The Carlyle Group Inc. (CG) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, to the UBS Virtual Financial Services Conference. Welcome back after a good day yesterday. Today, we're very pleased to have Curt Buser, CFO of Carlyle Group with us to do a little presentation, share some remarks, and then we'll have a little fireside chat. And you should also have a link, if you want to submit questions to me in writing, you can do that, I'll see them on my screen, and I can relay them to Curt. Before we begin, just a quick disclosure. UBS is required to make certain disclosures around our equity research. They can be found at www.ubs.com/disclosures. Thanks very much. And with that, I'm very pleased to turn it over to Curt Buser.

Adam, thank you, and thanks for hosting this conference and having us to present here today. I want to thank everyone who has dialed in or otherwise showing -- expressing your interest in Carlyle this morning. So just as a reminder, this presentation that I'm going to walk through is available on our website, so you can pull that down at your convenience, if you like. So let's begin with a quick reminder of who we are at Carlyle. Carlyle is first and foremost, a global firm with truly global presence, enabling us to do transactions that only a few others can accomplish on a global basis. And we operate out of 3 businesses: private equity business, which we consider to be world-class in our credit and Investment Solutions businesses, which have been growing rapidly, and we fully expect them to continue to grow. I'm proud of our financial results over the last 12 months, which reflect very attractive growth. Specifically, our fee-related earnings are up 21% over the last 12 months. Distributable earnings at about $1 billion or $2.50 per share are also up almost 50% over the last 12 months. And our net accrued carry is now at a record $4 billion as of June 30 and it also was up 125%. All of this reflects substantial growth in our key operating metrics. And you can see them here on this slide. Our [indiscernible] appreciation across the platform is up 43% on an LTM basis with Corporate Private Equity leading the way at 51%. Fundraising is up 56%, having raised $33.3 billion over the last 12 months. Our deployment, so the investments that we've put into the ground were up almost 60% on an LTM basis and realized proceeds out of our carry funds are also up about 23%. So the platform is firing on all cylinders as Kew likes to say. And we believe our strategic plan that we announced in February will help drive further growth. Specifically, we're focused on accelerating and scaling our business. We believe this will grow management fees and fee-related earnings. We're going back and capture adjacencies that are in capital markets and insurance solutions, as we talked about before. And we're going to continue to utilize the burn, meaning we're going to achieve higher FRE margins as we control costs, and we're aligning all of our professions with our key goals. And we're on pace to hit our strategic plan goals earlier than expected. In February, we presented our strategic plan at our Investor Day, highlighting our goals for 2024. We said we would grow fee-related earnings to $800 million from an as-adjusted $490 million in 2020, and we're running at an annualized pace of about $540 million. That's far better than I expected we would do at the beginning of the year when I gave guidance that we would do about the $490 million, maybe a little bit better, and we're well ahead of that plan. Our fee-related earnings margins, we said we would grow to 40% by 2024. And in Q2, we were at 34% or 33% blended for the first half of 2021, also very much on track or ahead of plan for our 2024 target. And we said we will grow net realized performance revenues to $800 million by 2024. And I expect we'll achieve that target this year. We have line of sight from already announced public transactions to over $500 million of realized -- net realized performance revenues that we think we'll realize here in the second half of the year. That's already announced deals. So you take that with the $300 million that we've recognized and realized in the first half of the year, that puts us up to $800 million or more. And further, really, we expect that average of $800 million or so, if not greater than that to continue for several years to come. This pickets are wide open on realizing care. We said we would also achieve $1.6 billion by 2024 for pretax distributable earnings, which equates to about mid-$3 per share by the same point in time over the -- and over the last 12 months, as I've already said, we've delivered about $1 billion or $2.50 per share, showing that we're likely to achieve these goals also earlier than we have set out for ourselves. We've been focused on growing fee-related earnings and improving our FRE margins, and we're remaining committed to doing just that. And over the last 5 years, as you can see here, our FRE has grown at a 20% CAGR, and we've had FRE margin expansion by 14%. Both of these growth rates are top tier or top of the pack. And as you look at really what underpins this, our fee-earning AUM is very stable and showing a compounded growth rate of about 10%. If you look at our