteed amounts), performance payment arrangements and benefits paid and payable to Carlyle employees. Bonuses are accrued over the service period to which they relate.
Equity-Based Compensation – Compensation expense relating to the issuance of equity-based awards is measured at fair value on the grant date. The compensation expense for awards that vest over a future service period is recognized over the relevant service period on a straight-line basis. The compensation expense for awards that do not require future service is recognized immediately. Cash settled equity-based awards are classified as liabilities and are re-measured at the end of each reporting period. The compensation expense for awards that contain performance conditions is recognized when it is probable that the performance conditions will be achieved; in certain instances, such compensation expense may be recognized prior to the grant date of the award. The compensation expense for awards that contain market conditions is based on a grant-date fair value that factors in the probability that the market conditions will be achieved and is recognized over the requisite service period on a straight-line basis.
Equity-based awards issued to non-employees are generally recognized as general, administrative and other expenses, except to the extent they are recognized as part of the Company’s equity method earnings because they are issued to employees of equity method investees.
The Company recognizes equity-based award forfeitures in the period they occur as a reversal of previously recognized compensation expense. The reduction in compensation expense is determined based on the specific awards forfeited during that period. Furthermore, the Company recognizes all excess tax benefits and deficiencies as income tax benefit or expense in the unaudited condensed consolidated statements of operations.
Performance Allocations and Incentive Fee Related Compensation – A portion of the performance allocations and incentive fees earned is due to employees and advisors of the Company. These amounts are accounted for as compensation expense in conjunction with the recognition of the related performance allocations and incentive fee revenue and, until paid, are recognized as a component of the accrued compensation and benefits liability. Accordingly, upon a reversal of performance allocations or incentive fee revenue, the related compensation expense, if any, is also reversed. In October 2021, the Company commenced a program under which, at the Company’s discretion, up to 20% of realized performance allocation related compensation over a threshold amount may be distributed in fully vested newly issued shares of the Company’s common stock. These shares will be accounted for as performance allocations and incentive fee related compensation and will not result in incremental compensation expense. As of September 30, 2021 and December 31, 2020, the Company had recorded a liability of $4.1 billion and $2.5 billion, respectively, related to the portion of accrued performance allocations and incentive fees due to employees and advisors, respectively, which was included in accrued compensation and benefits in the accompanying unaudited condensed consolidated balance sheets.
Income Taxes
The Carlyle Group Inc. is a corporation for U.S. federal income tax purposes and thus is subject to U.S. federal, state and local corporate income taxes. Tax positions taken by the Company are subject to periodic audit by U.S. federal, state, local and foreign taxing authorities. 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
17
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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.
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement reporting and the tax basis of assets and liabilities using enacted tax rates in effect for the period in which the difference is expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change in the provision for income taxes. Further, deferred tax assets are recognized for the expected realization of available net operating loss and tax credit carry forwards. A valuation allowance is recorded on the Company’s gross deferred tax assets when it is “more likely than not” that such asset will not be realized. When evaluating the realizability of the Company’s deferred tax assets, all evidence, both positive and negative, is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies, and expectations of future earnings. Lastly, the Company accounts for the tax on global intangible low-taxed income (“GILTI”) as incurred and therefore has not recorded deferred taxes related to GILTI on its foreign subsidiaries.
Under U.S. GAAP for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is “more likely than not” to be sustained upon examination. The Company analyzes its tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines that uncertainties in tax positions exist, a liability is established, which is included in accounts payable, accrued expenses and other liabilities in the unaudited condensed consolidated financial statements. The Company recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes. If recognized, the entire amount of unrecognized tax positions would be recorded as a reduction in the provision for income taxes.
Non-controlling Interests
Non-controlling interests in consolidated entities represent the component of equity in consolidated entities held by third-party investors. These interests are adjusted for general partner allocations which occur during the reporting period. Any change in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between the controlling and non-controlling interests. Transaction costs incurred in connection with such changes in ownership of a subsidiary are recorded as a direct charge to equity.
Earnings Per Common Share
The Company computes 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.
Investments, at Fair Value
Investments include (i) the Company’s ownership interests (typically general partner interests) in the Funds, (ii) strategic investments made by the Company (both of which are accounted for as equity method investments), (iii) the investments held by the Consolidated Funds (which are presented at fair value in the Company’s unaudited condensed consolidated financial statements), and (iv) certain credit-oriented investments, including investments in the CLOs and the preferred securities of TCG BDC, Inc. (the “BDC Preferred Shares”) (which are accounted for as trading securities).
The valuation procedures utilized for investments of the Funds vary depending on the nature of the investment. The fair value of investments in publicly-traded securities is based on the closing price of the security with adjustments to reflect appropriate discounts if the securities are subject to restrictions.
The fair value of non-equity securities or other investments, which may include instruments that are not listed on an exchange, considers, among other factors, external pricing sources, such as dealer quotes or independent pricing services, recent trading activity or other information that, in the opinion of the Company, may not have been reflected in pricing obtained from external sources.
When valuing private securities or assets without readily determinable market prices, the Company gives consideration to operating results, financial condition, economic and/or market events, recent sales prices and other pertinent information. These
18
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
valuation procedures may vary by investment, but include such techniques as comparable public market valuation, comparable acquisition valuation and discounted cash flow analysis. Because of the inherent uncertainty, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is reasonably possible that the difference could be material. Furthermore, there is no assurance that, upon liquidation, the Company will realize the values presented herein.
Upon the sale of a security or other investment, the realized net gain or loss is computed on a weighted average cost basis, with the exception of the investments held by the CLOs, which compute the realized net gain or loss on a first in, first out basis. Securities transactions are recorded on a trade date basis.
Equity Method Investments
The Company accounts for all investments in which it has or is otherwise presumed to have significant influence, including investments in the unconsolidated Funds and strategic investments, using the equity method of accounting. The carrying value of equity method investments is determined based on amounts invested by the Company, adjusted for the equity in earnings or losses of the investee (including performance allocations) allocated based on the respective partnership agreement, less distributions received. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
Cash and Cash Equivalents
Cash and cash equivalents include cash held at banks and cash held for distributions, including investments with original maturities of less than three months when purchased.
Cash and Cash Equivalents Held at Consolidated Funds
Cash and cash equivalents held at Consolidated Funds consists of cash and cash equivalents held by the Consolidated Funds, which, although not legally restricted, is not available to fund the general liquidity needs of the Company.
Restricted Cash
Restricted cash primarily represents cash held by the Company’s foreign subsidiaries due to certain government regulatory capital requirements as well as certain amounts held on behalf of Carlyle funds.
Derivative Instruments
The Company uses derivative instruments primarily to reduce its exposure to changes in foreign currency exchange rates. Derivative instruments are recognized at fair value in the unaudited condensed consolidated balance sheets with changes in fair value recognized in the unaudited condensed consolidated statements of operations for all derivatives not designated as hedging instruments.
Securities Sold Under Agreements to Repurchase
As it relates to certain European CLOs sponsored by the Company, securities sold under agreements to repurchase (“repurchase agreements”) are accounted for as collateralized financing transactions. The Company provides securities to counterparties to collateralize amounts borrowed under repurchase agreements on terms that permit the counterparties to repledge or resell the securities to others. As of September 30, 2021, $148.8 million of securities were transferred to counterparties under repurchase agreements and are included within investments in the unaudited condensed consolidated balance sheets. Cash received under repurchase agreements is recognized as a liability within debt obligations in the unaudited condensed consolidated balance sheets. Interest expense is recognized on an effective yield basis and is included within interest expense in the unaudited condensed consolidated statements of operations. See Note 5 for additional information.
Fixed Assets
Fixed assets consist of furniture, fixtures and equipment, leasehold improvements, and computer hardware and software and are stated at cost, less accumulated depreciation and amortization. Depreciation is recognized on a straight-line method over the assets’ estimated useful lives, which for leasehold improvements are the lesser of the lease terms or the life of the asset, and to seven years for other fixed assets. Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
19
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Leases
The Company accounts for its leases in accordance with ASU 2016-2, Leases (Topic 842), and recognizes a lease liability and right-of-use asset in the condensed consolidated balance sheet for contracts that it determines are leases or contain a lease. The Company’s leases primarily consist of operating leases for office space in various countries around the world. The Company also has operating leases for office equipment and vehicles, which are not significant. The Company does not separate non-lease components from lease components for its office space and equipment operating leases and instead accounts for each separate lease component and its associated non-lease component as a single lease component. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. The Company’s right-of-use assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Lease right-of-use assets include initial direct costs incurred by the Company and are presented net of deferred rent and lease incentives. Absent an implicit interest rate in the lease, the Company uses its incremental borrowing rate, adjusted for the effects of collateralization, based on the information available at commencement in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease right-of-use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
The Company does not recognize a lease liability or right-of-use asset on the balance sheet for short-term leases. Instead, the Company recognizes short-term lease payments as an expense on a straight-line basis over the lease term. A short-term lease is defined as a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. When determining whether a lease qualifies as a short-term lease, the Company evaluates the lease term and the purchase option in the same manner as all other leases.
