What to Expect from Carlyle Group's 1Q16 Earnings
Cost initiatives in turbulent times
Carlyle Group’s (CG) compensation costs are competitive when compared to other players in the alternative asset management industry.
Over the past couple of years, Carlyle Group has spent an average of 51% of its revenues on compensation and benefits.
The company’s other operating expenses amount to around 30%–40% of its total revenues. Carlyle’s various funds derive value from the effective management of its operating companies as well as the returns generated for its shareholders and limited partners.
As a result, the majority of the company’s expenditures relate to compensation and benefits for fund managing teams. Compensation and benefits include basic compensation and performance fees.
In 1Q16, CG expects to maintain fee-related earnings at a quarterly average consistent with the previous quarter, even given lower expected fee revenues on the back of cost initiatives related to management compensation. Total expenses rose by $133 million to $796 million in 4Q15 compared to the corresponding quarter of the previous year.
Carlyle’s focus has been on managing compensation expenses, which fell in 4Q15 as well as in 2015, mainly due to lower appreciation in carry fund valuations and lower realized performance fees due to fewer exits in the previous quarter.
However, non-cash compensation rose to $122 million in 2015 from $80 million in 2014 on the incremental vesting of annual brands. New units issued have been fewer over the past two years.
Carlyle generated a negative return on equity in the last year. It was a competitive year among CG’s alternative investment peers, which form part of the iShares Dow Jones US Financial ETF (IYF). Carlyle’s peers posted the following returns on equity:
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Blackstone (BX): 28%
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KKR (KKR): 12.5%
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Apollo Global Management (APO): 3.1%
Performance-based compensation
Carlyle Group’s compensation is based on total funds under management. Performance fees or benefits are based on the performance of its investment funds. Carlyle’s performance fees fell in 2014 due to weak energy-related investments.
Carlyle’s focus is on retaining talent across industries in order to efficiently operate its portfolios. In this way, it improves the operational performances of its holding companies. To do this, the company must maintain dynamic and high-performance pay structures. As performance and scale improve, compensation costs are expected to rise but remain in the 50%–55% range of total revenues.