Q4 2019 Earnings Call
This time all participants are in listen only mode. After the speakers presentation, there would be a question answer session.
Last question during the session you would need to press star one of your telephone. Please be advised to today's conference is being recorded in Ukraine. Further systems. Please press star zero.
I'd now like turn the conference over to your speech today, Daniel Harris head of Investor Relations. Thank you. Please go ahead Sir.
Thank you Shannon.
Good morning, and welcome to Carlyle's fourth quarter and full year 2019 earnings call with me on the call today, our co Chief Executive officers, Q sung Lee and bloody younger and our Chief financial officer for abuse or.
This call is being webcast a replay will be available on our website, we will refer to certain non-GAAP financial measures. During today's call. These measures should not be considered an isolation from or substitute for measures prepared in accordance with generally accepted accounting principles. We provided reconciliations of these measures to GAAP earnings release.
Any forward looking statements made today do not guarantee future performance and undue reliance should not be placed on.
These statements are based on current imagined expectations and involve inherent risks and uncertainties, including those identified in the risk factor section of our annual report on form 10-K that could cause actual results to differ materially from those indicated Carlyle assumes no obligation to update any forward looking statements at any time.
Earlier. This morning, we issued a press release any new detailed earnings presentation, which is also available on our Investor Relations website. In addition, we have added a new downloadable metrics disclosure, including all of our key metrics and financial summary, then you can find alongside our earnings release on our site.
Fourth quarter, we generated $108 million you related earnings and 172 million in distributable earnings with de per common share of 47 cents. You have declared our first quarterly different then as a corporation of 25 cents per common share.
What's your participation by all those on the call. Please limit yourself to one question and then returned to the queue for any additional follow ups with that let me turn the call over to our co Chief Executive Officer, you suddenly.
Thank you Dan and good morning, everyone.
2019 was a year a significant growth in positive change at Carlisle and our goal is to keep it all going this year.
Starting with our progress against our most important priorities and finish with some thoughts on the current environment.
Then will then discuss our focus areas for 2020 as we build upon her strong momentum.
Regarding progress on our priorities first we drove growth in fee related earnings.
The 453 million and therefore, we produced in 2019 was almost 30% higher year over year, and our operating margin expanded significantly.
Growing our overall earnings capacity and improving our operating margins remains a core priority.
Second we implemented shareholder friendly actions on January 1st we completed our corporate conversion and began the year with a best in class structure.
It's simple as a high degree of transparency and improve shareholder alignment and governance with our one share one vote construct.
Well, we are in the early innings of our corporate transition our trading velocity has already more than doubled and we've expanded meaningfully or dialogue with a broader universe of investors.
And third we remain focused on investing wisely in a challenging environment.
Consistency in good times in bad and delivering attractive returns for fund investors is our goal.
We began the year with our performance on a solid trajectory.
We are carefully deploying capital at a consistent pace, having invested more than $21 billion in 2019 and begin the year with a record $155 billion a fair value of investments in the ground.
As of yearend, we've accrued more than $1.7 billion and that performance revenues on our balance sheet that we expect what ultimately convert to earnings.
Our largest funds continue to track generally in line with predecessor funds with respect to value creation, and we're delivering the kind of long term performance our fund investors seek.
Over the past five years or corporate private equity carry funds have appreciated at an average 14% per year more than 600 basis points higher than the miscue all cap World Index, our U.S. real estate funds have averaged 18% annual appreciation and Rcs U.S. yellow to produce net ire ours of 16% for equity holders since since.
Option and over the past five years or defaults have been about one third of the industry average.
Clearly our objective in 2020 is to continue all of this strong momentum.
Before Glens thoughts on how we intend to do this let me provide three comments on the current environment based on our data and portfolio companies.
First the global economy continues to grow, albeit at a slower rate then observed in prior years.
Global GDP growth decelerated steadily over the course of 2019, but our data provides clear signs that growth rates have stabilized.
While we haven't seen a rebound as of yet we're cautiously optimistic that we will eventually see such an upturn later this year.
Second the private capital investment industry remains well positioned as fund raising and deal flow continues to be strong.
As you know, we exceeded our 100 billion multiyear fundraising target earlier than planned.
And while significant dry powder has contributed to elevated valuations for new investments.
It is important to stress that deal flow has similarly increased with the opportunity set for private capital continuing to expand across global industry sectors.
As a result, our investment teams have been successful in deploying capital at a similar or even higher pace relative to historical levels.
Recently announced investments include filled a middle market that will be all of a leading insurance broker in the U.S. higher view a growth investment in a disruptive video interviewing platform SAP. So a significant minority stake in the largest privately held integrated energy company in Europe.
And candela, a direct loan into a company selling cosmetic medical devices.
These deals are just a very small sampling of the significant capabilities of our broad deep and diverse platform, which will drive our ability to deploy available capital into attractive deals around the world.
