Carlyle's shares closed nearly 8 percent lower on Thursday as investors vented their 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, because the funds made less money from selling companies. Carlyle shareholders get dividends mainly from management fees and funds' asset sales.

In the fourth quarter of 2011, a few months before Carlyle went public, its funds generated big profits from selling companies in their portfolios.

With less of that activity in the fourth quarter of 2012, the cash generated to pay dividends to shareholders dropped.

To be sure, Carlyle did complete transactions that paid investors in its funds: its private equity funds borrowed more against the assets of the companies in their portfolios, and essentially gave the borrowed money to fund investors as dividends.

But those dividends for fund investors do not directly translate into dividends for shareholders.

And even with those dividends, its funds gained 4 percent in the fourth quarter of 2012, less than the 7 percent rise in the same quarter a year earlier.

Carlyle's earnings 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.

The asset manager's profit drop differs from peers like Blackstone Group LP, KKR & Co LP and Apollo Global Management LLC, which posted stronger quarterly results as they sold more assets in a strong stock market.

Part of the reason for the difference is Carlyle's decision to defer some income for itself and shareholders. When the asset manager's private equity funds generate enough profit from selling companies, the manager is entitled to a percentage of the gains, known as "performance fees" or "carried interest."

But if the funds then perform less well, fund investors can ask Carlyle to give money back in a move known as a "claw-back." To avoid having to give money back, Carlyle says it is conservative in taking carried interest.

"I guess you might roll your eyes a bit, but the truth is we have this obsession with not having claw-backs," Carlyle co-founder and co-chief executive David Rubenstein told analysts on a conference call.

He added that there is no industry standard regarding when to pay carried interest.

BELOW EXPECTATIONS

Carlyle said economic net income (ENI), a measure of profitability that reflects 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.

DIVIDEND PAYMENTS

Carlyle said it got more than $1.7 billion in dividends from its companies in the fourth quarter, including drug research firm Pharmaceutical Product Development Inc, vitamin maker NBTY Inc, telecommunications equipment company CommScope Inc, French digital set-top box maker Sagemcom and British roadside recovery company RAC Ltd.

On the dealmaking side, Carlyle invested $3.3 billion in equity in the fourth quarter and $7.9 billion in 2012, down from $11.3 billion in 2011, despite the firm carrying out more deals and totaling higher transaction volume in 2012 than any rival.

"When it comes to our activity in 2012, I would say I am pleased but not satisfied, especially with regard to our investment pace," Co-Chief Executive Bill Conway, who founded Carlyle in 1987 with Rubenstein and Daniel D'Aniello, told analysts on the same call.

Among the sales of assets Carlyle profited from in the fourth quarter were retail assets at 666 Fifth Avenue in New York, car parts manufacturer Metaldyne, Chinese chemical company Sinochem and stakes in pipeline company Kinder Morgan Inc and car rental firm Hertz Global Holdings Inc in the United States, healthcare company Qualicorp SA in Brazil and mortgage lender Housing Development Finance Corp in India.

Carlyle said its funds that generate carry had about $25 billion in so-called dry powder that is available capital to invest.

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. Across its 101 funds, Carlyle boasts about 1,500 investors from 76 countries.

Carlyle, which completed a $671 million initial public offering in May 2012, declared a quarterly distribution of 85 cents per common unit.

Carlyle shares closed 7.8 percent lower at $33.80 on the Nasdaq on Thursday.