Intangible Assets and Goodwill
The Company’s intangible assets consist of acquired contractual rights to earn future fee income, including management and advisory fees, customer relationships, and acquired trademarks. Finite-lived intangible assets are amortized over their estimated useful lives, which range from to ten years, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Intangible asset amortization expense was $1.8 million and $3.7 million during the three months ended September 30, 2021 and 2020, respectively, and $8.4 million and $10.9 million during the nine months ended September 30, 2021 and 2020, respectively, and is included in general, administrative, and other expenses in the unaudited condensed consolidated statements of operations.
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired and is recorded in the functional currency of the acquired entity. Goodwill is recognized as an asset and is reviewed for impairment annually as of October 1st and between annual tests when events and circumstances indicate that impairment may have occurred.
Deferred Revenue
Deferred revenue represents management fees and other revenue received prior to the balance sheet date, which has not yet been earned. The increase in the deferred revenue balance for the nine months ended September 30, 2021 was primarily driven by cash payments received in advance of the Company satisfying its performance obligations, partially offset by revenues that were included in the deferred revenue balance at the beginning of the period.
Accumulated Other Comprehensive Income (Loss)
The Company’s accumulated other comprehensive income (loss) is comprised of foreign currency translation adjustments and gains and losses on defined benefit plans sponsored by AlpInvest. The components of accumulated other comprehensive income (loss) as of September 30, 2021 and December 31, 2020 were as follows:
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Dollars in millions) | |||||||||||
| Currency translation adjustments | $ | (216.8) | $ | (181.4) | |||||||
| Unrealized losses on defined benefit plans | (23.4) | (27.3) | |||||||||
| Total | $ | (240.2) | $ | (208.7) | |||||||
20
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Foreign Currency Translation
Non-U.S. dollar denominated assets and liabilities are translated at period-end rates of exchange, and the unaudited condensed consolidated statements of operations are translated at rates of exchange in effect throughout the period. Foreign currency gains (losses) resulting from transactions outside of the functional currency of an entity of $(9.9) million and $(2.6) million for the three months ended September 30, 2021 and 2020, respectively, and $(11.8) million and $18.9 million for the nine months ended September 30, 2021 and 2020, respectively, are included in general, administrative and other expenses in the unaudited condensed consolidated statements of operations.
Recent Accounting Pronouncements
Recently Issued Accounting Standards Adopted as of January 1, 2021
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12, among other changes, (i) removes certain exceptions to the general principles in Topic 740, (ii) provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and (iii) provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The guidance was adopted by the Company on January 1, 2021 and the impact was not material.
3. Fair Value Measurement
The fair value measurement accounting guidance 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.
Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:
Level I – inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date. The types of financial instruments in this category include unrestricted securities, such as equities and derivatives, listed in active markets. The Company does not adjust the quoted price for these instruments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
Level II – inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. The types of financial instruments in this category include less liquid and restricted securities listed in active markets, securities traded in other than active markets, government and agency securities, and certain over-the-counter derivatives where the fair value is based on observable inputs.
Level III – inputs to the valuation methodology are unobservable and significant to overall fair value measurement. The inputs into the determination of fair value require significant management judgment or estimation. The types of financial instruments in this category include investments in privately-held entities, non-investment grade residual interests in securitizations, collateralized loan obligations, and certain over-the-counter derivatives where fair value is based on unobservable inputs.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
In certain cases, debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments and various relationships between investments.
21
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of September 30, 2021:
| (Dollars in millions) | Level I | Level II | Level III | Total | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments of Consolidated Funds: | |||||||||||||||||||||||
| Equity securities | $ | — | $ | — | $ | 18.9 | $ | 18.9 | |||||||||||||||
| Bonds | — | — | 581.1 | 581.1 | |||||||||||||||||||
| Loans | — | — | 5,852.9 | 5,852.9 | |||||||||||||||||||
| — | — | 6,452.9 | 6,452.9 | ||||||||||||||||||||
Investments in CLOs and other(1) | 1.4 | 45.6 | 423.4 | 470.4 | |||||||||||||||||||
| Subtotal | $ | 1.4 | $ | 45.6 | $ | 6,876.3 | $ | 6,923.3 | |||||||||||||||
Investments measured at net asset value(2) | 33.9 | ||||||||||||||||||||||
| Total | $ | 6,957.2 | |||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
Loans payable of Consolidated Funds(3) | $ | — | $ | — | $ | 5,938.3 | $ | 5,938.3 | |||||||||||||||
| Foreign currency forward contracts | — | 0.2 | — | 0.2 | |||||||||||||||||||
| Total | $ | — | $ | 0.2 | $ | 5,938.3 | $ | 5,938.5 | |||||||||||||||
(1)The Level III balance excludes a corporate investment in equity securities which the Company has elected to account for under the measurement alternative for equity securities without readily determinable fair values pursuant to ASC 321, Investments – Equity Securities. In July 2021, the Company remeasured this investment to a fair value of $36.6 million due to an observable price change. As such, the fair value of $36.6 million is not as of September 30, 2021. As a non-recurring fair value measurement, the fair value of these equity securities is excluded from the tabular Level III rollforward disclosures.
(2)Balance represents Fund Investments that the Company reports based on the most recent available information which typically has a lag of up to 90 days, of which $16.8 million relates to investments of consolidated funds.
(3)Senior and subordinated notes issued by CLO vehicles are valued based on the more observable fair value of the CLO financial assets, less (i) the fair value of any beneficial interests held by the Company and (ii) the carrying value of any beneficial interests that represent compensation for services.
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of December 31, 2020:
| (Dollars in millions) | Level I | Level II | Level III | Total | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments of Consolidated Funds: | |||||||||||||||||||||||
| Equity securities | $ | — | $ | — | $ | 9.4 | $ | 9.4 | |||||||||||||||
| Bonds | — | — | 550.4 | 550.4 | |||||||||||||||||||
| Loans | — | — | 5,497.1 | 5,497.1 | |||||||||||||||||||
| — | — | 6,056.9 | 6,056.9 | ||||||||||||||||||||
| Investments in CLOs and other | — | — | 570.8 | 570.8 | |||||||||||||||||||
| Foreign currency forward contracts | — | 0.7 | — | 0.7 | |||||||||||||||||||
| Subtotal | $ | — | $ | 0.7 | $ | 6,627.7 | $ | 6,628.4 | |||||||||||||||
Investments measured at net asset value(1) | 16.4 | ||||||||||||||||||||||
| Total | $ | 6,644.8 | |||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
Loans payable of Consolidated Funds(2) | $ | — | $ | — | $ | 5,563.0 | $ | 5,563.0 | |||||||||||||||
| Foreign currency forward contracts | — | 0.4 | — | 0.4 | |||||||||||||||||||
| Total | $ | — | $ | 0.4 | $ | 5,563.0 | $ | 5,563.4 | |||||||||||||||
(1)Balance represents Fund Investments that the Company reports based on the most recent available information which typically has a lag of up to 90 days.
22
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(2)Senior and subordinated notes issued by CLO vehicles are valued based on the more observable fair value of the CLO financial assets, less (i) the fair value of any beneficial interests held by the Company and (ii) the carrying value of any beneficial interests that represent compensation for services.
Investment professionals with responsibility for the underlying investments are responsible for preparing the investment valuations pursuant to the policies, methodologies and templates prepared by the Company’s valuation group, which is a team made up of dedicated valuation professionals reporting to the Company’s chief accounting officer. The valuation group is responsible for maintaining the Company’s valuation policy and related guidance, templates and systems that are designed to be consistent with the guidance found in ASC 820, Fair Value Measurement. These valuations, inputs and preliminary conclusions are reviewed by the fund accounting teams. The valuations are then reviewed and approved by the respective fund valuation subcommittees, which include the respective fund head(s), segment head, chief financial officer and chief accounting officer, as well as members of the valuation group. The valuation group compiles the aggregate results and significant matters and presents them for review and approval by the global valuation committee, which includes the Company’s co-chairmen of the board, chairman emeritus, chief executive officer, chief risk officer, chief financial officer, chief accounting officer, and the business segment heads, and observed by the chief compliance officer, the director of internal audit, the Company’s audit committee and others. Additionally, each quarter a sample of valuations is reviewed by external valuation firms. Valuations of the funds’ investments are used in the calculation of accrued performance allocations, or “carried interest”.
