The Carlyle Group reported declining distributable earnings and assets in Global Markets Strategies (GMS), its credit business, during the third quarter.
GMS’s distributable earnings were at $15 million in Q3 and $52 million for the year, compared with $170 million for the previous 12 months.
“The decline in LTM [last 12 months] distributable earnings compared to the prior LTM period is largely attributable to a decline in hedge fund-related management fees and realised net performance fees,” the firm said in its third quarter earnings report.
The firm’s long/short credit hedge funds at Claren Road Asset Management have been performing poorly and suffering redemptions.
Economic net income (ENI) for the segment was negative $28 million for Q3 and minus $6 million in the last 12 months, compared with $168 million for the prior year.
GMS carry fund valuations decreased 9 percent in Q3 2015, compared with a 6 percent rise in Q3 2014. The asset-weighted hedge fund performance was -4 percent in Q3.
Total assets under management (AUM) at GMS was $35.5 billion as of Q3, down 9 percent from a year ago. Fee-earning AUM of $29.5 billion was also a 6 percent decrease from the last quarter and a 15 percent decline year on year.
Carlyle management said the firm had a strong quarter in terms of fundraising in a variety of real estate, private equity, energy and credit strategies. The firm has now raised $2.4 billion for its energy mezzanine fund, almost hitting its $2.5 billion target. It also closed a US and European CLO in the quarter totaling $1 billion in assets.
“We expect GMS management fees to move higher in the next several quarters as we turn on fees for our new energy mezzanine and distressed funds and continue to raise additional capital,” said co-founder Bill Conway speaking on Carlyle’s earnings call.
Carlyle management also confirmed that fundraising for the distressed fund has been launched, as PDI first reported last month.
However a conflation of market volatility and various macro headwinds meant deployment has been slower than usual.
“Last quarter, we said we were being cautious with respect to new investments for a variety of reasons: high asset prices, uncertainty over China, the significant downturn in commodity and energy prices, the strong dollar and low growth. These trends remain largely intact during the third quarter and continued to persist today,” said Conway.
The firm has about $12.6 billion in new capital commitments that are yet to show up on its fee-earnings assets due to slower deployment.
Overall, Carlyle raised $4.6 billion in the quarter and $18.6 billion over the year through 30 September, although the firm’s total assets decreased by 7 percent to $187.7 billion as the result of net distributions and redemptions, as well as limited impact from currency exchange rates.
The firm estimated it had about $63.2 billion in dry powder in Q3, of which $27.5 billion is in corporate private equity, $3.9 billion in GMS, $16.7 billion in real assets and $15.1 billion in investment solutions.
Total ENI was also negatively impacted this quarter. Carlyle posted ENI of minus $128 million or $0.43 per share, compared with about $180 million both in the second quarter of this year and in the third quarter of 2014.
Q3 2015 ENI was negatively impacted by lower carry fund valuations in corporate private equity and Global Market Strategies, resulting in net performance fees of $149 million,” Carlyle said.