10-Q: DigitalBridge Q3: FEEUM Soars, Carried Interest Reverses

DigitalBridge Group reports significant growth in fee-earning equity under management and Fee-Related Earnings, despite a large reversal in carried interest allocation impacting GAAP net income.

Summary

• Fee Earning Equity Under Management (FEEUM) increased by $5.2 billion, or 15%, to $40.7 billion as of September 30, 2025, driven by capital raises for the third flagship fund and new co-investment vehicles.
• Assets Under Management (AUM) grew by $12.0 billion, or 12.5%, to $107.6 billion as of September 30, 2025.
• Fee-Related Earnings (FRE) for the three months ended September 30, 2025, increased by $11.1 million, or 43%, to $37.3 million, with the FRE margin improving to 40% from 34% a year ago.
• Distributable Earnings (DE) for the three months ended September 30, 2025, rose by $11.0 million to $21.7 million.
• Total revenues for the nine months ended September 30, 2025, significantly decreased to $46.1 million from $540.9 million in the prior year, primarily due to a $(290.8) million carried interest allocation reversal.
• Net income attributable to common stockholders for the nine months ended September 30, 2025, was $32.8 million, a slight increase from $31.6 million in the prior year.
• Cash generated by operating activities for the nine months ended September 30, 2025, was $183.8 million, a substantial increase from $31.4 million in the prior year.
• The company received $59.7 million in proceeds from a secondary sale of equity by its DataBank portfolio company in February 2025.
• The capacity under the Variable Funding Notes (VFN) facility was reduced from $300 million to $100 million in June 2025, expected to generate annual savings of $1.0 million in unused fees.
• All 149,571 shares of Class B common stock were converted into Class A common stock in 2025.

Sentiment

Score: 6

Explanation: The company shows strong operational growth in FEEUM, AUM, FRE, and DE, indicating a healthy core business. However, the significant negative carried interest allocation reversal heavily impacted GAAP revenues and net income, creating volatility. Improved cash from operations is a positive, but the overall GAAP financial performance is mixed, leaning towards worse due to the large revenue decline.

Positives

• FEEUM increased by 19% year-over-year to $40.7 billion, indicating strong capital raising and deployment.
• AUM grew by 12.5% to $107.6 billion, reflecting overall business expansion.
• Fee-Related Earnings (FRE) increased by 43% to $37.3 million in Q3 2025, with an improved FRE margin of 40%, demonstrating enhanced profitability from recurring fee streams.
• Distributable Earnings (DE) increased by $11.0 million to $21.7 million in Q3 2025, indicating improved realized earnings for distribution and reinvestment.
• Net cash generated by operating activities significantly increased to $183.8 million for the nine months ended September 30, 2025, providing strong operational liquidity.
• Successful realization of investment in DataBank generated $59.7 million in proceeds, including $34.0 million in realized principal investment income.
• Reduction in VFN capacity will lead to $1.0 million in annual savings on commitment fees.

Negatives

• Total revenues for the nine months ended September 30, 2025, decreased significantly by $494.8 million to $46.1 million, primarily due to a large $(290.8) million reversal in carried interest allocation.
• Income (loss) from continuing operations before income taxes was a loss of $(49.9) million for the nine months ended September 30, 2025, compared to a gain of $163.0 million in the prior year.
• Net income (loss) from continuing operations was a loss of $(50.7) million for the nine months ended September 30, 2025, compared to a gain of $160.9 million in the prior year.
• Net cash used in investing activities increased to $(97.5) million for the nine months ended September 30, 2025, from $(6.8) million in the prior year, driven by fundings for general partner commitments and warehoused investments.