In the absence of observable market prices, the Company values its investments using valuation methodologies applied on a consistent basis. For some investments little market activity may exist. Management’s determination of fair value is then based on the best information available in the circumstances and may incorporate management’s own assumptions and involve a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks. Investments for which market prices are not observable include private investments in the equity of operating companies and real estate properties, and certain debt positions. The valuation technique for each of these investments is described below:
Private Equity and Real Estate Investments – The fair values of private equity investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), the discounted cash flow method, public market or private transactions, valuations for comparable companies or sales of comparable assets, and other measures which, in many cases, are unaudited at the time received. The methods used to estimate the fair value of real estate investments include the discounted cash flow method and/or capitalization rate (“cap rate”) analysis. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (e.g., applying a key performance metric of the investment such as EBITDA or net operating income to a relevant valuation multiple or cap rate observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar models. Adjustments to observable valuation measures are frequently made upon the initial investment to calibrate the initial investment valuation to industry observable inputs. Such adjustments are made to align the investment to observable industry inputs for differences in size, profitability, projected growth rates, geography and capital structure if applicable. The adjustments are reviewed with each subsequent valuation to assess how the investment has evolved relative to the observable inputs. Additionally, the investment may be subject to certain specific risks and/or development milestones which are also taken into account in the valuation assessment. Option pricing models and similar tools do not currently drive a significant portion of private equity or real estate valuations and are used primarily to value warrants, derivatives, certain restrictions and other atypical investment instruments.
Credit-Oriented Investments – The fair values of credit-oriented investments (including corporate treasury investments) are generally determined on the basis of prices between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments and various relationships between investments. Specifically, for investments in distressed debt and corporate loans and bonds, the fair values are generally determined by valuations of comparable investments. In some instances, the Company may utilize other valuation techniques, including the discounted cash flow method.
CLO Investments and CLO Loans Payable – The Company measures the financial liabilities of its consolidated CLOs based on the fair value of the financial assets of its consolidated CLOs, as the Company believes the fair value of the financial assets are more observable. The fair values of the CLO assets are primarily based on quotations from reputable dealers or relevant pricing services. In situations where valuation quotations are unavailable, the assets are valued based on similar securities, market index changes, and other factors. Generally, the assets of the CLOs are not publicly traded and are classified as Level III. Similar to the CLO assets, the fair values of the CLO structured asset positions are
23
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
primarily determined based on relevant pricing services or, in certain instances, discounted cash flow analyses. Those analyses consider the position size, liquidity, current financial condition of the CLOs, the third party financing environment, reinvestment rates, recovery lags, discount rates and default forecasts and are compared to broker quotations from market makers and third party dealers. The Company performs certain procedures to ensure the reliability of the quotations from pricing services for its CLO assets and CLO structured asset positions, which generally includes corroborating prices with a discounted cash flow analysis.
The Company measures the CLO loans payable held by third party beneficial interest holders on the basis of the fair value of the financial assets of the CLO and the beneficial interests held by the Company. The Company continues to measure the CLO loans payable that it holds at fair value based on relevant pricing services or discounted cash flow analyses, as described above.
Fund Investments – The Company’s primary and secondary investments in external funds are valued based on its proportionate share of the net assets provided by the third party general partners of the underlying fund partnerships based on the most recent available information which typically has a lag of up to 90 days. The terms of the investments generally preclude the ability to redeem the investment. Distributions from these investments will be received as the underlying assets in the funds are liquidated, the timing of which cannot be readily determined.
24
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The changes in financial instruments measured at fair value for which the Company has used Level III inputs to determine fair value are as follows (Dollars in millions):
| Financial Assets | |||||||||||||||||||||||||||||
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
| Investments of Consolidated Funds | |||||||||||||||||||||||||||||
| Equity securities | Bonds | Loans | Investments in CLOs and other | Total | |||||||||||||||||||||||||
| Balance, beginning of period | $ | 18.3 | $ | 542.0 | $ | 5,543.6 | $ | 431.5 | $ | 6,535.4 | |||||||||||||||||||
Consolidation of funds (1) | 3.3 | — | 490.4 | (3.0) | 490.7 | ||||||||||||||||||||||||
| Purchases | 0.1 | 108.1 | 1,058.4 | 9.6 | 1,176.2 | ||||||||||||||||||||||||
| Sales and distributions | (1.2) | (44.0) | (781.0) | (14.9) | (841.1) | ||||||||||||||||||||||||
| Settlements | — | (0.2) | (378.4) | — | (378.6) | ||||||||||||||||||||||||
| Realized and unrealized gains (losses), net | |||||||||||||||||||||||||||||
| Included in earnings | (1.3) | (11.3) | 13.3 | 6.9 | 7.6 | ||||||||||||||||||||||||
| Included in other comprehensive income | (0.3) | (13.5) | (93.4) | (6.7) | (113.9) | ||||||||||||||||||||||||
| Balance, end of period | $ | 18.9 | $ | 581.1 | $ | 5,852.9 | $ | 423.4 | $ | 6,876.3 | |||||||||||||||||||
| Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date | $ | (1.9) | $ | 1.5 | $ | (4.2) | $ | 7.3 | $ | 2.7 | |||||||||||||||||||
| Changes in unrealized gains (losses) included in other comprehensive income related to financial assets still held at the reporting date | $ | (0.3) | $ | (13.7) | $ | (92.3) | $ | (6.7) | $ | (113.0) | |||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
| Investments of Consolidated Funds | |||||||||||||||||||||||||||||
| Equity securities | Bonds | Loans | Investments in CLOs and other (2) | Total | |||||||||||||||||||||||||
| Balance, beginning of period | $ | 9.4 | $ | 550.4 | $ | 5,497.1 | $ | 570.8 | $ | 6,627.7 | |||||||||||||||||||
Deconsolidation/consolidation of funds (1) | 5.7 | — | 314.2 | 23.1 | 343.0 | ||||||||||||||||||||||||
| Purchases | 0.6 | 472.0 | 3,375.3 | 71.7 | 3,919.6 | ||||||||||||||||||||||||
| Sales and distributions | (3.5) | (405.2) | (2,199.0) | (254.9) | (2,862.6) | ||||||||||||||||||||||||
| Settlements | — | (3.8) | (1,020.2) | — | (1,024.0) | ||||||||||||||||||||||||
| Realized and unrealized gains (losses), net | |||||||||||||||||||||||||||||
| Included in earnings | 7.3 | (1.3) | 103.1 | 16.5 | 125.6 | ||||||||||||||||||||||||
| Included in other comprehensive income | (0.6) | (31.0) | (217.6) | (3.8) | (253.0) | ||||||||||||||||||||||||
| Balance, end of period | $ | 18.9 | $ | 581.1 | $ | 5,852.9 | $ | 423.4 | $ | 6,876.3 | |||||||||||||||||||
| Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date | $ | 5.2 | $ | 7.7 | $ | 61.1 | $ | 16.3 | $ | 90.3 | |||||||||||||||||||
| Changes in unrealized gains (losses) included in other comprehensive income related to financial assets still held at the reporting date | $ | (0.4) | $ | (22.0) | $ | (185.3) | $ | (3.8) | $ | (211.5) | |||||||||||||||||||
(1) As a result of the consolidation of one CLO during the three months ended September 30, 2021 and two CLOs during the nine months ended September 30, 2021, the investments that the Company held in those CLOs are now eliminated in consolidation and no longer included in investments in CLOs and other. As a result of the deconsolidation of one CLO during the nine months ended September 30, 2021, the investment that the Company held in that CLO is no longer eliminated in consolidation and is now included in investments in CLOs and other.
(2) The beginning balance of Investments in CLOs and other has been revised to reflect the exclusion of Fund Investments measured at fair value using the NAV per share practical expedient from the fair value hierarchy.