pending AUM, it's about $17 billion, and that's capital that we've raised, which we haven't yet activated the fees. Upon activating that, if you would add that to the $175 billion, that's about $192 billion of fee-earning AUM inclusive of the pending AUM. We finally, keep in mind that 98% of this AUM is locked up in long-term structures is subject to, and it's not subject to redemption. And given our LTM renewal rates of roughly 75%, I would call that incredibly sticky capital and that underpins very stable, sustainable FRE growth. All of this is supported by a fantastic fundraising momentum. We've raised $18 billion in the first half of 2021, which is 50% higher than the prior year. Momentum is good across products, segments and geographies, and 2021 is going to be a really strong fundraising year. That's going to set us up very nicely for next year, where I'm predicting that we're going to see very strong FRE growth in 2022. We're going to further scale FRE by capturing revenue adjacencies. There's a fantastic opportunity to capture revenue in capital markets, as I talked extensively about already. And our insurance solutions platform isn't performing as intended. We're optimistic that we will be able to do more in this platform and continue to grow. We have substantially grown the remaining fair value that's invested in the ground in our carry funds. And we now have about $116 billion invested. That's up about 85% from the level we had in the ground between 2012 and 2017. That's important because during 2012 to 2017, we averaged about $650 million of net realized performance revenue during that time period. We really thought of it as a carry engine during that time frame. We're now sitting on $116 billion. And so you can kind of all see what that implies in terms of growth from a realized carry perspective. And our investment performance remains strong across asset class, geography and segment. All of this explains where we now have net accrued carry of $4 billion, and that's up from $2.3 billion just 6 months ago. The proof of carry is our best indicator of future realized carry. And we think this sets us up to average at least $800 million annually in net realized performance revenues over the next several years, if not longer. On a per share basis, our net accrued carry is twice that of our peers. It makes us a substantial portion of our market cap. And you can see here it's over 20% of our market cap in terms of value. It's also contributing to our growth in distributable earnings, our realized investment income, which we generate often -- which is earnings off of our balance sheet. And over the first half of this year, we earned about $70 million in realized investment income. Over the last 12 months, it's over $100 million. You see it here is $103 million. And again, it shows great progress toward achieving our 2024 goal of $150 million arguably faster than we had laid out. This slide might be my favorite slide, and it shows what we're going to do with all of these earnings. So specifically, as we accelerate fee-related earnings, we're going to increase our dividend. And we think about this on an after-tax basis. I want the dividend right now, it's a fixed dividend. And I wanted to remain very sustainable, and I wanted to change only one direction, up. So I want to grow the dividend, and we're going to do that as we grow after-tax fee-related earners. We also -- you can see that we're going to increase our performance revenues, both realized carry and realized investment income, and that helped build retained earnings. So what are we going to do with the retained earnings? Well, first priority is to reinvest that to grow fee-related earnings. How are we going to do that? Well, we want to invest organically larger funds that we raise. So as we're raising funds that are maybe 20% to 40% larger, not all of them will be that much larger. But that means more capital from the balance sheet to be able to drive those funds, that will drive higher management fees and higher fee-related earnings. We're also launching new products and teams that will require capital, another good thing to do organically. And capital markets and insurance adjacencies will require capital as well to underwrite the capital markets expansion and also to be able to find the appropriate things to build our insurance business. And then last, we will take our shots from a strategic M&A perspective, really as opportunities arise that are appropriate to add capabilities to our business. I'm really happy to say that our stock price has performed incredibly well this year, but it's still a great time to invest in Carlyle. You can kind of see here from a consensus perspective, that there's a clear expectation for growth in EPS for Carlyle really top of class. And our stock remains very much valued at a discount. So this, to me, looks like a great opportunity to invest in Carlyle, now is the time. This is a great time to make this presentation as we're firing on all cylinders, our results are larger than expected, and we're achieving them faster than we expected. You know what, I was wrong. This is my favorite slide. We're thinking bigger, we're performing better, and we're moving faster. Thank you all. Adam, let's do some Q&A.