My final comment.
We are regularly reminded that the environment continues to be characterized by a constant, namely the presence of uncertainty.
We're seeing that now with the current situation in regards to the current a virus, which we are monitoring very closely and doing what we can to help.
In addition, there is a mix of other ongoing challenges issues like global trade tensions the impact of negative interest rates and the politics of the day.
All of this as a reminder that are most important priority as an investment organization is to avoid complacency and remain vigilant as we navigate this complex in high valuation environment against a slow economic backdrop.
As we look towards 2020, we are well positioned to continue doing what we do well.
Just to raise invest in manage large amounts of capital and generate attractive performance at scale in order to deliver for all of our stakeholders over the long term.
For our people.
We are proud of our strong culture and diverse workforce that makes carlyle a great place to build a career.
Our people are what make Carlyle special we're constantly striving to strengthen our teams and culture.
Last year, 50% of new hires were women, including almost 30% at the senior level.
And we're rolling out new training throughout the entire organization to help our teams make better decisions by mitigating unconscious bias. There remains more work to do on many fronts, but we're on the right path.
For our communities and companies everything we do is about impact as we partner with management teams to build great companies and improve all aspects of the business for more diverse boards and workforce to more sustainable practices that companies and throughout supply chains to improvements in governments governance to name just a few ways we.
Our companies.
This impact at every level makes good businesses even better.
The impact of improving businesses drives value for all including strengthening the communities in which we live and work.
For our shareholders Carlyle stock more than doubled during 2019, yes, we see room for further upside as we drive earnings growth deliver on results and improve our shareholder base.
As I've mentioned before we believe we are well positioned to be included in the largest number of widely followed benchmark indices.
And for our fund investors.
We remain vigilant with a long term focus as we seek to generate attractive and sustainable returns by investing wisely and responsibly.
Our clients rely on our performance to help secure the retirement of millions of beneficiaries and we will continue to build our capabilities to position us well to capture opportunities as or industry continues to grow and evolve.
With that let me now turn the call over to my partner Glenn Youngkin. Thank you Q and let me add my welcome to accused everyone. Thanks for joining us.
To build on our 2019 momentum acute just described we have a clear set of priorities for Twentytwenty and beyond.
Those priorities our first growth.
Second fund raising both in 2020 and importantly through the next multiyear fundraising campaign and third continuing to build out and institutionalize the Carlyle platform.
Let me expand on each of these and then current mill frame our financial expectations for the next few years first.
We remain focused on growing our platform.
We have several sources of near term and long term growth.
We expect global credit to generate improved financial results, both revenues and earnings in 2020 and thereafter.
We have made significant investments over the past few years, and we should see solid F. R. E contribution as a U M and revenues grow.
We will continue to scale our next generation funds.
For example, this year includes among others substantial fund raising targets for several Alpinvest and aviation funds, helping drive the investment solutions and global credit segments.
We will launch new strategies, leveraging our established platforms.
In addition to new products across the global credit platform Carlyle's infrastructure group, which now has more than $4 billion of at U.M. across six different focus areas has launched a renewable energy strategy again in each case, we already have talented investment teams in place.
Well drive additional scale across Carlyle through our insurance platform Fortitude rig.
Adding more permanent capital for us to manage.
The plans capital rotation to our investment strategies is on schedule and.
And we expect to close our latest transaction with AI jie in the middle of this year subject to certain regulatory approvals.
And we will evaluate select acquisitions that could complement our existing investment activities and add incremental growth opportunities much like Carlyle aviation partners has done for us.
All in we have a multitude of initiatives underway laying the foundation for attractive long term growth.
Our second priority is fund raising.
Of course remains critical to our success.
The global fundraising environment renamed remains very healthy.
Private capital continues to post attractive relative performance to other asset classes.
A large percentage of investors estimated at over 40% are increasing allocations to the various private capital asset classes.
The largest institutional investors continue to reduce their number of gpus to focus on a smaller number of larger strategic relationships.
And certain investors such a sovereign wealth funds high net worth individuals and insurance companies are growing their private capital portfolios, even faster than the rest of the market.
These trends underpin expectations that industry, a U.M. growth should continue at an 8% to 10% annual rate.
This attractive backdrop gives us a high degree of confidence in our ability to raise significant new capital.
In 2020, we expect to raise at least $20 billion, but the majority of the focus on global credit and investment solution strategies.
And looking mid to longer term, we expect the next multiyear fund raising campaign to begin to ramp in late 2021.
While it's too early to discuss specific fund targets or timing.
Our goal for platform growth is for a 20% to 30% uplift in fund raising compared to the prior multiyear campaign.
Third on our priority list.
Is to further build and institutionalize our business.
We're making great progress here on a number of fronts.
