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

Good afternoon, everyone. This is Craig Siegenthaler from Bank of America, and it's my pleasure to introduce Curt Buser. Curt is the CFO of the Carlyle Group. Curt joined Carlyle in 2004 and served as the firm's Chief Accounting Officer until 2014 and then CFO for the last 7 years. Prior to Carlyle, Curt was a partner with Ernst & Young, he is also an alumni of Georgetown University. Good afternoon, Curt. Thank you for joining us today.

Craig, thanks for having us. I really appreciate the opportunity.

So I just wanted to start with a little background on Carlyle before Curt takes over. It's one of the largest alternative asset managers in the world with almost $300 billion in assets under management. The firm was founded in 1987, not in New York City, but in Washington, D.C.; not by former investment bankers, but 3 individuals with diverse backgrounds. Bill Conway was the CFO of MCI Communications and David Rubenstein was a lawyer that worked in government for the President Carter's administration. Together, they built one of the largest and diverse private equity franchises globally. And over the last decade, Carlyle has been expanding outside of private equity into credit, real assets, solutions where it has sizable businesses today. And earnings are also accelerating. The company just generated $730 million in distributable earnings in 3Q, which compares to only $150 million last year. So a big rate of change. And with that, let me turn it over to Curt.

Great. Thank you for that, and thank you for your kind comments. And thank you also to BofA and to everyone who's dialed in. There's a brief presentation I'm going to go through. It's available online. It's also on the Carlyle IR website, and I'm going to just refer to page numbers as I flip through it. So starting on Page 3. Carlyle is a leading global investment firm, and I'm going to cover kind of 3 main points today. First, we're delivering exceptional results. Second, our financial model is transparent and is poised for significant acceleration. And third, we're performing ahead of our strategic plan, and I also think we happen to be attractively valued at the present time. So first, we are a leading global investment firm delivering exceptional results. And if you turn to Slide 5, you'll see just what I mean. We're global. We're a diversified business with diversity of products operating across 3 different segments, a Global Private Equity business, Global Investment Solutions business and a Global Credit business, all aggregating to just shy of $300 billion in total assets under management. On Slide 6, you'll see how our platform is performing. Year-to-date results are shown here, 34% appreciation. This is our CPE carry funds, but it's strong across all of the businesses, which resulted in record fundraising, record deployment and record realized proceeds all up over 100% compared to the comparable numbers just a year ago. On Slide 7, you see how this kind of translates into financial performance. Our fee-related earnings are up 23% year-to-date at $424 million. Distributable earnings are at $1.3 billion, up 170% year-to-date compared to a year ago. That translates into roughly $3 on an after-tax basis per share just for 3 quarters. So it's not even a full year's set of results. And then our net accrued performance revenue stand at $3.9 billion. That translates into roughly $11 per share of future earnings on a pretax basis. On Slide 8, you'll see really the backdrop that we're operating in. The market for private capital is growing rapidly. You see the AUM by strategy is up, and you see that the CAGR, whether it's a 5-year, 10-year, 20-year CAGR for the industry, up 12% to 15%, depending upon how you measure it, but very strong tailwinds to what we're doing. On the next slide, you will see that really what's also contributing to our growth is the fact that allocations of public pension funds, in particular, have increased roughly 75% and the share of money going to the top 20 funds has gone from 29% in 2014 to 45% in 2019. So you have both an increase in allocations and then more of those allocations going to the large players. On Slide 10, I'll start my second major theme that we operate a very transparent and simple financial model, and we're poised for significant acceleration. So on the next slide, Slide 11, you see really the components of distributable earnings. Very simple business model. First, fee-related earnings. We have all of our operating expenses against really all of our fee revenues. That's what generates fee-related earnings to earnings lift in the management of the global business. Plus our net realized performance revenues, often this is referred to as carry. This is the firm's share of that carry, again across all of the business lines. And then finally, it's the investment income that we generate off of our balance sheet, that investment income is now becoming a real significant driver of our distributable earnings. And then what's not shown is net interest expense, but those would be the 4 components of distributable earnings. And then on Slide 12, you'll see that really our focus has been on driving fee-related earnings growth as well as expanding margins. So $424 million of FRE year-to-date, but what's important is the 20% per year CAGR, really over the last 5 years. So this year, we're up 23% year-to-date in FRE, but it's been 20% for the last 5 years. That's