Risks

• Difficult market and political conditions, including inflation, high interest rates, trade barriers, and economic slowdowns or recessions, could adversely affect financial performance.
• Ability to raise capital from investors for the company, its funds, and managed companies is crucial and subject to market conditions.
• Performance of funds and investments is highly variable, leading to unpredictable revenues, earnings, and cash flow.
• Exposure to risks inherent in the ownership and operation of infrastructure and digital infrastructure assets, including reliance on third-party suppliers.
• Business risks in Europe, Asia, Latin America, and other foreign markets, including the impact of changes in foreign exchange rates.
• Challenges in increasing AUM and expanding investment strategies while maintaining consistent standards and controls.
• Potential for conflicts of interest in investment management activities.
• Ability to expand into new investment strategies, geographic markets, and businesses, including through acquisitions.
• Impact of climate change and regulatory or societal efforts related to environmental, social, and governance (ESG) matters.
• Maintaining effective information and cybersecurity policies and the potential impact of cybersecurity incidents.
• Ability of portfolio companies to attract and retain key customers and provide reliable services without disruption.
• Litigation and contractual claims against the company and its affiliates, including potential settlement and litigation costs.
• Ability to obtain and maintain financing arrangements, including securitizations, on favorable terms.
• General volatility of the securities markets.
• Market value of assets and the effects of hedging instruments on assets.
• Impact of legislative, regulatory, and competitive changes, including those related to privacy, data protection, and new SEC rules.
• Uncertainty regarding the ability to utilize existing tax attributes to offset taxable income.
• Maintaining exemption from registration as an investment company under the Investment Company Act of 1940.
• Changes in the board of directors or management team, and availability of qualified personnel.
• Ability to make or maintain distributions to stockholders.
• Navigating the competitive landscape in which the company and its managed companies operate.
• Carried interest distributions may be subject to clawback if a decline in investment values results in cumulative fund performance falling below minimum return hurdles.

Future Outlook

The company continues to evaluate the effects of new accounting guidance and tax legislation, with no material impact expected from the income tax disclosures ASU. It intends to elect the practical expedient for credit loss measurement, which is not expected to have a material impact. The company believes it has sufficient cash on hand and anticipated cash generation to meet short-term and long-term liquidity needs, while continuously evaluating alternatives to manage its capital structure and strengthen liquidity.

Management Comments

• "We believe we have sufficient cash on hand, and anticipated cash generated from operating activities and availability of external financing sources, to meet our short term and long term liquidity and capital requirements."
• "While we have sufficient liquidity to meet our operational needs, we continuously evaluate alternatives to efficiently manage our capital structure and market opportunities to strengthen our liquidity and provide further operational and strategic flexibility."

Industry Context

DigitalBridge operates as a leading global investment manager in digital infrastructure, a sector experiencing significant growth driven by increasing demand for data centers, cell towers, fiber networks, small cells, and edge infrastructure. The company's focus on value-add, core equity, credit, and liquid strategies positions it to capitalize on diverse investment opportunities within this expanding ecosystem. The variability in carried interest allocation highlights the inherent volatility in private equity investment performance, which is common across the alternative investment management industry, especially in early-lifecycle funds.

Comparison to Industry Standards

• The 19% year-over-year growth in FEEUM to $40.7 billion and 12.5% growth in AUM to $107.6 billion demonstrates strong capital raising capabilities, which is competitive within the digital infrastructure investment management space, often outpacing general market growth rates for traditional asset classes.
• The improvement in Fee-Related Earnings (FRE) margin to 40% in Q3 2025 from 34% in Q3 2024 suggests improved operational efficiency, a key metric for assessing the core profitability of investment managers compared to peers like Brookfield Asset Management or Blackstone's infrastructure segments.
• The significant reversal in carried interest allocation, while impacting GAAP revenues, is a common characteristic of private equity funds, particularly those in early stages where preferred returns accrue faster than investment fair value appreciation. This is a known dynamic in funds like DBP I and DBP II, which have gross IRRs of 11.2% and 10.3% respectively, aligning with typical target returns for value-add digital infrastructure funds.
• The company's investment in DataBank, a data center portfolio company, and its subsequent secondary sale, reflects a common strategy of realizing value from mature digital infrastructure assets, comparable to similar transactions seen with companies like Equinix or Digital Realty Trust in the data center market.