25
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
| Financial Assets | |||||||||||||||||||||||||||||
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Investments of Consolidated Funds | |||||||||||||||||||||||||||||
| Equity securities | Bonds | Loans | Investments in CLOs and other | Total | |||||||||||||||||||||||||
| Balance, beginning of period | $ | 108.8 | $ | 438.4 | $ | 4,034.0 | $ | 530.5 | $ | 5,111.7 | |||||||||||||||||||
| Purchases | 0.4 | 68.6 | 933.7 | 23.8 | 1,026.5 | ||||||||||||||||||||||||
| Sales and distributions | (33.5) | (98.6) | (261.7) | (8.1) | (401.9) | ||||||||||||||||||||||||
| Settlements | — | — | (89.0) | — | (89.0) | ||||||||||||||||||||||||
| Realized and unrealized gains (losses), net | |||||||||||||||||||||||||||||
| Included in earnings | 4.0 | 34.9 | 126.0 | 32.2 | 197.1 | ||||||||||||||||||||||||
| Included in other comprehensive income | — | 18.6 | 130.2 | 9.1 | 157.9 | ||||||||||||||||||||||||
| Balance, end of period | $ | 79.7 | $ | 461.9 | $ | 4,873.2 | $ | 587.5 | $ | 6,002.3 | |||||||||||||||||||
| Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date | $ | 4.0 | $ | 31.1 | $ | 108.0 | $ | 32.2 | $ | 175.3 | |||||||||||||||||||
| Changes in unrealized gains (losses) included in other comprehensive income related to financial assets still held at the reporting date | $ | — | $ | 14.5 | $ | 119.9 | $ | 9.1 | $ | 143.5 | |||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Investments of Consolidated Funds | |||||||||||||||||||||||||||||
| Equity securities | Bonds | Loans | Investments in CLOs and other | Total | |||||||||||||||||||||||||
| Balance, beginning of period | $ | 19.4 | $ | 574.1 | $ | 4,413.8 | $ | 496.2 | $ | 5,503.5 | |||||||||||||||||||
| Purchases | 87.8 | 209.5 | 1,751.8 | 147.5 | 2,196.6 | ||||||||||||||||||||||||
| Sales and distributions | (33.7) | (313.5) | (941.4) | (64.4) | (1,353.0) | ||||||||||||||||||||||||
| Settlements | — | — | (282.8) | — | (282.8) | ||||||||||||||||||||||||
| Realized and unrealized gains (losses), net | |||||||||||||||||||||||||||||
| Included in earnings | 6.2 | (26.1) | (204.1) | 12.8 | (211.2) | ||||||||||||||||||||||||
| Included in other comprehensive income | — | 17.9 | 135.9 | (4.6) | 149.2 | ||||||||||||||||||||||||
| Balance, end of period | $ | 79.7 | $ | 461.9 | $ | 4,873.2 | $ | 587.5 | $ | 6,002.3 | |||||||||||||||||||
| Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date | $ | 6.1 | $ | (22.7) | $ | (193.2) | $ | 12.8 | $ | (197.0) | |||||||||||||||||||
| Changes in unrealized gains (losses) included in other comprehensive income related to financial assets still held at the reporting date | $ | — | $ | 14.6 | $ | 110.3 | $ | (4.6) | $ | 120.3 | |||||||||||||||||||
26
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
| Financial Liabilities | |||||||||||
| Loans Payable of Consolidated Funds | |||||||||||
| Three Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Balance, beginning of period | $ | 5,373.9 | $ | 4,412.0 | |||||||
| Consolidation of funds | 480.0 | — | |||||||||
| Borrowings | 1,133.0 | 745.2 | |||||||||
| Paydowns | (712.0) | (1.3) | |||||||||
| Sales | (237.5) | (260.4) | |||||||||
| Realized and unrealized (gains) losses, net | |||||||||||
| Included in earnings | (2.4) | 139.1 | |||||||||
| Included in other comprehensive income | (96.7) | 147.1 | |||||||||
| Balance, end of period | $ | 5,938.3 | $ | 5,181.7 | |||||||
| Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date | $ | 3.7 | $ | 139.1 | |||||||
| Changes in unrealized (gains) losses included in other comprehensive income related to financial liabilities still held at the reporting date | $ | (127.0) | $ | 147.1 | |||||||
| Financial Liabilities | |||||||||||
| Loans Payable of Consolidated Funds | |||||||||||
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Balance, beginning of period | $ | 5,563.0 | $ | 4,685.2 | |||||||
| Deconsolidation/consolidation of funds | 360.8 | — | |||||||||
| Borrowings | 1,966.6 | 1,886.9 | |||||||||
| Paydowns | (1,303.0) | (1,092.0) | |||||||||
| Sales | (515.2) | (260.4) | |||||||||
| Realized and unrealized (gains) losses, net | |||||||||||
| Included in earnings | 90.7 | (188.5) | |||||||||
| Included in other comprehensive income | (224.6) | 150.5 | |||||||||
| Balance, end of period | $ | 5,938.3 | $ | 5,181.7 | |||||||
| Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date | $ | 98.1 | $ | (203.4) | |||||||
| Changes in unrealized (gains) losses included in other comprehensive income related to financial liabilities still held at the reporting date | $ | (281.4) | $ | 158.9 | |||||||
Realized and unrealized gains and losses included in earnings for Level III investments for investments in CLOs and other investments are included in investment income (loss), and such gains and losses for investments of Consolidated Funds and loans payable of Consolidated Funds are included in net investment gains (losses) of Consolidated Funds in the unaudited condensed consolidated statements of operations.
Gains and losses included in other comprehensive income for all Level III financial asset and liabilities are included in accumulated other comprehensive loss, non-controlling interests in consolidated entities.
27
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes quantitative information about the Company’s Level III inputs as of September 30, 2021:
| Fair Value at | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | ||||||||||||||||||||
| (Dollars in millions) | September 30, 2021 | ||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments of Consolidated Funds: | |||||||||||||||||||||||
| Equity securities | $ | 18.9 | Consensus Pricing | Indicative Quotes ($ per share) | 0.00 - 74.50 (0.66) | ||||||||||||||||||
| Bonds | 581.1 | Consensus Pricing | Indicative Quotes (% of Par) | 94 - 109 (100) | |||||||||||||||||||
| Loans | 5,834.3 | Consensus Pricing | Indicative Quotes (% of Par) | 37 - 109 (99) | |||||||||||||||||||
| 18.6 | Discounted Cash Flow | Discount Rates | 3% - 8% (6%) | ||||||||||||||||||||
| 6,452.9 | |||||||||||||||||||||||
| Investments in CLOs and other: | |||||||||||||||||||||||
| Senior secured notes | 274.9 | Consensus Pricing with Discounted Cash Flow | Indicative Quotes (% of Par) | 84 - 101 (99) | |||||||||||||||||||
| Discount Margins (Basis Points) | 50 - 1,330 (256) | ||||||||||||||||||||||
| Default Rates | 1% - 2% (1%) | ||||||||||||||||||||||
| Recovery Rates | 50% - 70% (60%) | ||||||||||||||||||||||
| Subordinated notes and preferred shares | 69.8 | Consensus Pricing with Discounted Cash Flow | Indicative Quotes (% of Par) | 43 - 88 (72) | |||||||||||||||||||
| Discount Rates | 10% - 25% (17%) | ||||||||||||||||||||||
| Default Rates | 1% - 2% (1%) | ||||||||||||||||||||||
| Recovery Rates | 50% - 70% (60%) | ||||||||||||||||||||||
| BDC preferred shares | 71.8 | Discounted Cash Flow | Discount Rates | 7% - 7% (7%) | |||||||||||||||||||
| Aviation subordinated notes | 6.9 | Discounted Cash Flow | Discount Rates | 16% - 16% (16%) | |||||||||||||||||||
| Total | $ | 6,876.3 | |||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Loans payable of Consolidated Funds: | |||||||||||||||||||||||
| Senior secured notes | $ | 5,700.1 | Other (1) | N/A | N/A | ||||||||||||||||||
| Subordinated notes and preferred shares | 238.2 | Consensus Pricing with Discounted Cash Flow | Indicative Quotes (% of Par) | 42 - 77 (56) | |||||||||||||||||||
| Discount Rates | 15% - 25% (20%) | ||||||||||||||||||||||
| Default Rates | 1% - 2% (1%) | ||||||||||||||||||||||
| Recovery Rates | 50% - 70% (60%) | ||||||||||||||||||||||
| Total | $ | 5,938.3 | |||||||||||||||||||||
(1) Senior and subordinated notes issued by CLO vehicles are classified based on the more observable fair value of the CLO financial assets, less (i) the fair value of any beneficial interests held by the Company and (ii) the carrying value of any beneficial interests that represent compensation for services.
