Carlyle Group Inc. is reviewing how it pays dealmakers to free up more stable cash flows for shareholders and authorized a plan to buy back up to $1.4 billion in shares.
The private equity giant, which reported fourth-quarter earnings that topped Wall Street estimates, said Wednesday it will give rainmakers and top employees a larger share of profits tied to investment outflows.
The changes are part of CEO Harvey Schwartz’s biggest effort yet to boost the company’s languishing stock price. The former co-chairman of Goldman Sachs Group Inc. is under pressure from shareholders and fund investors to articulate a clear vision after years of leadership changes.
Carlyle shares rose 8.1% to $44 as of 9:50 a.m. in New York.
By handing a larger share of future profits to employees, Carlyle is trying to give them more reasons to stay and lean into bets just as the trading freeze is beginning to thaw, with investors betting that the Federal Reserve will begin to cut interest rates this year. year.
The move frees up shareholders with more stable sources of cash, known as fee-related income.
“We want to make sure we’re investing in the business and investing for growth,” Schwartz said in a conference call with reporters, adding that the changes give the company “flexibility to return capital to shareholders when we think it makes sense.”
Carlyle plans to increase employee participation in profits tied to exit deals from 60% to 70%, up from an average of 47%, the company said in a statement. The portion of your compensation tied to fee-related income will decrease.
The change resulted in a $1.1 billion charge that fueled a fourth-quarter loss of $692 million, or $1.92 per share.
The company also issued approximately $300 million in performance stock units to senior management. The incentives are designed to motivate executives to think about the entire company, which has become more complex in recent years as it expands into new lines of business.
These shares will only be awarded if Carlyle shares reach key levels.
The changes follow moves by other companies to less tie shareholder profits to the rise and fall of acquisitions. KKR & Co. and Apollo Global Management Inc. have delivered more fee-related earnings to shareholders.
Meanwhile, the number of shares that Carlyle’s board of directors authorized the company to buy back equals nearly 10% of its $14.7 billion market value as of Tuesday. The stock has lagged far behind its rivals, rising 20% over the past three years, compared with gains of more than 100% for Apollo and KKR, and about 75% for Blackstone Inc.
Earnings exceedance
A year into Schwartz’s tenure as CEO, the company reported results that beat Wall Street expectations.
Fourth-quarter distributable earnings fell 7% to $402.7 million, or 86 cents per share, as deal exits slowed. That still beat the average estimate of 77 cents from analysts surveyed by Bloomberg. Commission-related earnings rose 26% to $254 million.
By 2024, the company said it expects $1.1 billion in fee-related earnings, a 28% increase from last year.
Fourth-quarter distributable earnings totaled $276.1 million for Carlyle’s private equity business, a 16% decline from a year ago, while rising 16% to $95.3 million in the credit arm . The solutions unit, which buys and creates fund portfolios, posted the biggest gain of 49%.
The company has received a more muted reception from investors over the past year. It received $63.5 billion in entries in 2023, up from $94.8 billion the previous year.
Carlyle is raising buyout funds to invest in Asia and Europe. Executives acknowledged “industry headwinds” for those efforts on a call with analysts, while touting investor interest in their secondary strategies.
The company continues to cut fat.
Schwartz’s cost-cutting drive, even as it creates unrest within some parts of the company, is starting to trickle down to the bottom line. Carlyle’s margin on fee-related earnings hit a record 43% in the final quarter of 2023, up from 36% a year earlier. That figure is expected to rise to 50% this year, according to the release.
The firm has previously said that Carlyle is planning for $40 million in savings by 2024, primarily thanks to compensation cuts.
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