That sounds great. Excellent presentation. Thank you very much. I want to start -- I have some -- actually some questions about the presentation. So -- and I want to start with your favorite slide, which was the last one. And I just really ask you, when -- after Glenn, left the firm and Kew kind of expanded his role, there were questions, of course, and the response was generally but stay the course in terms of strategy. And on paper, you could certainly make the case that you have. You're still doing buyout, you're still doing real estate, credit, secondaries. So on paper seems fairly similar. And yet, not only are the results really good, as you just highlighted, but I think the tone, the strategic clarity is better, maybe more refined. So I ask you, may being an outsider, I ask you as an insider, how has the firm changed? And was that always sort of embedded there? Or have things changed? Is it credit to Glen illuminating it over the past 12 months? Or where exactly is the firm? And how have you done in what I'll call the new era of Carlyle?

Look, I mean, it's been a journey. First, putting in the 2 CEOs; second, converting to a full set corporation. We had our Investor Day this year, which really spelled out a long-term plan. We hadn't had an Investor Day in a long period of time. And then we -- on the mist of all that, we're also in the pandemic. And so there's a couple of things that -- both those changes that I just spelled out, but all of it has led to far greater clarity, not different strategy per se, right? So very much focused on growing fee-related earnings, very much want to grow the firm organic because, quite frankly, that's the best return on capital for shareholders. And just as we've made these changes, we've become more and more focused, internal drive, goals, motivation are clear. Our muscle memory in terms of what we need to do is being developed. I mean before those things that we did before, which were all very good. But from a new focus perspective, that muscle memory is a whole lot better. The 3 business heads in terms of running the 3 businesses, they know what they're doing. The business is just coming together really nicely. And I hate to say it, but the pandemic -- through a lot of curveballs, caused a lot of stress. Our main goal and all that was obviously the health and safety of all of our people around the globe, as well as our portfolio companies and really all of our stakeholders. But it also brought in further focus. And a lot of things are just more efficient. Productivity, not just in our business but across our portfolio companies has really improved. It's driven technology. The data enhancements that we've seen, how to use it and how to better communicate with our stakeholders, our LPs has all gotten a whole lot better, and we're benefiting from it. And we were -- our portfolio, quite frankly, was well positioned going in, and it remains well positioned and it's -- the benefit of it is -- it really kind of come through. So it really is kind of the best of times right now.

Excellent. That makes a lot of sense. I have a question about a couple of other slides. And the first one is maybe segue from what you just talked about in terms of kind of evolving and stepping up from the past. And that's the concept of core fee-earning AUM and the growth of that versus legacy. And we don't need to run through the numbers. But just conceptually, can you tell us a little bit more about that and what's in core versus...

Sure. So some of that, if you think about Carlyle since [indiscernible], right? So we used to have hedge funds and we'll have hedge funds anymore. The relationship with Riverstone was different. And so you have to really look at core Carlyle. And we remain also focused on doing just that. So first half of this year, you saw us sell Metropolitan Real Estate, very good business like the lot, but small, and we didn't really think that it was really core of who we are and what we're doing. And we continue to, I'll just say, shed things that aren't going to be big or move the needle and they just have the propensity to be distractions. And so you talked about -- you asked the question before about how do we more focus, well, making sure you eliminate the distractions is one of the elements, and we've been doing that.

Makes perfect sense.

I'm sorry, but that's what really kind of ties that core FDP -- AUM because you got to look at things apart from what's gone away, right?

Yes. No, no, no. And the layout on that side is definitely -- is very helpful in understanding that and a little bit quantitatively as well. Moving on to something that is big as opposed to things that won't be big, your guidance for performance fee realizations on the slide, which has the old guidance from Investor Day, the arrow is pretty steep already. And now it's probably close to vertical. Just process-wise, I wanted to dig in and ask you, obviously, things that the portfolio companies are looking good, things in the funds are looking good. What -- I mean, the Investor Day wasn't that long ago. So what made the decision for you folks to change that guidance at this point?