28
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes quantitative information about the Company’s Level III inputs as of December 31, 2020:
| Fair Value at | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | ||||||||||||||||||||
| (Dollars in millions) | December 31, 2020 | ||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments of Consolidated Funds: | |||||||||||||||||||||||
| Equity securities | $ | 9.4 | Consensus Pricing | Indicative Quotes ($ per share) | 0.00 - 40.00 (0.57) | ||||||||||||||||||
| Bonds | 550.4 | Consensus Pricing | Indicative Quotes (% of Par) | 85 - 108 (98) | |||||||||||||||||||
| Loans | 5,497.1 | Consensus Pricing | Indicative Quotes (% of Par) | 15 - 108 (97) | |||||||||||||||||||
| 6,056.9 | |||||||||||||||||||||||
| Investments in CLOs and other | |||||||||||||||||||||||
| Senior secured notes | 437.0 | Discounted Cash Flow with Consensus Pricing | Discount Margins (Basis Points) | 85 - 1,725 (227) | |||||||||||||||||||
| Default Rates | 1% - 2% (1%) | ||||||||||||||||||||||
| Recovery Rates | 50% - 70% (60%) | ||||||||||||||||||||||
| Indicative Quotes (% of Par) | 71 - 100 (98) | ||||||||||||||||||||||
| Subordinated notes and preferred shares | 52.5 | Discounted Cash Flow with Consensus Pricing | Discount Rate | 16% - 30% (23%) | |||||||||||||||||||
| Default Rates | 1% - 2% (1%) | ||||||||||||||||||||||
| Recovery Rates | 50% - 70% (60%) | ||||||||||||||||||||||
| Indicative Quotes (% of Par) | 31 - 90 (46) | ||||||||||||||||||||||
| BDC preferred shares | 60.0 | Discounted Cash Flow | Discount Rates | 7% - 7% (7%) | |||||||||||||||||||
| Aviation subordinated notes | 7.2 | Discounted Cash Flow | Discount Rates | 20% - 20% (20%) | |||||||||||||||||||
| Loans | 14.1 | Consensus Pricing | Indicative Quotes (% of Par) | 98 - 100 (100) | |||||||||||||||||||
| Total | $ | 6,627.7 | |||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Loans payable of Consolidated Funds: | |||||||||||||||||||||||
| Senior secured notes | $ | 5,358.9 | Other (1) | N/A | N/A | ||||||||||||||||||
| Subordinated notes and preferred shares | 204.1 | Discounted Cash Flow with Consensus Pricing | Discount Rates | 16% - 30% (22%) | |||||||||||||||||||
| Default Rates | 1% - 2% (1%) | ||||||||||||||||||||||
| Recovery Rates | 50% - 70% (60%) | ||||||||||||||||||||||
| Indicative Quotes (% of Par) | 30 - 91 (50) | ||||||||||||||||||||||
| Total | $ | 5,563.0 | |||||||||||||||||||||
(1) Senior and subordinated notes issued by CLO vehicles are classified based on the more observable fair value of the CLO financial assets, less (i) the fair value of any beneficial interests held by the Company and (ii) the carrying value of any beneficial interests that represent compensation for services.
The significant unobservable inputs used in the fair value measurement of investments of the Company’s consolidated funds are indicative quotes. Significant decreases in indicative quotes in isolation would result in a significantly lower fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Company’s investments in CLOs and other investments include indicative quotes, discount margins, discount rates, default rates, and recovery rates. Significant decreases in indicative quotes or recovery rates in isolation would result in a significantly lower fair value measurement. Significant increases in discount margins, discount rates or default rates in isolation would result in a significantly lower fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Company’s loans payable of Consolidated Funds are indicative quotes, discount rates, default rates, and recovery rates. Significant increases in discount rates or default rates in isolation would result in a significantly lower fair value measurement. Significant decreases in indicative quotes or recovery rates in isolation would result in a significantly lower fair value measurement.
29
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
4. Investments
Investments consist of the following:
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Dollars in millions) | |||||||||||
| Accrued performance allocations | $ | 8,100.3 | $ | 4,968.6 | |||||||
| Principal equity method investments, excluding performance allocations | 2,039.3 | 1,810.8 | |||||||||
| Principal investments in CLOs and other | 538.9 | 601.5 | |||||||||
| Total | $ | 10,678.5 | $ | 7,380.9 | |||||||
Accrued Performance Allocations
The components of accrued performance allocations are as follows:
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Dollars in millions) | |||||||||||
| Global Private Equity | $ | 6,485.7 | $ | 3,926.1 | |||||||
| Global Credit | 262.8 | 132.3 | |||||||||
Global Investment Solutions (1) | 1,351.8 | 910.2 | |||||||||
| Total | $ | 8,100.3 | $ | 4,968.6 | |||||||
(1) The Company’s primary and secondary investments in external funds are generally valued based on its proportionate share of the net assets provided by the third party general partners of the underlying fund partnerships based on the most recent available information which typically has a lag of up to 90 days. As a result, amounts presented may not include the impact of economic activity in the current quarter.
Approximately 30% and 41% of accrued performance allocations at September 30, 2021 and December 31, 2020, respectively, are related to Carlyle Partners VI, L.P., one of the Company’s Global Private Equity funds.
Accrued performance allocations are shown gross of the Company’s accrued performance allocations and incentive fee-related compensation (see Note 6), and accrued giveback obligations, which are separately presented in the unaudited condensed consolidated balance sheets. The components of the accrued giveback obligations are as follows:
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Dollars in millions) | |||||||||||
| Global Private Equity | $ | (18.4) | $ | (18.4) | |||||||
| Global Credit | (6.3) | (0.3) | |||||||||
| Total | $ | (24.7) | $ | (18.7) | |||||||
30
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Principal Equity Method Investments, Excluding Performance Allocations
The Company’s principal equity method investments (excluding performance allocations) include its fund investments in Global Private Equity, Global Credit, and Global Investment Solutions typically as general partner interests, and its strategic investments in Fortitude Re (included within Global Credit) and NGP (included within Global Private Equity), which are not consolidated. Principal investments are related to the following segments:
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Dollars in millions) | |||||||||||
| Global Private Equity | $ | 1,220.2 | $ | 1,082.1 | |||||||
| Global Credit | 749.1 | 671.9 | |||||||||
| Global Investment Solutions | 70.0 | 56.8 | |||||||||
| Total | $ | 2,039.3 | $ | 1,810.8 | |||||||
Strategic Investment in Fortitude Re (f/k/a DSA Re)
On November 13, 2018, the Company acquired a 19.9% interest in Fortitude Group Holdings, LLC (“Fortitude Holdings”), a wholly owned subsidiary of American International Group, Inc. (“AIG”) (“the Minority Transaction”), pursuant to a Membership Interest Purchase Agreement by and among the Company, AIG and Fortitude Holdings, dated as of July 31, 2018 (the “2018 MIPA”). Fortitude Holdings owns 100% of the outstanding common shares of Fortitude Reinsurance Company Ltd., a Bermuda domiciled reinsurer (“Fortitude Re”, f/k/a “DSA Re”) established to reinsure a portfolio of AIG’s legacy life, annuity and property and casualty liabilities.
The Company paid $381 million in cash at closing of the Minority Transaction (the “Initial Purchase Price”) and expects to pay up to $95 million in additional deferred consideration following December 31, 2023. In May 2020, the Initial Purchase Price was adjusted upward by $99.5 million in accordance with the 2018 MIPA as Fortitude Holdings chose not to distribute a planned non-pro rata dividend to AIG prior to May 13, 2020. The Company paid $79.6 million of such adjustment in May 2020 and will pay the remaining $19.9 million following December 31, 2023.
On June 2, 2020, Carlyle FRL, L.P. (“Carlyle FRL”), a Carlyle-affiliated investment fund, acquired a 51.6% ownership interest in Fortitude Holdings from AIG (the “Control Transaction”) and T&D United Capital Co., Ltd. (“T&D”), a subsidiary of T&D Holdings, Inc., purchased a 25.0% ownership interest as a strategic third-party investor pursuant to a Membership Interest Purchase Agreement by and among the Company, AIG, Carlyle FRL, and T&D, dated as of November 25, 2019 (the “2019 MIPA”). At closing, the Company contributed its existing 19.9% interest in Fortitude Holdings to Carlyle FRL, such that Carlyle FRL holds a 71.5% interest in Fortitude Holdings. Taken together, Carlyle FRL and T&D have 96.5% ownership of Fortitude Holdings. AIG initially agreed to a post-closing purchase price adjustment in the event of certain adverse reserve developments in the Fortitude Re property and casualty insurance business. Effective June 30, 2021, Fortitude Re and AIG entered into an agreement resulting in the termination of any obligations of AIG to Fortitude Re related to such adverse reserve development.