Adding resources to our investment teams as I mentioned in areas like global credit and renewables deepening our one carlyle value creation platform with enhanced digital capabilities procurement expertise impact reporting and operating executive talent around the globe.
And driving efficiencies and streamlining processes.
This focus both furthers carlyle's ability to invest wisely and create value in our portfolio.
While at the same time insurers each of our segments is best positioned to operate at the most effective level in a competitive world.
By pursuing these priorities and achieving our goals.
We expect the result to be continued growth in both fr right Andy in the short term and over the long term.
Kurt will frame, our financial outlook, but stepping back let me say that we are exceptionally well positioned and we look forward to the year ahead.
That let me turn the call over to our Chief Financial Officer hurt user. Thank you Glenn.
In my remarks, I will first discuss 2019 results, including Q4.
Then I will frame growth prospects for effortlessly, Andy before wrapping up of comments on our C Corp conversion.
Let's begin with our results for the quarter and 2019.
Fee related earnings were $108 million in the quarter and $453 million for 2019, an increase of nearly 30% year over year.
The comparison of the fourth quarter of 2018 is not straightforward.
As Q4, 2018 FRB of $175 million.
Included several abnormal items as we discussed last year.
Adjusting for these items furry in Q4, 2018 was approximately $90 million compared to the $108 million in Q4 2019.
20% uplift.
And our Q4 2019, F. Ari is a relatively good run rate to consider as we enter 2020.
Distributable earnings were $172 million in the quarter and $647 million for the year.
Q4, 2018, distributable earnings was $211 million or about $125 million when adjusted for the same abnormal items affecting Q4 F. Ari.
So on a like for like basis, Q4, 2019 D is up about 35%.
We believe 2019 was a low point for both net realized performance revenues and distributable earnings both of which we expect to grow over the coming years.
For the year management fees increased 15% year over year to $1.6 billion, even as fee, earning AUM only modest was only modestly higher at 161 billion.
We benefited from a full year of revenue from Carl Aviation partners as well as the full year fee impact from our largest carry funds, which activated throughout 2018.
For 2019 every margins expanded by about 300 basis points to 28%.
Cash compensation expense exclusive of the investments made in building our global credit platform grew by just 1%.
Going forward, we expect cash compensation and other expenses for the entire business to grow in the mid single digit range over the next few years.
A slower growth rate compared with recent years as many of our platform build outs have been substantially completed.
We're also working to manage equity based compensation expense and shareholder dilution by granting fewer shares.
In 2018, we granted 13.3 million units versus approximately 6.7 million in 2019, and we expect to grant less than 5 million shares in 2020.
Stock grants generally vest over periods of up to three and half years and as a result, we fully expect to see a decrease in shareholder dilution and equity based compensation expense over each of the next two years as fewer shares vest.
With fewer shares issued and continued share repurchases, we will seek to manage share dilution to mourn to no more than 1% annually over the next several years.
Equity based compensation expense was $35 million in the fourth quarter and full your equity compensation expense of $151 million declined 17% year over year and to be clear our higher stock prices offsetting some of the expected improvements and equity based compensation.
A good problem to have.
Now turning to fee related earnings growth in 2020 and beyond.
Before we raised the next generation of our big buyout and real estate funds began in late 2021.
We expect Fareed to reach about 475 million in 2020, and at least 500 million in 2021.
Over the next five years, we're targeting to achieve average annualized jeffery growth of about 10% or more with slower growth in next year or two and higher growth thereafter.
I've already margins should exceed 30% in the next few years and then move higher into the mid Thirtys over our next multiyear fundraising campaign.
In 2020, we should see growth and fee, earning AUM nfthree in both global credit and investment solutions with some downward pressure on corporate private equity and real assets, especially with our expectation of increased realizations.
Beyond the positive the obvious positive impact of driving more predictable and sustainable earnings growth as both queuing lot of mentioned growing fee related earnings will position us to potentially increase our fixed dividend beyond our initial one dollar per at per share annual level.
Now, let me frame projected growth in net realized performance revenues and distributor learnings.
Our funds remain on track to deliver a much higher level of carry over the next few years.
We expect net realized performance revenue in 2022, approximately double our 2019 results.
Thereafter, we expect further growth in 2021, and then reaching an exceeding our long term average of $600 million.
We expect pre tax distributor earnings should grow at an average annual rate of 20% to 25% over the next several years, although a little slower in 2020.
Moving onto expectations for the impact of our corporate conversion, which will appear in our first quarter results.
We will have only a single class of common shares with all income allocated to these shares, thereby simplifying our GAAP financial statements and all shareholders will receive a form 10 99, rather than a K one for their 2020 dividend income.
We expect our first year as a corporation will lead to a current tax rate undistributed earnings in the high single digits and will then move higher into the mid to high teens in 2021 before further increasing the twentys in several years.
