10-Q: Carlyle Q3 2025: AUM Growth Amidst Performance Allocation Decline

Carlyle Group Inc. reported a significant drop in net income for Q3 2025 due to negative performance allocations, despite growth in AUM and fee-related earnings.

Summary

• Net income attributable to The Carlyle Group Inc. plummeted to $0.9 million for the three months ended September 30, 2025, down from $595.7 million in the prior year, primarily due to negative performance allocations.
• Diluted EPS for the quarter was $0.00, a sharp decrease from $1.63 in Q3 2024.
• For the nine months ended September 30, 2025, net income attributable to The Carlyle Group Inc. was $450.6 million, down 44% from $809.5 million in the same period last year, with diluted EPS of $1.22 compared to $2.21.
• Total revenues for Q3 2025 were $332.7 million, an 87% decrease from $2,635.2 million in Q3 2024, largely driven by a $(606.7) million performance allocation loss in Global Private Equity.
• Total revenues for the nine months ended September 30, 2025, decreased 34% to $2,878.7 million from $4,393.3 million in the prior year.
• Fund management fees increased by 9% to $583.3 million in Q3 2025 and by 13% to $1,789.8 million for the nine months ended September 30, 2025.
• Incentive fees rose by 33% to $51.4 million in Q3 2025 and by 40% to $135.1 million for the nine months ended September 30, 2025.
• Total Assets Under Management (AUM) grew to $474.1 billion as of September 30, 2025, up from $441.0 billion at December 31, 2024.
• Fee-earning AUM increased to $332.0 billion as of September 30, 2025, from $304.4 billion at December 31, 2024.
• The carry fund portfolio appreciated 2% in Q3 2025, with Global Credit carry funds appreciating 4% and Carlyle AlpInvest carry funds appreciating 2%, while corporate private equity funds were flat.
• Net Accrued Performance Revenues stood at $2,630.1 million as of September 30, 2025.
• An impairment charge of $92.5 million and a $38.0 million reduction in NGP accrued carry were recorded in Q1 2025 due to the NGP restructuring.

Sentiment

Score: 3

Explanation: The significant decline in net income and EPS, driven by negative performance allocations in Global Private Equity, indicates a challenging quarter. While AUM and fee revenues show growth, the core profitability metric was severely impacted. The NGP restructuring impairment also contributed to a negative outlook for principal investment income year-to-date. Ongoing legal proceedings and potential government shutdown impacts add to uncertainty, despite some positive market trends in other segments.

Positives

• Fund management fees increased by 9% in Q3 2025 and 13% year-to-date, indicating strong recurring revenue growth.
• Incentive fees saw substantial growth, up 33% in Q3 2025 and 40% year-to-date.
• Total Assets Under Management (AUM) increased to $474.1 billion, reflecting strong inflows of $16.9 billion in Q3 2025 and $44.5 billion year-to-date.
• Fee-earning AUM also grew to $332.0 billion, with inflows of $14.1 billion in Q3 2025 and $44.0 billion year-to-date.
• The carry fund portfolio showed overall appreciation of 2% in Q3 2025, with Global Credit and Carlyle AlpInvest funds performing well.
• Realized principal investment income increased significantly by 91% in Q3 2025, driven by a $31.4 million dividend from Carlyle FRL.
• The senior credit facility was amended in May 2025 to extend its maturity date from April 29, 2027, to May 29, 2030, enhancing liquidity management.
• The Global Credit Revolving Credit Facility's maturity date for a $200 million line of credit was extended to August 19, 2026.
• The company issued $800.0 million of 5.050% senior notes due 2035, strengthening its capital structure.
• The Authentix Matter legal proceeding was decided in favor of Carlyle and all other defendants on November 5, 2025, resolving a significant litigation risk.

Negatives

• Net income attributable to The Carlyle Group Inc. decreased by 100% to $0.9 million in Q3 2025 from $595.7 million in Q3 2024.
• Diluted EPS fell to $0.00 in Q3 2025 from $1.63 in Q3 2024.
• Performance allocations experienced a significant reversal of $(606.7) million in Q3 2025, compared to a gain of $1,785.5 million in Q3 2024, primarily due to market price decreases in certain public investments in Global Private Equity funds (CP VII and CAP V).
• For the nine months ended September 30, 2025, performance allocations decreased by 86% to $255.0 million from $1,826.7 million in the prior year.
• Principal investment income for the nine months ended September 30, 2025, decreased by 61% due to a $92.5 million impairment charge and a $38.0 million reduction in NGP accrued carry related to the NGP restructuring.
• Total revenues decreased by 87% in Q3 2025 and 34% year-to-date, largely driven by the poor performance allocations.
• Retained earnings decreased from $2,040.8 million at December 31, 2024, to $1,617.8 million at September 30, 2025.