The Company entered into a strategic asset management relationship with Fortitude Holdings pursuant to which Fortitude Holdings committed to allocate assets in asset management strategies and vehicles of the Company and its affiliates. If Fortitude Holdings fails to allocate an agreed upon amount of assets to the Company’s asset management strategies and vehicles within 30 to 36 months of the closing of the Minority Transaction, the Company may be entitled to certain payments from Fortitude Holdings based on the commitment shortfall and assumed customary rates. As of September 30, 2021, Fortitude Holdings and AIG have committed approximately $6.3 billion of capital to-date to various Carlyle strategies, and the Company does not expect to receive any payments for a commitment shortfall.
Prior to the Control Transaction, the Company’s investment was accounted for under the equity method of accounting by recognizing its pro rata share of Fortitude Holdings’ U.S. GAAP earnings, which is included in principal investment income in the unaudited condensed consolidated statements of operations. These amounts are inclusive of unrealized gains (losses) related to the change in fair value of embedded derivatives related to certain reinsurance contracts included in Fortitude Re’s U.S. GAAP financial statements. Modified coinsurance is subject to the general accounting principles for hedging, specifically the guidance originally issued as Derivatives Implementation Group Issue No. B36: Embedded Derivatives: Modified Coinsurance Agreements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments (“DIG B36”). As of December 31, 2019, the Company’s investment
31
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
in Fortitude Holdings was $1,200.9 million, which reflected $628.2 million of cumulative unrealized gains related to the change in the fair value of embedded derivatives.
At the time the Company contributed its existing 19.9% stake in Fortitude Holdings to Carlyle FRL, the Company’s investment became an ownership interest in the fund. Accordingly, the Company began accounting for its investment under the equity method based on its net asset value in Carlyle FRL, which is an investment company that accounts for its investment in Fortitude Holdings at fair value. The contribution of the Company’s 19.9% interest to Carlyle FRL resulted in a loss in principal investment income (loss) of $620.7 million in the three months ended June 30, 2020. As of September 30, 2021, the Company’s investment in Carlyle FRL was $655.7 million, relative to its cost of $465.3 million. Following the contribution, the Company no longer records its pro rata share of the U.S. GAAP earnings of Fortitude Holdings. Refer to Note 4 in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 for summarized financial information of Fortitude Holdings for the three and six months ended June 30, 2020, given the significance of the results of Fortitude Holdings relative to the Company’s results prior to the contribution of its interest to Carlyle FRL.
Strategic Investment in NGP
The Company has equity interests in NGP Management Company, L.L.C. (“NGP Management”), the general partners of certain carry funds advised by NGP, and principal investments in certain NGP funds. The Company accounts for its investments in NGP under the equity method of accounting, and includes these investments in the Global Private Equity segment. These interests entitle the Company to an allocation of income equal to 55.0% of the management fee-related revenues of NGP Management which serves as the investment advisor to certain NGP funds as well as 47.5% of the performance allocations received by certain current and future NGP fund general partners.
The Company’s investments in NGP as of September 30, 2021 and December 31, 2020 are as follows:
| As of | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Dollars in millions) | |||||||||||
| Investment in NGP Management | $ | 372.5 | $ | 373.5 | |||||||
| Investments in NGP general partners - accrued performance allocations | 2.9 | — | |||||||||
| Principal investments in NGP funds | 62.3 | 51.4 | |||||||||
| Total investments in NGP | $ | 437.7 | $ | 424.9 | |||||||
Investment in NGP Management. The Company’s equity interests in NGP Management entitle the Company to an allocation of income equal to 55.0% of the management fee-related revenues of NGP Management, which serves as the investment advisor to the NGP Energy Funds. Management fees are generally calculated as 1.0% to 2.0% of the limited partners’ commitments during the fund’s investment period, and 0.5% to 2.0% based on the lower of cost or fair market value of invested capital following the expiration or termination of the investment period. Management fee-related revenues from NGP Management are primarily driven by NGP XII, NGP XI and NGP X during the three and nine months ended September 30, 2021 and 2020.
The Company records investment income (loss) for its equity income allocation from NGP management fee-related revenues and also records its share of any allocated expenses from NGP Management, expenses associated with the compensatory elements of the strategic investment, and the amortization of the basis differences related to the definite-lived identifiable intangible assets of NGP Management. The net investment income (loss) recognized in the Company’s unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 were as follows:
32
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Management fee-related revenues from NGP Management | $ | 18.2 | $ | 18.6 | $ | 54.9 | $ | 56.8 | |||||||||||||||
| Expenses related to the investment in NGP Management | (2.9) | (2.9) | (8.1) | (8.6) | |||||||||||||||||||
| Amortization of basis differences from the investment in NGP Management | (0.7) | (1.1) | (2.1) | (3.2) | |||||||||||||||||||
| Net investment income from NGP Management | $ | 14.6 | $ | 14.6 | $ | 44.7 | $ | 45.0 | |||||||||||||||
The difference between the Company’s remaining carrying value of its investment and its share of the underlying net assets of the investee was $2.1 million and $4.2 million as of September 30, 2021 and December 31, 2020, respectively; these differences are amortized over a period of 10 years from the initial investment date. The Company assesses the remaining carrying value of its equity method investment for impairment whenever events or circumstances indicate that the carrying value may not be recoverable, and considers factors including, but not limited to, expected cash flows from its interest in future management fees and NGP’s ability to raise new funds.
Investment in the General Partners of NGP Carry Funds. The Company’s investment in the general partners of the NGP Carry Funds entitle it to 47.5% of the performance allocations received by certain current and future NGP fund general partners. The Company records its equity income allocation from NGP performance allocations in principal investment income (loss) from equity method investments rather than performance allocations in its unaudited condensed consolidated statements of operations. The Company recognized $1.7 million and $2.8 million of net investment earnings related to these performance allocations for both the three and nine months ended September 30, 2021, respectively. There were no net investment earnings (losses) related to these performance allocations for the three and nine months ended September 30, 2020.
Principal Investments in NGP Funds. The Company also holds principal investments in the NGP Carry Funds. The Company recognized net investment earnings (losses) of $5.1 million and $0.9 million for the three months ended September 30, 2021 and 2020, respectively, and $16.8 million and $(14.0) million for the nine months ended September 30, 2021 and 2020, respectively, related to these investments and which are included in principal investment income in its unaudited condensed consolidated statements of operations.
33
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Principal Investments in CLOs and Other Investments
Principal investments in CLOs and other investments as of September 30, 2021 and December 31, 2020 were $538.9 million and $601.5 million, respectively, and primarily consisted of investments in CLO senior and subordinated notes. A portion of these investments is collateral to CLO term loans (see Note 5). As of September 30, 2021 and December 31, 2020, principal investments in CLOs and other investments also included the Company’s investment in the BDC Preferred Shares at fair value of $71.8 million and $60.0 million, respectively (see Note 8).
Investment Income (Loss)
The components of investment income (loss) are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Performance allocations | |||||||||||||||||||||||
| Realized | $ | 1,018.1 | $ | 86.8 | $ | 1,645.6 | $ | 415.7 | |||||||||||||||
| Unrealized | (43.6) | 390.6 | 3,195.7 | 315.9 | |||||||||||||||||||
| 974.5 | 477.4 | 4,841.3 | 731.6 | ||||||||||||||||||||
| Principal investment income (loss) from equity method investments (excluding performance allocations) | |||||||||||||||||||||||
| Realized | 87.7 | 26.9 | 175.5 | 105.3 | |||||||||||||||||||
| Unrealized | 30.5 | 48.8 | 239.4 | (756.3) | |||||||||||||||||||
| 118.2 | 75.7 | 414.9 | (651.0) | ||||||||||||||||||||
| Principal investment income (loss) from investments in CLOs and other investments | |||||||||||||||||||||||
| Realized | 4.4 | 0.3 | 3.9 | 0.5 | |||||||||||||||||||
Unrealized (1) | 37.8 | 30.7 | 58.4 | (8.7) | |||||||||||||||||||
| 42.2 | 31.0 | 62.3 | (8.2) | ||||||||||||||||||||
| Total | $ | 1,134.9 | $ | 584.1 | $ | 5,318.5 | $ | 72.4 | |||||||||||||||
(1) The three and nine months ended September 30, 2021 include investment income of $31.5 million associated with the remeasurement of a corporate investment, which was carried at cost, resulting from an observable price change pursuant to ASC 321, Investments – Equity Securities.