Well, so look, when we started the year, we're still in the pandemic. In February is when we presented the strategic plan, obviously, that was the end of 2020 to enable that kind of a presentation and having rigor around it. And we started the year with a little over $2 billion of net accrued carry. Performance was good second half of last year, but then continue to just rock here in the first half of this year. And we're sitting on $4 billion of net accrued carry and the excess that we signed up. And the multiples on those axis are all -- look, I mean some of that -- okay, we think we can do this. We hope we can do this, when can we do this, what year can we do this, didn't think that all that was going to happen right when we did it. And when you give a plan like we did in February, based on our best views at that point in time, the philosophy in this business is changing fast. And so you then have to be prepared to talk about changes when change is -- big changes happen. And so as we were kind of presenting our second quarter results, it was appropriate to resteer and tell people kind of what we were seeing is different, and the realized performance revenue was the clear obvious piece. But the more subtle one, I think, was FRE, right? So as we started the year, I now was very clear in terms of saying, look, on as we did $520 million in 2020, but we carved out the cost to $490 million. We'll do it the same, maybe a little bit better, a little bit bigger. You're really going to see the growth come in the later cycle. And so the curve is -- the curve changed, curve changed. It's faster. And I'm seeing that in FRE. And so $270 million 1st half of the year, I think we're going to do at least that in the second half of the year. So it's a different story, and it's appropriate to share that. Now things can change again, and we'll do our best to keep everybody up to speed with where we are.

Makes sense. And not to push the envelope too much, but one of the themes that Kew and yourself and others have highlighted recently has been that other favorite slide of taking performance fees and other cash flow and using that as capital to improve the FRE. I think that's -- you've latched on to the key theme for the industry and really operationalize it. Given the higher realizations that you're now expecting, should we expect that to maybe accelerate the growth of FRE in some of the areas that you highlighted?

Look, that's certainly what I want to have happen, right? How do make FRE increase earlier, faster and more and improve the margins along the way. And doing organically -- be able to use our own resources to do that is a great outcome for shareholders. Look, speed on some of it is easier to see. So that's why I like the revenue adjacencies because I think we can lean in more and really push that and that's what Kew and others are doing. And then as the fundraising cycle momentum here, not just for us, but the tailwinds in the industry are really good and really driven by just phenomenal performance that we have are really across our firms and others as well. And that's just making this a very attractive asset class to invest in. And so what we're seeing is the velocity in deployment and capital raise really accelerate. And as we're coming back to market with bigger funds, we'll obviously see more. And look, Kew has really challenged us to how to think bigger and faster and perform better, and that means also new products. And so we're thinking about the right things to launch, but not small. We've done the small, I want big. And so how do we launch big stuff, and that's going to require some capital. And that won't be all kind of linear perfect FRE growth because take some investment. But we're going to try to manage that in a way to manage our FRE store because we care a lot of that.

Yes. No, for sure. And it's true that some of these initiatives not only take capital, but also take a certain in amount of time, I would think, in maturation. You could throw 3x capital with something, but it doesn't mean it's going to happen 3x sooner.

Absolutely right. And that's why I like to think in longer terms. And so why we set our goals for 2024, et cetera, because fundamentally, Carlyle is private, right? It's private equity, private credit, private real estate, private capital. And the advantage of all that private is longer term, not forever, but that 3- to 5-year window makes a whole lot of sense and be able to manage it and measure stuff over that kind of window matters.

I want to ask you about -- I'll shift gears a little bit. I want to ask you about one of the -- I think it's a theme in the industry, certainly a theme at Carlyle, which is the preference of LPs to do business with fewer GPs, fewer providers, if you will. I know Carlyle statistics there are really good. I'm just glancing at them, but the percent of LPs in 3 or more products has gone from like 25% to 75% over the last 10 years. So that's a huge gain, I think of it in terms of client wallet share. So I'd like to ask you. Number one, what is your -- now that you're at 75% in 3 or more products, what's the next hurdle? What's the next target in terms of getting clients more involved? And then the second part of the question is, how much care and feeding and administration do LPs like that require in terms of, okay, in all these products with Carlyle, how are you going to help me manage that portfolio, if you will, within Carlyle?