Risks

• Market volatility, economic, political, regulatory, and public health conditions may significantly impact investments and profitability.
• A slowdown in capital deployment could adversely affect the ability to raise new funds and impact management fees.
• Risk of impairment of intangible assets and goodwill.
• Limitations on liquidating publicly-traded investments, including potential discounts due to the number of shares being sold.
• Non-U.S. investments are subject to additional risks such as foreign currency exchange rate fluctuations, unexpected changes in regulatory requirements, political and economic instability, management difficulties, and adverse tax consequences.
• Exposure to economic risk concentrations related to certain large investments and concentrations in specific industries and geographies.
• Credit risk from default by counterparties in debt securities, loans, leases, and derivatives.
• The ongoing U.S. federal government shutdown could postpone planned realization activity (e.g., IPOs) or delay deal pipelines due to reduced regulatory agency capacity.
• Potential for giveback obligations if fund investment values decline below certain return hurdles, with $1.5 billion subject to potential giveback if all fund investments were deemed worthless.
• Litigation and regulatory matters, including the Tax Receivable Agreement Matter, could result in significant legal defense fees or adverse outcomes, despite current accruals of $35 million for contingencies.

Future Outlook

The company expects to continue using working capital and cash flows to invest in growth initiatives, service debt, fund working capital needs, and return capital to stockholders. It anticipates meeting longer-term cash requirements through existing cash, cash flow from operations, accumulated earnings, and available credit facilities. The ongoing U.S. federal government shutdown introduces uncertainty, potentially postponing planned realization activity like IPOs or delaying deal pipelines.

Management Comments

• The third quarter of 2025 was one of continued optimism across markets.
• Broad enthusiasm for AI continues to drive sharp price action, with just ten stocks accounting for 40% of U.S. stock market capitalization.
• Relatively modest declines in data center capacity utilization, or extensions of AI monetization timelines, could be enough to shift major stock market indexes.
• Private markets abide by arithmetic constraints absent from listed markets, helping to ensure prices remain tied to fundamentals and returns stem from earnings growth.
• U.S. economic underlying growth is resilient and expanded at an annualized rate of roughly 2.7% in the third quarter, with household spending regaining momentum and business investment advancing at nearly 5%.
• U.S. job growth has slowed with monthly payroll gains during the third quarter averaging only 15,000-20,000, reflecting narrower operating margins and a shrinking labor supply.
• If the Federal Reserve interprets a labor-supply shortfall as a sign of weak demand and cuts rates too aggressively, it could trigger wage-price pressures in 2026.
• Domestic consumption in China is growing at its slowest pace in two years despite an improving outlook for China's manufacturing sector.
• India portfolio data suggest domestic business volumes strengthened in Q3 2025, with annual growth averaging 7%.
• Global M&A activity gained momentum in Q3 2025, with year-to-date dollar volumes nearly matching full-year 2024 levels, though driven by larger transactions.
• Buyout exits remain muted, but global buyout funds have recorded five consecutive quarters of non-negative net distributions.
• The IPO market showed strength in Q3 2025, with 28 U.S. exchange-listed offerings raising $15.5 billion, concentrated in software, pharma/health-tech, and AI-related sectors.
• The continued backdrop of fewer transactions, slower exits, and constrained liquidity creates an attractive environment for secondaries strategies.
• Fears have risen around the quality of underlying assets in the syndicated loan and private credit markets following the Tricolor Auto Group and First Brands Group bankruptcies.
• Within our Global Credit portfolio, credit quality remains healthy, with non-accrual rates nearly half of the market-wide direct lending rate and CLO default rates 40% of the market level.
• Our carry fund portfolio appreciated 2% in the third quarter, continuing to show relative stability against a backdrop of volatility in the global equity markets.
• Our inflows during the third quarter included $3 billion in our evergreen wealth products, which continue to be an area of strategic focus.
• We are monitoring the potential impact a prolonged U.S. federal government shutdown could have on our investment activity, including potentially postponing planned realization activity such as initial public offerings or delaying deal pipelines.

Industry Context

The filing highlights a bifurcated market environment where public equities, particularly AI-related stocks, are driving market concentration and performance, often divorced from traditional business quality metrics. In contrast, private markets are characterized by fundamental-driven pricing due to longer holding periods and transaction frictions. Global M&A activity is gaining dollar volume but with fewer, larger deals, and buyout exits remain subdued, favoring secondaries strategies. Concerns about credit quality in syndicated loans and private credit are rising following recent bankruptcies, though Carlyle's Global Credit portfolio reports healthier metrics than the broader market. The slowdown in U.S. job growth is attributed to tariffs and tighter immigration policy, potentially influencing Federal Reserve rate decisions.