The performance allocations included in revenues are derived from the following segments:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Global Private Equity | $ | 777.8 | $ | 336.6 | $ | 4,142.5 | $ | 726.0 | |||||||||||||||
| Global Credit | 27.4 | 16.3 | 124.6 | (24.0) | |||||||||||||||||||
| Global Investment Solutions | 169.3 | 124.5 | 574.2 | 29.6 | |||||||||||||||||||
| Total | $ | 974.5 | $ | 477.4 | $ | 4,841.3 | $ | 731.6 | |||||||||||||||
Approximately 22%, or $216.0 million, of performance allocations for the three months ended September 30, 2021 are related to the following funds along with total revenue recognized (total revenue includes performance allocations, fund management fees, and principal investment income):
•Carlyle Partners VI, L.P. (Global Private Equity segment) - $130.7 million, and
•Carlyle Realty Partners VIII, L.P. (Global Private Equity segment) - $119.1 million.
34
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Approximately 35%, or $1,715.9 million, of performance allocations for the nine months ended September 30, 2021 are related to the following funds along with total revenue recognized (total revenue includes performance allocations, fund management fees, and principal investment income):
•Carlyle Partners VI, L.P. (Global Private Equity segment) - $1,281.0 million, and
•Carlyle Europe Partners IV, L.P. (Global Private Equity segment) - $579.3 million.
Approximately 46%, or $217.9 million, of performance allocations for the three months ended September 30, 2020 are related to the following funds along with total revenue recognized (total revenue includes performance allocations, fund management fees, and principal investment income):
•Carlyle Partners VI, L.P. (Global Private Equity segment) - $141.7 million, and
•Carlyle Asia Partners IV, L.P. (Global Private Equity segment) - $112.4 million.
Performance allocations for the nine months ended September 30, 2020 are primarily related to Carlyle Partners VI, L.P. (Global Private Equity segment) with total revenue recognized (total revenue includes performance allocations, fund management fees, and principal investment income) of $773.4 million. In addition to Carlyle Partners VI, L.P., performance allocations of $129.9 million, for the nine months ended September 30, 2020 are related to the following funds along with total revenue recognized (total revenue includes performance allocations, fund management fees, and principal investment income):
•Carlyle Asia Partners IV, L.P. (Global Private Equity segment) - $323.5 million, and
•Carlyle International Energy Partners I, L.P. (Global Private Equity segment) - $(144.9) million.
Carlyle’s income (loss) from its principal equity method investments consists of:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Global Private Equity | $ | 63.8 | $ | 40.7 | $ | 272.9 | $ | 60.7 | |||||||||||||||
Global Credit (1) | 47.5 | 33.9 | 120.6 | (709.9) | |||||||||||||||||||
| Global Investment Solutions | 6.9 | 1.1 | 21.4 | (1.8) | |||||||||||||||||||
| Total | $ | 118.2 | $ | 75.7 | $ | 414.9 | $ | (651.0) | |||||||||||||||
(1) The nine months ended September 30, 2020 includes a loss of $620.7 million related to the contribution of the Company's investment in Fortitude Holdings to Carlyle FRL, as discussed above in "Strategic Investment in Fortitude Re (f/k/a DSA Re)".
Investments of Consolidated Funds
The Company consolidates the financial positions and results of operations of certain CLOs in which it is the primary beneficiary. During the nine months ended September 30, 2021, the Company consolidated two CLOs for which the Company is the primary beneficiary.
There were no individual investments with a fair value greater than five percent of the Company’s total assets for any period presented.
Interest and Other Income of Consolidated Funds
The components of interest and other income of Consolidated Funds are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Interest income from investments | $ | 56.9 | $ | 50.8 | $ | 170.4 | $ | 155.0 | |||||||||||||||
| Other income | 5.2 | 5.5 | 14.9 | 9.5 | |||||||||||||||||||
| Total | $ | 62.1 | $ | 56.3 | $ | 185.3 | $ | 164.5 | |||||||||||||||
35
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Net Investment Gains (Losses) of Consolidated Funds
Net investment gains (losses) of Consolidated Funds include net realized gains (losses) from sales of investments and unrealized gains (losses) resulting from changes in fair value of the Consolidated Funds’ investments. The components of net investment gains (losses) of Consolidated Funds are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Gains (losses) from investments of Consolidated Funds | $ | (2.5) | $ | 163.1 | $ | 100.3 | $ | (219.2) | |||||||||||||||
| Gains (losses) from liabilities of CLOs | 2.4 | (139.2) | (90.7) | 180.3 | |||||||||||||||||||
| Total | $ | (0.1) | $ | 23.9 | $ | 9.6 | $ | (38.9) | |||||||||||||||
The following table presents realized and unrealized gains (losses) earned from investments of the Consolidated Funds:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Realized gains (losses) | $ | (10.7) | $ | (9.6) | $ | 6.5 | $ | (49.9) | |||||||||||||||
| Net change in unrealized gains (losses) | 8.2 | 172.7 | 93.8 | (169.3) | |||||||||||||||||||
| Total | $ | (2.5) | $ | 163.1 | $ | 100.3 | $ | (219.2) | |||||||||||||||
5. Borrowings
The Company borrows and enters into credit agreements for its general operating and investment purposes. The Company’s debt obligations consist of the following:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Borrowing Outstanding | Carrying Value | Borrowing Outstanding | Carrying Value | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Global Credit Revolving Credit Facility | $ | 70.0 | $ | 70.0 | $ | — | $ | — | |||||||||||||||
CLO Borrowings (See below) | 203.0 | 198.7 | 356.1 | 353.6 | |||||||||||||||||||
3.875% Senior Notes Due 2/01/2023 | 250.0 | 249.7 | 250.0 | 249.5 | |||||||||||||||||||
5.625% Senior Notes Due 3/30/2043 | 600.0 | 600.6 | 600.0 | 600.7 | |||||||||||||||||||
5.650% Senior Notes Due 9/15/2048 | 350.0 | 346.1 | 350.0 | 346.0 | |||||||||||||||||||
3.500% Senior Notes Due 9/19/2029 | 425.0 | 421.4 | 425.0 | 421.1 | |||||||||||||||||||
4.625% Subordinated Notes Due 5/15/2061 | 500.0 | 484.2 | — | — | |||||||||||||||||||
| Total debt obligations | $ | 2,398.0 | $ | 2,370.7 | $ | 1,981.1 | $ | 1,970.9 | |||||||||||||||
Senior Credit Facility
As of September 30, 2021, the senior credit facility included $775.0 million in a revolving credit facility. The revolving credit facility is scheduled to mature on February 11, 2024, and principal amounts outstanding under the revolving credit facility accrue interest, at the option of the borrowers, either (a) at an alternate base rate plus an applicable margin not to exceed 0.50%, or (b) at LIBOR plus an applicable margin not to exceed 1.50% (at September 30, 2021, the interest rate was 1.33%). The Company made no borrowings under the senior credit facility during the three and nine months ended September 30, 2021 and there were no amounts outstanding at September 30, 2021.
Global Credit Revolving Credit Facility
On December 17, 2018, certain subsidiaries of the Company established a $250.0 million revolving line of credit, primarily intended to support certain lending activities within the Global Credit segment. The credit facility initially included a $125.0 million line of credit with a one-year term, which was amended in December 2020 to extend its maturity to December
36
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
2021, and a $125.0 million line of credit with a three-year term. In September 2021, the revolving line of credit was further amended to terminate the one-year line of credit, and extend the term of the three-year line of credit to September 2024 as well as increase its capacity from $125.0 million to $250.0 million. Principal amounts outstanding under the facility accrue interest, at the option of the borrowers, either (a) at an alternate base rate plus an applicable margin not to exceed 1.00%, or (b) at the Eurocurrency rate plus an applicable margin, not to exceed 2.00% (at September 30, 2021, the interest rate was 2.085%). The Company borrowed $70.0 million under the credit facility during the three and nine months ended September 30, 2021, and $70.0 million remained outstanding as of September 30, 2021. The balance outstanding as of September 30, 2021 was repaid in October 2021.