grown because of the significant fundraising. And what's important is the $30 billion of pending AUM will turn on probably 1/2 to 2/3 of that here in the fourth quarter, that will drive fourth quarter revenues up and really sets us up very nicely for higher FRE in 2022, and that pending AUM number is up about 123% since the beginning of the year. We've said before that our goal for 2024 was $800 million of FRE, and we also have said that we think that we're going to hit that sooner than 2024. On Slide 13, you'll see our fundraising story. So we've announced before the $130 billion-plus target. This year, we're already at $40 billion just year-to-date. That's before even completing the year. It's $50 billion on an LTM basis. It's spread across all 3 of our businesses, and we're going to have more funds in the market next year. So we're well positioned to hit our $130 billion target sooner than what we said in our Investor Day just at the beginning of the year. Turning to Slide 14. Really here, we want to talk about our net realized performance revenues and they're accelerating. So we're already at $847 million of net realized performance revenues year-to-date, with still a quarter to go. I see $450 million of net realized performance revenues that we expect to realize from signed transactions just in the next 2 quarters of Q4 and Q1, plus what we potentially can earn from additional exits from our public portfolio, which is about $19 billion. More importantly, as we look forward, there's $3.9 billion of accrued carry that's underpinned by $115 billion in our traditional carry funds at fair value. And on the next slide, on Slide 15, you'll see what I'm talking about. So in 2012 to 2017, we averaged $646 million annually in net realized performance revenues. Over the last 12 months, we've earned $934 million, up 45%. Why? Because the platform is bigger. So in 2012 to 2017, we generally had about $60-plus billion invested. We now have $116 billion of remaining fair value in the ground, and that's translated into a 188% increase in net accrued carry, $3.9 billion now compared to roughly $1.4 billion on average during the prior period. If you go to Page 16, our third key point to mention here is really our realized investment income. We're on pace to hit our $150 million goal that we set for 2024 this year, so $139 million year-to-date. So nearly triple the amount that we generated in 2020. Turn to Slide 17, and you'll see what's really driving this. Our balance sheet is now up to $2 billion, up 62% from 2018. And cash that is on our balance sheet is now at $2.4 billion compared to $700 million back in 2018. Again, remarkable growth in the business to translate into further assets on the balance sheet which enables us to do a whole lot more than we've done before. Turning to Slide 18. How do we plan to use this increased earnings firepower as well as cash that we've been able to generate. First, protect and grow our fixed dividend. So fee-related earnings on an after-tax basis will provide dividend growth. Our increase in levels of performance revenues as well as realized investment income will be used to drive higher fee related earnings. How are we going to do that? Well, we plan to raise larger funds through increase in fundraising, so part of the balance sheet, we'll invest into that. We'll also, in some cases, seed that. We may have a seed portfolio in advanced operational fund to help raise a larger fund. And then we've talked about our adjacencies, both in capital markets and insurance in the past, namely through Fortitude, both of which we need to underpin with capital and potentially also try to grow those. And then finally, we'll take advantage of the markets from a strategic M&A perspective. And let's not forget that we're going to manage our dilution to 1% or less. And so we'll use some of this capital to buy back stock as well. On Slide 19, I just want to cover the third key point. We are ahead of our strategic plan, and I think we're also attractively valued. So on Slide 20, it really kind of lays out what we said in the beginning of this year in February at our Investor Day, and we're really well positioned right now. So right now, we think that we're going to achieve our $800 million of FRE and the 40% margin earlier than 2024. Year-to-date, we're at $424 million of FRE, 20% up over the prior year. Our margins are up to 33%. And as I said before, with pending AUM of $30 billion, we're in a good position to continue to grow these numbers on a very fast pace. And that's all going to be driven by fundraising. We're ahead of schedule. We're going to hit this $130 billion plus sooner than 2024. We've already done $40 billion through 9 months of this year. And we've already surpassed our goals with respect to net realized performance revenue and realized investment income. The business is performing well. Final comment on '21. Our growth rate is comparable to our peers and yet the price multiple that you're seeing is still very attractive. So as I look at kind of the potential here to invest in the firm and continue to benefit from the increase in the stock price we've already had, I think it's a compelling story to consider. And last, we've been really driving much faster performance. We've been thinking bigger, moving faster and trying to perform better, and you can kind of see that in our results with our improved margins. So with that, Craig, I'll turn it back to you to take some questions.