Comparison to Industry Standards

• U.S. public equity multiples are 20-30% above their 10-year average, indicating a potentially overheated public market compared to historical norms.
• Median purchase price multiples across the U.S. buyout universe are still in line with the 10-year historical average, suggesting private market valuations remain more disciplined than public markets.
• Global buyout funds have recorded five consecutive quarters of non-negative net distributions, indicating an improving trend in liquidity for private equity investors after significant cumulative net outflows since early 2022.
• Carlyle's Global Credit portfolio's non-accrual rate is nearly half of the market-wide direct lending non-accrual rate, suggesting superior credit quality compared to industry averages.
• Default rates in Carlyle's U.S. CLO business are 40% of the market level, indicating stronger performance and risk management in this segment compared to industry benchmarks.
• Risk premiums for leveraged finance are exceedingly tight, reflecting a broader industry trend of high demand and low supply for leveraged loans and credit.

Legal Proceedings

• The Authentix Matter: A lawsuit alleging breach of fiduciary duties in the sale of Authentix, Inc. was decided in favor of Carlyle and all other defendants on January 8, 2025. The plaintiffs appealed, and the Delaware Supreme Court rendered a decision in favor of Carlyle and all other defendants on November 5, 2025.
• The Tax Receivable Agreement Matter: An alleged stockholder filed suit challenging cash payments associated with the elimination of a tax receivable agreement during the 2020 conversion. Derivative claims were dismissed for the original plaintiff, but a new plaintiff intervened for derivative claims, and a direct claim proceeds. Carlyle expects to incur legal defense fees.
• The company is subject to ongoing examinations, inquiries, and investigations by various U.S. and non-U.S. governmental and regulatory agencies, including the SEC and Department of Justice. As of September 30, 2025, $35 million has been accrued for litigation-related contingencies.

Related Party Transactions

• Aircraft transactions: Carlyle paid $0.4 million in Q3 2025 and $1.4 million year-to-date for the use of aircraft owned by co-founders' controlled entities, based on market rates.
• BDC Preferred Shares: Carlyle exchanged its 2,000,000 preferred shares in CGBD for 3,004,808 newly issued common shares of CGBD on March 27, 2025, at a net asset value of $16.64 per common share. The common shares are subject to a tiered lock-up agreement over two years.
• Co-investment entities: Senior Carlyle professionals and employees participate in co-investment entities that invest in or alongside Carlyle funds, generally without management fees or performance allocations, but are responsible for partnership expenses.
• Carried interest: Carried interest income distributed to senior Carlyle professionals and employees is subject to repayment (clawback) if fund investment values decline, with personal guarantees from these individuals.
• Business with portfolio companies: Carlyle conducts business with some of its portfolio companies on a negotiated basis.
• Revenue from affiliates: Substantially all revenue is earned from affiliates of Carlyle.

Stakeholder Impact

• Shareholders: Experienced a significant decrease in net income and EPS, impacting dividend sustainability and share price. However, AUM growth and fee revenue increases provide some long-term stability. The share repurchase program and consistent dividend policy aim to return capital.
• Employees/Senior Carlyle Professionals: Compensation is tied to performance allocations, which saw a significant decrease. However, they also have personal investments in funds and are responsible for giveback obligations.
• Customers (Fund Investors): Funds experienced varied performance, with Global Private Equity seeing reversals in performance allocations, while Global Credit and Carlyle AlpInvest funds showed appreciation. The firm continues to attract significant inflows.
• Creditors: The company issued new senior notes and extended credit facilities, indicating continued access to capital markets. Debt covenants are being met, and CLO borrowings are non-recourse to Carlyle.

Next Steps

• Monitor the potential impact of a prolonged U.S. federal government shutdown on investment activity, including IPOs and deal pipelines.
• Continue to manage and dispose of remaining investments in Legacy Energy Funds in the ordinary course of business.
• The Board of Directors declared a quarterly dividend of $0.35 per share of common stock, payable on November 19, 2025.
• The company will continue to monitor additional guidance released by the U.S. Department of the Treasury, the Internal Revenue Service, and other standard-setting bodies regarding the Inflation Reduction Act of 2022 (CAMT) and the OECD's Pillar Two GloBE model rules.

Key Dates

Recommendation

The significant decline in net income and EPS, primarily driven by negative performance allocations in the Global Private Equity segment, presents a clear negative for the quarter. However, the underlying business shows resilience with strong growth in AUM and fee-related earnings across Global Credit and Carlyle AlpInvest. The successful resolution of the Authentix legal matter is a positive, and the extension of credit facilities indicates continued financial flexibility. The NGP restructuring, while causing an impairment charge, aims for long-term strategic alignment. Given the mixed signals – strong operational growth in some areas offset by a major hit to performance-based income – a 'hold' recommendation is appropriate. Investors should monitor the recovery of performance allocations and the impact of broader market conditions on investment valuations, particularly in private equity.

Keywords

Private Equity, Asset Management, SEC Filing, 10-Q, Financial Results, AUM, Fee-earning AUM, Performance Allocations, Global Credit, Carlyle AlpInvest, NGP Restructuring, Investment Income, EPS, Dividends, Senior Notes, Capital Markets, Risk Management