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Carlyle plans M&A for growth after record earnings

US private equity group Carlyle is planning to use its fast-growing earnings and assets under management to expand and diversify through acquisitions.

In results published on Thursday, the group reported a record $903mn of distributable earnings in the quarter to the end of the December — the metric favoured by analysts as a proxy for cash flow. Distributable earnings totalled $2.2bn for the year, or $5.01 a share, beating analyst estimates and 143 per cent up on the previous year. Its annual dividend will increase 30 per cent to $1.30 a share.

Carlyle will aim to expand by buying asset managers focused on growing markets such as credit investments, chief executive Kewsong Lee told the Financial Times.

“In the big picture, we are looking for strategic adjacencies, new markets that we can scale in, and businesses that are additive to our fee-related earnings,” he said. “The areas with the most opportunities for us are in credit and in investment solutions.”

The group’s private equity business accounts for 90 per cent of its overall distributable profits and two-thirds of management fee-based earnings, unlike some rivals that have diversified more.

Competitors including Blackstone Group, KKR, Apollo Global, and Ares Management have all made large acquisitions in recent years to expand in markets such as insurance and debt-focused investments.

Lee’s strategy is to keep pace with soaring share prices among alternative investment managers. Carlyle’s stock generated a total return of 64 per cent over the past 12 months, trailing Blackstone, KKR, and Ares, but outperforming Apollo.

There has been a surge of M&A activity in the private equity industry recently, with a number of companies looking to list on public markets or to sell to larger rivals. At the same time, money continues to pour into private investment strategies, driving record earnings across the industry.

Carlyle’s earnings were boosted by rising markets that increased the value of its investments and fast-growing assets under management, which increased 22 per cent over the year to top $300bn.

It also ended the year with $3.9bn of “carried interest” — fees that are generally set at 20 per cent of investment profits — on its balance sheet, a 67 per cent increase year on year.

Lee is just over a full year into the job as sole CEO after co-head Glenn Youngkin left the company in Sept 2020 to eventually become governor of Virginia.

Lee’s tenure has also coincided with rising fund performance and early success in reaching a milestone of raising $130bn in new assets by 2024. Seventy-five per cent of Carlyle’s assets eligible to earn performance fees were doing so at year end, a 30 percentage point increase from the year before.

“We have established a new level of earnings power,” he said. “It is a stronger and healthier Carlyle that is better positioned than ever before.”

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