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Carlyle Group’s profits fell last quarter as the buyout group failed to benefit from a rebound in markets and struggled to drum up interest in a new flagship fund, underlining the challenge facing new chief executive Harvey Schwartz.
A former executive at Goldman Sachs, Schwartz took the reins at Carlyle in February and has pledged to revive profits at the Wall Street institution during a testing period for the private equity industry.
Schwartz on Wednesday laid out five areas of focus, including growing the group’s insurance and underwriting business lines and cutting costs in an effort to improve margins that have consistently lagged behind peers such as Blackstone and Apollo Global.
“[We’re] basically doing a line-by-line review going through the business and making sure we’re super-disciplined about expense,” he told analysts during a conference call.
While Schwartz’s comments give investors new insight into his priorities after a six-month review of Carlyle’s operations that included meeting with 150 investors around the world, he was reluctant to provide definitive financial targets or strategic goals, something analysts expect he will have to do by the end of the year.
Carlyle shares fell about 9 per cent in early Wall Street trading on Wednesday.
The company said that its second-quarter distributable earnings — a metric analysts favour as a proxy for the group’s cash flows — dropped to $388mn, a 26 per cent drop from the same period a year earlier. The results were better than analysts expected.
A prolonged slowdown in dealmaking curbed Carlyle’s ability to exit investments profitably and secure valuable performance fees, something it warned would continue to the year-end. Dealmaking remained subdued in the quarter despite a rebound in markets that has propelled the S&P 500 up by almost a fifth this year.
Carlyle secured $7.1bn in new money from investors, a slight increase from the first quarter. Investors committed just $300mn to its new flagship US buyout fund in the period, putting the total raised at about $16bn and short of the $22bn target set by Schwartz’s predecessor, Kewsong Lee.
The firm has already warned shareholders that most of its new buyout funds will be smaller as investors scale back their exposure to private assets, as rising interest rates radically reshape conditions for the industry.
Carlyle is expected to begin raising new buyout funds in Europe and Asia, which could help its expansion later this year.
Schwartz has begun to overhaul Carlyle’s leadership and recently named dealmaker John Redett as chief financial officer and Lúcia Soares as chief information officer. The appointments are expected to be the start of a revamp of Carlyle’s operations.
Schwartz previously told analysts that he was examining each of Carlyle’s businesses in an effort to find efficiencies that will bolster profits. He has vowed to be “disciplined” in plotting a recovery at a time when rapidly rising interest rates have prompted investors to pull back from private assets.
Despite the challenges, Schwartz said on Wednesday he was optimistic that the broader economic and financial backdrop was improving.
“While the economic backdrop remains complex and investor sentiment remains mixed, the peak of the inflation cycle may have passed.”