Thank you, Curt. That was great. You really covered a lot of ground there. And I think Slide 14 was my favorite, where you highlighted Carlyle has $11 per share in future pretax earnings, kind of already in the bag. I mean, that's a big number, considering what you've been generating in the last few years. So I like that data point. [Operator Instructions] But Curt, I wanted to start out with the accelerating growth trajectory and the sustainability of growth after your large flagship were fundraises over the next 2 years. So I know you mapped out your fundraising cycle. But after you get the big flagship sort of behind us, what drives growth and what does growth look like after that point?

Thanks for that, Craig. Look, we've been very focused on growing FRE. And as I can't overemphasize that it's been really kind of a key cornerstone in terms of getting our 20% compounded growth rate. We're up again 20%. And I think if we got more products coming into the marketplace next year, the $30 billion of pending AUM that's turning on. So near term, again, it's very -- the visibility on future fee growth as well as margin enhancement is very good for the near term. Longer term, look, I think all 3 of the businesses are performing well, opportunities in our adjacencies in capital markets as well as insurance. And we're eager about new areas like infrastructure and natural resources to take advantage of those, both on the equity side as well as on the credit side. And so I think there's lots of good ways for us to kind of continue to grow and not to mention the fact that with a balance sheet that now can further support growth will you use that to also kind of drive future growth as we think long term.

Great. And Curt, I had another one on insurance. It's really interesting, but all the op managers have built out sort of different insurance models. Yours came out of AIG, Fortitude. It's more of a B2B model. But maybe talk about how your model is different than the other models? And what sort of growth or what sort of economics could Carlyle shareholders see from that business?

Sure. So look, Fortitude has been doing just what we wanted it to do. It's rotated in and/or committed $6 billion of capital in the Carlyle product as of 9/30. So that's on track. It's just what we told everybody that would do. The underlying business is appreciating at double-digit return on equity. It's contributed about $50 million of annual run rate fees to the business. So all of that's really good. It's announced the Prudential transaction for the Annuities Life Insurance Corp business. And so we're very happy about that. And that's really all self-funded out of Fortitude plus debt to fill the Fortitude will take on. That does two things for the Fortitude business, first, it gives us domestic insurance licenses, so creating the opportunity to do more in the future. It also gives good expertise in variable annuities and again, underpinnings for further growth in that business. Fortitude is a good example of investing strategically to help us grow and diversify. And look, I think that there's lots of opportunities that we can further take advantage of from here. But right now, very happy with what it is. It's distinct in terms of, as you point out, Craig, it's mostly B2B. And so I don't have the same kind of underwriting risk that others might have in terms of -- that will come from origination. And so with really having a -- the runoff or really the existing kind of business that it has, we're able to really understand the exposures in that business and very pleased with how it's been carved out and set up. So like our situation right now.

Great. Thank you, Curt. I have another one on the solutions business, AlpInvest. And I think this is probably an underappreciated business of yours, but it's fairly scaled today. And I wanted to see if you could talk about growth prospects and in particular, across the 3 verticals, primary, secondary co-investment.

So look, thanks for calling it out. And it's grown from almost nothing, right? So $17 million of FRE in 2019. Year-to-date, it's at $64 million. So 80-plus in terms of run rate FRE, business has done real well. It came off of a great fundraising year last year and the first part of this year. The secondaries business is what I think will be really the cornerstone for future growth. I really like the team that we have there. The thing that people lose sight of is the phenomenal performance. That business, a 10% appreciation here in the third quarter, and it currently has net accrued carry now close to $300 million. And those are European style waterfalls, so you're going to see increases in the carry from that business, but not at levels like the PE business, but it's growing nicely, and it will be a nice contributor in future years from that. I think that there's great opportunities to continue to scale that business. We're looking at a number of different products and initiatives. It's too early to kind of go into that in detail. I think that this will be -- we've done a really nice job of getting the scale of it up, there'll be some starts and stops, but the long-term trajectory in this business is real good.