CLO Borrowings
For certain of the Company’s CLOs, the Company finances a portion of its investment in the CLOs through the proceeds received from term loans and other financing arrangements with financial institutions. The Company’s outstanding CLO borrowings consist of the following (Dollars in millions):
| Formation Date | Borrowing Outstanding September 30, 2021 | Borrowing Outstanding December 31, 2020 | Maturity Date (1) | Interest Rate as of September 30, 2021 | |||||||||||||||||||||||||||||||
| February 28, 2017 | $ | 54.2 | $ | 79.9 | November 17, 2031 | 2.35% | (2) | ||||||||||||||||||||||||||||
| April 19, 2017 | — | 22.7 | April 22, 2031 | N/A | (3) (14) | ||||||||||||||||||||||||||||||
| June 28, 2017 | — | 22.9 | July 22, 2031 | N/A | (4) (14) | ||||||||||||||||||||||||||||||
| August 2, 2017 | — | 22.7 | July 23, 2029 | N/A | (5) (14) | ||||||||||||||||||||||||||||||
| August 2, 2017 | — | 21.3 | August 3, 2022 | N/A | (6) | ||||||||||||||||||||||||||||||
| August 14, 2017 | — | 22.4 | August 15, 2030 | N/A | (7) (14) | ||||||||||||||||||||||||||||||
| November 30, 2017 | — | 22.7 | January 16, 2030 | N/A | (8)(14)(15) | ||||||||||||||||||||||||||||||
| December 6, 2017 | — | 19.0 | October 16, 2030 | N/A | (9)(14)(15) | ||||||||||||||||||||||||||||||
| December 7, 2017 | — | 20.8 | January 19, 2029 | N/A | (10)(14)(15) | ||||||||||||||||||||||||||||||
| January 30, 2018 | — | 19.2 | January 23, 2030 | N/A | (11)(14)(15) | ||||||||||||||||||||||||||||||
| March 1, 2018 | — | 15.2 | January 16, 2031 | N/A | (12)(14)(15) | ||||||||||||||||||||||||||||||
| March 15, 2019 | 1.9 | 22.6 | March 15, 2032 | 8.11% | (13) | ||||||||||||||||||||||||||||||
| August 20, 2019 | 4.2 | 22.9 | August 15, 2032 | 4.74% | (13) | ||||||||||||||||||||||||||||||
| September 15, 2020 | 20.6 | 21.8 | April 15, 2033 | 1.59% | (13) | ||||||||||||||||||||||||||||||
| January 8, 2021 | 21.6 | — | January 15, 2034 | 2.49% | (13) | ||||||||||||||||||||||||||||||
| March 9, 2021 | 20.7 | — | August 15, 2030 | 1.37% | (13) | ||||||||||||||||||||||||||||||
| March 30, 2021 | 19.4 | — | March 15, 2032 | 1.71% | (13) | ||||||||||||||||||||||||||||||
| April 21, 2021 | 3.7 | — | April 15, 2033 | 5.85% | (13) | ||||||||||||||||||||||||||||||
| May 21, 2021 | 16.2 | — | November 17, 2031 | 1.36% | (13) | ||||||||||||||||||||||||||||||
| June 4, 2021 | 21.6 | — | January 16, 2034 | 2.28% | (13) | ||||||||||||||||||||||||||||||
| June 10, 2021 | 1.4 | — | November 17, 2031 | 2.85% | (13) | ||||||||||||||||||||||||||||||
| August 4, 2021 | 17.5 | — | August 15, 2032 | 1.98% | (13) | ||||||||||||||||||||||||||||||
| $ | 203.0 | $ | 356.1 | ||||||||||||||||||||||||||||||||
(1) Maturity date is earlier of date indicated or the date that the CLO is dissolved.
(2) Outstanding borrowing of €46.8 million; incurs interest at EURIBOR plus applicable margins as defined in the agreement.
(3) Incurs interest at LIBOR plus 1.932%. This term loan was fully repaid in April 2021.
(4) Incurs interest at LIBOR plus 1.923%. This term loan was fully repaid in April 2021.
(5) Incurred interest at LIBOR plus 1.808%. This term loan was fully repaid in February 2021.
(6) Original borrowing of €17.4 million; incurred interest at EURIBOR plus 1.75% and had full recourse to the Company. This term loan was fully repaid in March 2021.
(7) Incurred interest at LIBOR plus 1.848%. This term loan was fully repaid in March 2021.
(8) Incurs interest at LIBOR plus 1.731%. This term loan was fully repaid in April 2021.
(9) Incurred interest at LIBOR plus 1.647%. This term loan was fully repaid in May 2021.
(10) Incurred interest at LIBOR plus 1.365%. This term loan was fully repaid in May 2021.
37
The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(11) Incurred interest at LIBOR plus 1.624%. This term loan was fully repaid in April 2021.
(12) Incurred interest at LIBOR plus 1.552%. This term loan was fully repaid in May 2021.
(13) Incurs interest at the average effective interest rate of each class of purchased securities plus 0.50% spread percentage.
(14) Term loan issued under master credit agreement.
(15) CLO Indentures for the respective CLO borrowings entered on November 30, 2017 and after provided for an alternative rate framework determined at the Company’s discretion upon a trigger event of LIBOR.
The CLO term loans are secured by the Company’s investments in the respective CLO, have a general unsecured interest in the Carlyle entity that manages the CLO, and generally do not have recourse to any other Carlyle entity. Interest expense for the three months ended September 30, 2021 and 2020 was $1.2 million and $1.9 million, respectively. Interest expense for the nine months ended September 30, 2021 and 2020 was $4.4 million and $6.6 million, respectively. The fair value of the outstanding balance of the CLO term loans at September 30, 2021 approximated par value based on current market rates for similar debt instruments. These CLO term loans are classified as Level III within the fair value hierarchy.
European CLO Financing - February 28, 2017
On February 28, 2017, a subsidiary of the Company entered into a financing agreement with several financial institutions under which these financial institutions have provided a €46.8 million term loan ($54.2 million at September 30, 2021) to the Company. This term loan is secured by the Company’s investments in the retained notes in certain European CLOs that were formed in 2014 and 2015. This term loan will mature on the earlier of November 17, 2031 or the date that the certain European CLO retained notes have been redeemed. The Company may prepay the term loan in whole or in part at any time. Interest on this term loan accrues at EURIBOR plus applicable margins (2.35% at September 30, 2021).
Master Credit Agreement - Term Loans
In January 2017, the Company entered into a master credit agreement with a financial institution under which the financial institution provided term loans to the Company for the purchase of eligible interests in CLOs. Term loans issued under this master credit agreement were secured by the Company’s investment in the respective CLO as well as any senior management fee and subordinated management fee payable by each CLO. Term loans bore interest at LIBOR plus a weighted average spread over LIBOR on the CLO notes and an applicable margin, which was due quarterly. CLO indentures for the respective CLO borrowings entered on November 30, 2017 and after provided for an alternative rate framework determined at the Company’s discretion upon a trigger event of LIBOR. This agreement terminated in January 2020. As of September 30, 2021, all outstanding CLO term loans under this agreement have been fully repaid.
CLO Repurchase Agreements
On February 5, 2019, the Company entered into a master credit facility agreement (the “CLO Financing Facility”) to finance a portion of the risk retention investments in certain European CLOs managed by the Company. The maximum facility amount is €100.0 million, but may be expanded on such terms agreed upon by the Company and the counterparty subject to the terms and conditions of the CLO Financing Facility. Each transaction entered into under the CLO Financing Facility will bear interest at a rate based on the weighted average effective interest rate of each class of securities that have been sold plus a spread to be agreed upon by the parties. As of September 30, 2021, €128.6 million was outstanding under the CLO Financing Facility.
Each transaction entered into under the CLO Financing Facility provides for payment netting and, in the case of a default or similar event with respect to the counterparty to the CLO Financing Facility, provides for netting across transactions. Generally, upon a counterparty default, the Company can terminate all transactions under the CLO Financing Facility and offset amounts it owes in respect of any one transaction against collateral, if any, or other amounts it has received in respect of any other transactions under the CLO Financing Facility; provided, however, that in the case of certain defaults, the Company may only be able to terminate and offset solely with respect to the transaction affected by the default. During the term of a transaction entered into under the CLO Financing Facility, the Company will deliver cash or additional securities acceptable to the counterparty if the securities sold are in default. Upon termination of a transaction, the Company will repurchase the previously sold securities from the counterparty at a previously determined repurchase price. The CLO Financing Facility may be terminated at any time upon certain defaults or circumstances agreed upon by the parties.
The repurchase agreements may result in credit exposure in the event the counterparty to the transaction is unable to fulfill its contractual obligations. The Company minimizes the credit risk associated with these activities by monitoring counterparty credit exposure and collateral values. Other than margin requirements, the Company is not subject to additional
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The Carlyle Group Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
terms or contingencies which would expose the Company to additional obligations based upon the performance of the securities pledged as collateral.
Senior Notes
Certain indirect subsidiaries of the the Company have issued long term borrowings in the form of senior notes, on which interest is payable semi-annually in arrears. The following table provides information regarding these senior notes (Dollars in millions):
| Interest Expense | |||||||||||||||||||||||||||||||||||||||||
Fair Value (1) As of | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
| Aggregate Principal Amount | September 30, 2021 | December 31, 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||
3.875% Senior Notes Due 2/1/2023 (2) | $ | 250.0 | |||||||||||||||||||||||||||||||||||||||