Carlyle Group Inc. is overhauling how it pays dealmakers to free up steadier cash flows for shareholders and authorized a plan to repurchase as much as $1.4 billion of stock.
The private equity giant, which reported fourth-quarter earnings that beat Wall Street estimates, said Wednesday that it will give rainmakers and senior employees a greater share of gains tied to investment exits.
The changes are part of Chief Executive Officer Harvey Schwartz’s biggest effort so far to boost the firm’s languishing stock price. The former Goldman Sachs Group Inc. co-president is under pressure from shareholders and fund investors to articulate a clear vision after years of leadership churn.
Carlyle shares rose 8.1% to $44 at 9:50 a.m. in New York.
By handing over a bigger chunk of future profits to employees, Carlyle is trying to give them more reason to stick around and tend to bets just as a dealmaking freeze is beginning to thaw, with investors wagering that the Federal Reserve will begin cutting interest rates this year.
The move frees up more stable sources of cash known as fee-related income to shareholders.
“We want to make sure that we are investing in the business and investing for growth,” Schwartz said in a conference call with journalists, adding that the changes give the firm “flexibility to return capital to shareholders when we think it makes sense.”
Carlyle plans to lift employees’ share of profits tied to deal exits to 60% to 70%, up from an average of 47%, the company said in a statement. The portion of their compensation tied to fee-related earnings will fall.
The shift resulted in a $1.1 billion charge that fueled a fourth-quarter loss of $692 million, or $1.92 a share.
The firm also issued roughly $300 million in performance share units to top brass. The incentives are designed to motivate executives to think about the entire firm, which has grown more complex in the past few years as it expands into new business lines.
These shares will only vest if Carlyle shares hit key levels.
The changes follow moves by other firms to knit shareholder profits less to the boom and bust of buyouts. KKR & Co. and Apollo Global Management Inc. have both handed over more fee-related earnings to shareholders.
Meanwhile, the amount of stock that Carlyle’s board authorized the firm to repurchase equals almost 10% of its $14.7 billion market value as of Tuesday. The shares have lagged far behind rivals, climbing 20% over the past three years, compared with gains of more than 100% for Apollo and KKR, and roughly 75% for Blackstone Inc.
One year into Schwartz’s tenure as CEO, the firm reported results that beat Wall Street expectations.
Fourth-quarter distributable earnings fell 7% to $402.7 million, or 86 cents a share, as deal exits slowed. That still beat the 77-cent average estimate of analysts surveyed by Bloomberg. Fee-related earnings surged 26% to $254 million.
For 2024, the firm said it expects $1.1 billion of fee related earnings, an increase 28% from last year.
Fourth-quarter distributable earnings totaled $276.1 million for Carlyle’s private equity business, a 16% decline from a year earlier, while they climbed 16% to $95.3 million at the credit arm. The solutions unit, which buys and builds portfolios of funds, posted the biggest gain of 49%.
The firm has received a more muted reception from investors in the past year. It took in $63.5 billion of inflows in 2023, down from $94.8 billion the prior year.
Carlyle is raising buyout funds to invest in Asia and Europe. Executives acknowledged “industry headwinds” to those efforts on a call with analysts, while touting investor interest in its secondaries strategies.
The firm is continuing to cut fat.
Schwartz’s cost-cutting drive, even as it creates unrest within some pockets of the firm, is starting to flow through to the bottom line. Carlyle’s margin on fee-related earnings was a record 43% in the final quarter of 2023, up from 36% a year earlier. That is expected to climb as high as 50% this year, according to the statement.
The firm has previously said that Carlyle is planning $40 million in savings for 2024, mostly from cutting compensation.