UPDATE 2-Carlyle's earnings drop on asset sales
* Private equity arm mostly to blame for earnings drop
* ENI per adjusted unit 47 cts vs Street view of 69 cts
* Pretax distributable earnings down 24 pct to $188 mln
* Carlyle shares fall 7 pct percent
(Adds CEO comments, analyst comment, share price)
Feb 21 (Reuters) - Carlyle Group LP said on Thursday fourth-quarter earnings fell 28 percent as the alternative asset manager failed to match the previous year's sales of assets and relied more on company dividends to return money to its fund investors.
Carlyle's shares were down more than 7 percent on Thursday morning as investors voiced disappointment with what the firm likes to call "the Carlyle engine." The stock had been up 41 percent since the start of the year, compared with a 5 percent rise in the Nasdaq Composite Index.
Carlyle's private equity arm, which accounted for about a third of its assets but about two-thirds of profit, was mostly responsible for the earnings drop, bucking a trend among peers Blackstone Group LP, KKR & Co LP and Apollo Global Management LLC.
This is partly because Carlyle took advantage of stronger capital markets to carry out more refinancings of portfolio companies and pay dividends, which resulted in money returned to fund investors but did not generate so-called carried interest - a cut of the profit for Carlyle.
Such moves highlight the challenges publicly listed asset managers face in balancing the interests of their fund investors, who earn profit on investments first, with those of their shareholders, who rely on carried interest and management fees trickling down to them.
What is more, Carlyle's funds appreciated 4 percent in the fourth quarter, less than the 7 percent rise a year ago. The firm also said it was disciplined in paying itself carried interest, when eligible, to avoid having to pay money back to investors if funds perform less well later.
"There is no common standard in the industry for when you collect carry. We'd say we are very conservative. I guess you might roll your eyes a bit, but the truth is we have this obsession with not having (carry) claw-backs," Carlyle co-founder and co-chief executive David Rubenstein told analysts on a conference call.
Carlyle said economic net income (ENI), a measure of profitability that takes into account the market valuation of its assets, came in at $182 million, down from $254 million a year earlier.
This translates to ENI per adjusted unit of 47 cents versus an average forecast of 69 cents by analysts in a Thomson Reuters poll. Blackstone, KKR and Apollo all significantly beat analysts' fourth-quarter earnings expectations.
"The miss versus our ENI per share estimate was largely driven by realized performance fees and, to a lesser extent, unrealized performance fees coming in lower than our estimates," Barclays Capital analysts wrote in a note.
Pretax distributable earnings, Carlyle's favored indicator of profitability that shows cash that has been generated and is available to pay distributions to its shareholders, were down 24 percent to $188 million.
This was despite realizing profit in its funds of $6.8 billion for the fourth quarter and $18.7 billion for 2012, up from $17.6 billion in 2011.
Fee-related earnings were $55 million in the fourth quarter, up from $14 million a year ago due to an increase in fee-earning assets under management, lower general and administrative expenses, and $18 million in proceeds from an insurance settlement, Carlyle said.
The Washington, D.C.-based firm capped a very strong year for fundraising, amassing $14 billion in 2012 compared with $6.6 billion in 2011 and bringing total assets under management to $170.2 billion.
Carlyle's latest flagship buyout fund, Carlyle Partners VI, has reached 60 percent of its $10 billion fundraising target, Rubenstein said.
Carlyle, which completed a $671 million initial public offering in May 2012, declared a quarterly distribution of 85 cents per common unit.
Carlyle shares were down 7.3 percent at $33.99 on Thursday morning on the Nasdaq.
(Reporting by Greg Roumeliotis in New York; editing by Gerald E. McCormick, John Wallace and Matthew Lewis)