Management Changes

Corporate Governance

Legal Proceedings

• The company may be involved in litigation and claims in the ordinary course of business. As of September 30, 2025, the company was not involved in any material legal proceedings.

Related Party Transactions

• Amounts due from affiliates (investment vehicles, portfolio companies, employees) totaled $95.95 million at September 30, 2025.
• Amounts due to affiliates totaled $1.22 million at September 30, 2025.
• Substantially all fee revenue is from affiliates.
• Cost reimbursements and recoverable expenses from investment vehicles totaled $6.9 million for the nine months ended September 30, 2025.
• Marc Ganzi (CEO) and Ben Jenkins (President & CIO) have retained equity investments and general partner interests in portfolio companies (e.g., Vantage), which may trigger future carried interest payments to them upon realization events. Their carried interest entitlement is included in noncontrolling interests ($64.6 million at September 30, 2025).
• Certain employees invest in sponsored investment vehicles, not subject to management fees or carried interest, totaling $61.9 million at September 30, 2025.
• The company reimburses Mr. Ganzi for variable costs of business travel on private aircraft and up to 100 hours of personal travel, as well as a proportional share of fixed cash costs of any aircraft he partially or fully owns. Expenses totaled $3.5 million for the nine months ended September 30, 2025.

Stakeholder Impact

• **Shareholders (Common Stockholders):** Net income attributable to common stockholders slightly increased, and a consistent $0.01 per share dividend was declared. However, the significant carried interest reversal could impact investor perception of GAAP profitability.
• **Preferred Stockholders:** Continue to receive stable quarterly dividends of $14.7 million.
• **Employees:** Compensation expense (cash and equity-based) increased due to higher performance-based incentive compensation accruals. Employees also hold noncontrolling interests in the Operating Company and general partner entities, aligning their interests with fund performance.
• **Investors in Sponsored Funds:** The company's ability to raise $4.1 billion in new capital and grow FEEUM indicates continued investor confidence in its digital infrastructure strategies. Fund performance metrics (MOIC, IRR) are provided for key funds, offering transparency to limited partners.
• **Customers (Portfolio Companies):** The company provides services like information technology, facilities, and operational support to certain portfolio companies, indicating ongoing support and engagement.

Next Steps

• The Board of Directors declared a common stock dividend of $0.01 per share to be paid in January 2026.
• The company will continue to evaluate the effects of new accounting guidance, including ASU 2025-06 (Internal-Use Software), ASU 2025-05 (Credit Losses), ASU 2025-03 (Accounting Acquirer in VIE), and ASU 2024-03 (Disaggregation of Income Statement Expenses).
• The company will continue to manage its capital structure and explore market opportunities to strengthen liquidity and provide operational and strategic flexibility.
• The non-call period for the CLO subordinated notes ends in October 2026, after which the notes may be redeemed.

Key Dates

Recommendation

While DigitalBridge demonstrates strong operational growth in its core investment management business, evidenced by significant increases in FEEUM, FRE, and DE, the GAAP financial results are heavily skewed by a large non-cash carried interest allocation reversal. This volatility makes it challenging to assess underlying profitability solely from GAAP net income. The company's liquidity position appears sound, and strategic capital raising is ongoing. However, until the impact of carried interest reversals stabilizes or becomes more predictable, a 'hold' recommendation is prudent. Investors should monitor the consistency of distributable earnings and the trajectory of FEEUM growth, while acknowledging the inherent accounting complexities of private equity structures.

Keywords

Digital infrastructure, Investment management, FEEUM, AUM, Fee-Related Earnings, Distributable Earnings, Carried interest, Data centers, Cell towers, Fiber networks, Private equity, SEC filing, 10-Q, Financial results