So first, I think it starts with the mindset. You have a choice. Do I view my unlimited partners as our customers or do I view them as our partners. And I start with the viewpoint, they're our partners. And those are long-term relationships and we're partners. And so we want to bring a holistic value equation to our partners. And that's -- a lot of that is how things operate and being able to get them information about our portfolio, especially as we went into the pandemic, people were really worried and being able to report not just values quickly, but really the drivers of those values. And not just -- what just happened, but what do we think is going to happen. And what are we seeing because of our global presence around the world. And Jason Thomas, we just have a fantastic economist for the firm. And he's able to take the data that we're seeing out of our portfolio companies and really synthesize that into what we're seeing happen from a growth perspective or lack of in some places. And to share that with our investors and compare and contrast that to other things that they're reading and seeing, and that adds a lot of value. And look, the back office, don't underestimate the importance of the back office in terms of getting the information reported quickly, transparently, quickly to our limited partners. I think we do that really well. There's others that I think do it all so well. But there's only a handful that can really do it in a world-class way. And it does take time, and it takes care and feeding. And look, data and the importance of being digital and how you develop the firm and think about things, we think is critical, and it's not just, how we run our own shaft, but really across the portfolio. It's a real driver of value. Others are thinking about similarly, but it's -- and you can see it in productivity enhancements worldwide. And I think it's going to be a real game changer. We like to say that every deal is a technology deal and that's part of it. And that's why these LPs are consolidating who they work with because: one, they've got to deploy large amounts of capital; and two, it's about their own back office costs; and three, it's about how to do that with a safe pair of hands. So those are the reasons that we and other firms like us have done really well in that place. And we can do more? Absolutely. And our distribution and fundraising team are focused on continuing to build and enhance those relationships. We measure renewal rates. We measure wallet share. We measure those relationships. And we both -- obviously, we like bringing new LPs in the fold and bringing them the across the platform. And -- but it's always about kind of back to treating all of them as partners.

Got it, for sure. You tempted me by talking about aggregating the data of what you're seeing in portfolio companies, especially internationally. And there's a lot of attention at least right now to different regions, Europe, Asia Pac, hotspots in the pandemic. So just broadly, we don't need a deep dive, but what are you seeing globally right now? I think some of your Europe funds have done extremely well recently. But what are the opportunities for Carlyle in the relatively near term internationally

So one importance of being global is understanding that different pockets in different places around the globe, operate differently and growth rates are different and challenges are different and way business has done is different, and that's why it's really important to us to have people on the ground. So we have a real global presence and not just kind of we send them out of New Jersey and flying around the world. And so that ad is really key. Now what I can -- it's really amazing right now. All of our teams are incredibly busy. That deployment pace that I quote really on, it's up 60%. The amount of invested capital in the ground, $116 billion. That just doesn't happen. The acceleration of fundraises because there's been more capital deployed. And so guess what, funds are getting called to market sooner. And you mentioned Europe. Our Europe Buyout fund, our Europe Technology Fund, Europe real estate product and CLOs We have a really good CLO practice in Europe and CLOs have been hot this year, which is one nice because I was kind of calling a different store last year. And the team, both in the U.S. and in Europe has just deployed a lot of capital, really run that portfolio really well. And it's also throwing the exit side. I mean we're seeing in CLOs, refinancings and the like in the portfolio, just phenomenal deals that we're seeing. And it's because people can see the specific issues and find the right opportunities and that -- which is really one of understand how we can create value.

You mentioned what you alluded to the sort of flywheel concept those are my words, but of accelerating the return of capital and the new fundraising. And that's obviously significant for Carlyle and for the industry. At the same time, there's been a theme growing recently around focusing on perpetual capital. And kind of avoiding that cycle in some ways. So where do you see Carlyle in that mix? How important is it for you to build perpetual capital? What might be the ultimate target level in terms of proportion of your AUM? What are your thoughts around that?