Great. I have a question here on the FRE margin. And listen, I know you hit on it on Slide 20. You gave some color, it will achieve earlier than expected, your 40% target by 2024. But given the momentum you have on the fundraising side, which means revenues, maybe will you use those kind of faster-than-expected revenue growth to reinvest back in the business? Or will the upside to the margin come kind of faster than we all expected?

Look, I think the upside in margin to getting to 40 -- look, getting to 40% sooner than 2024, I think, is very likely to happen. Exactly when, hard to predict. The big business is doing very well from a margin perspective, our global private equity business solutions has now gotten this margin to where it needs to be. And we're in -- the business that's probably lagging is credit, but it's the perfect place to be, because that's the business has grown the fastest, and that's the business that has the highest potential FRE margin. And so in terms of thinking of purely on a margin perspective, that sets us up very nicely to improve overall margins. Now, as I said before, I care a whole lot more about dollars than I do about margins, but margins is a way, obviously, to get the dollars and that's why we care about it.

Right. And Curt, in your evaluation section, I was looking at Slide 21, I couldn't help but notice, like you look at, you compare growth to price and kind of that's the way to do it. But I'm wondering if you think the companies in your coverage that are trading higher than you have a larger retail element to their story? And is that something where maybe Carlyle is underrepresented? And what is your perspective on that? Is that something you want to reinvest in building? Or do you maybe think that's something that's overhyped by the markets today?

So I'm going to change your word, I'm going to say that many of them have higher credit businesses, are bigger credit businesses, and those businesses generally produce better FRE margins. And that's where we are focused on, is being a fast filer in growing rapidly our credit business. We've doubled AUM in the credit business here recently and think we can continue to do that. Now on the retail question, the real question is kind of what is our plan. And our plan really has always been based around mostly institutional dollars. Now we also have a very important high net worth channel that generates 10% to 15% of our capital raise, and we'll continue to do so. And we'll continue to expand and take advantage of that high net worth channel that takes advantage of feeders and the like. But I don't consider that through retail. And depending upon which period you're talking about, some of them are doing really kind of just the same thing as we're doing. And some of them obviously, have some products that are more oriented around true retail. Look, we're executing to our plan and doing what we have laid out to do and do it bigger, faster and better, is reliant upon just doing what we've just said. Focusing on institutional, growing our insurance business and staying focused on this high net worth channel. Now whatever we then choose to do down the road from a retail perspective, view that as great and that just further upside.

Great. One more question here on your S&P 500 Index ad potential post the C-corp conversion and the one share, one vote structure.

So look, on the S&P 500 Index, first and foremost, I'm really happy with the things that we've done over the last 2 years, both in terms of financial performance but also in terms of improved governance. We converted to being a full C corp, one share, one vote. Everyone participates the same, much improved corporate governance. We're no longer a controlled corp. And I've noticed that some of our peers have also made the same change just like we did. And I'm really proud and pleased to see them kind of follow in making those same changes, because I think that they're good for the full industry. In terms of what the S&P 500 will do, Craig, you know as well as -- I mean, that's not an open book type process. I think we're fully eligible. And I'd like to see someone in our peer group be added. I obviously would like it to be us. But I don't really have a whole lot of insight in terms of what the S&P will do. And I do think that we're a very good candidate.

Great. Curt, it looks like we are now out of questions, and I'm out of questions too. So maybe we could stop at it there. But just on behalf of everyone here at Bank of America, we just wanted to thank you for participating. And hopefully, next year, we will see you in person.

Craig, I'm looking forward to connecting with everybody in person and good to have you back active in doing what you do, and it's good to catch up with you. Thank you.

Thanks, Curt. It's good to be back. Thank you, everyone.