My father worked in a post office and never made probably more than $8,000 a year as an employee of the post office, so when people can rise from very modest circumstances and do well economically, I think that’s a good thing about America, and we should encourage that kind of activity. - David Rubenstein
The world is no stranger to the Carlyle Group. The name boasts significant credibility, and the co-CEO, David Rubenstein, makes everything even harder to miss. Perhaps the more his show gains traction, the better it is for the stock; or investors would at least hope so.
Carlyle group manages $222 Billion in AUM. It has generated $685 million in distributable earnings in the last four quarters.
In Q3 2019, the company reported $109 Million fee-related earnings (FRE) out of the total $161 million in distributable earnings. The company had given guidance for $400 million in FRE earlier, but then it was increased to $450 million a month ago. Further, it is expected to reach $500 million in the next couple of years.
TCG has about $1.8 Billion in accrued performance fee, which investors would expect to realize over time. But these future earnings do come with a question mark.
A private equity fund does not generate those cash flows other than the management fee unless it divests part of its portfolio. This means that variability in cash flows is natural for a PE firm.
But the market judges a company based on its cash flows. If the market prices in that variability, then the stock prices can go haywire from time to time.
Private Equity firms earn 2-3% every year on the assets it manages and 15-20% on profits once it disinvests part of the portfolio.
PE firms grow by raising money, and they tend to keep doing that. The increase in fund size increases the management fee as a steady under-stream, while the investments keep tap-dancing on the top. The much more significant portion, i.e., the accrued earnings, remains merely a metric on paper.
Global funds like The Carlyle Group tend to be invested in various sectors, in different capacities, and through multiple channels. They tend to look reasonably diversified, but macroeconomic headwinds can alter appearances of these AUMs in virtually no time.
While lower interest rates are good news for Leveraged Buyouts, the driving force behind the rate cuts is still the fall in consumption. Overall, business and consumer sentiment have been taking hits because of global headwinds; both of them can wipe significant value off the balance sheet.
2019 has been particularly well-paced for the stock as it nears the 2X mark.
We have the four largest listed PE players: Apollo Global Management, Blackstone Group, Carlyle Group, and KKR. Three of these are trading at much higher multiples than The Carlyle Group, which gives the stock a fair bit of headroom to grow.
TCG’s private equity peers - KKR, Blackstone, Ares Management Corp, and Apollo Global Management – have all adopted the C-Corporation structure. This structure places all stockholders on the same level and allows the stock to be included in stock indexes and attract new investors.
TCG is going to be listed with a C-Corporation structure starting January 2020, as well. Moreover, it would be the first PE firm that will give its shareholders a vote. This add-on is expected to make the stock an even prettier deal for many investors.
This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.
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