Last as we transition into our new corporate structure, we will maintain our balance sheet light orientation with increased capital flexibility to accelerate our growth and drive shareholder value.
Let me also convey what we expect to occur over the next few months regarding our likely addition to various indices.
We expect to be added to the varies Crs P. indices, whose ranking date is early March with re constitution in mid March.
Our market cap and one share one vote governance should position us to be added to the Russell 1000 indices with their annual ranking date likely in mid May and reconstitution in June.
We expect to be additive to the mesquite and S&P total market indices as well as several smaller indices, which will occur in the March to June timeframe.
And we continue to believe we have met the criteria for inclusion in the S&P 500, but that of course is a more subjective evaluation for which we cannot predict an outcome.
Before I turn the call over to the operator.
Half of our board and management team I want to take a moment to thank all of our shareholders for their support in 2019.
We remain excited about our opportunity to grow the business and our stock price over time with that we're now ready for your questions.
As a reminder to ask a question you need to press star one of your telephone.
Withdraw your question press the pound key.
We ask that you. Please limit yourself to one question you may recall for any additional questions. Please stand by what we compiled acuity roster.
Our first question comes from Ken Worthington with Jpmorgan. Your line is open.
Hi, Good morning, Thank you for taking my question.
I was hoping you could speak about more about fortitude can you talk about the ownership structure you've chosen.
With the increased exposure, it's a bit different than what we've seen it.
And at some of your peers and then maybe you can finish up with some discussion about the.
Organic and inorganic growth opportunities you see in the market for Fortitude say over the next year. So.
Hey, Ken its Q. Good morning. Thanks for the question up overall, we're very pleased with where four to two is going you're right. We are taking a different strategy and approach than some of our peers fortitude is a much more diversified.
Insurance company and it is not only diversified by product line, but is diversified around the world.
[music].
Globally.
It is also much more of an institutional business as opposed to some of our peers, which are selling insurance directly to the consumer in a more modeling fashion.
The strategy, we have is right on track.
Which is.
Earlier as you know we announced late last year.
We raised additional funds from our Lps and position with the strategic Investor in TNT, we have negotiated to secure a approximately 75% of the shares of AI jie such that upon completion of that which we expect regulatory approval for some time.
Mid 2020, we would be in a position, where we and our investors would control fortitude moving forward.
As fortitude grows we would expect that fortitude would rotate investable assets into Carlyle with respect to alternative investments.
With respect to that rotation, thus far we have a little bit over 2 billion already invested in Carlyle funds more will be added this year.
And everything about the strategy right now I can say is on track.
The carve out continues to do well, we expect full separation and the stand up the fortitude sometime later on this year.
And perhaps most importantly, our balance sheet investment.
Is doing just fine as fortitude is generating approximately 14, 15% or are we.
And the reserves are exactly as we expected when we struck this deal a couple of years ago.
Great. Thank you very much.
Thank you. Our next question comes from Patrick Davitt with Autonomous Research. Your line is open.
Hey, good morning, guys.
Good morning.
It looks like you have a lot of ipos in the pipeline this quarter account five but maybe you could confirm that an updated but could you remind us how we should think about the framework for how much. These events can add to net accrued carry for you guys. In other words, a view of like how much higher the average pricing is in the previous market such or some other PE firms.
Given us a guide around that.
Hey, Patrick its Q, let me start maybe others will jump in Illinois broadly speaking the capital markets right now are pretty robust an open.
We as a firmer trying to take advantage of it as many of our portfolio companies in the us in Europe that refinanced in the debt capital markets clearly the IPO market is more open now than it was last year. It's inappropriate for me to comment on any situation given the fact that some of these companies aren't registration and and during the quite period.
Lets stepping back what we said all along is that we have invested very well over the past several years that it's going to take a little bit a time for those companies to mature and then be available and ready for realizations.
From my perspective, and from our perspective it feels like this is a year, where we're definitely going to see some pickup in realization activity, which.
Which.
Supports kurtz comment earlier in the call where he expected last year to be a low watermark and would there to be a doubling of net realized performance fees. This year.
So we feel very good about our pipeline I don't want to comment specifically on any individual situation, but we do expect there to be a pickup in realizations. This year.
Patrick just add another since its current so your comment on pop or increase in valuation.
Yes, so as the CFO, it's my job to make sure we value things at fair value.
So when we have companies that are in the pipeline for a public offering we're off and really looking at you know what can we sell or how can we move. These companies are positions are really more theoretically what would a market participant pay for our position in these comp in these companies as a point in time Amar the IPO process as you know.
Theres all kinds of discussions and comments in pricing and ranges. So it's really hard to take that fully into account until it's really done and priced in the market.
Generally speaking when you do look back you will see favorable movements, but it's hard to kind of say, it's the X percent et cetera, I look back testing from our valuations clearly supports the valuation methodologies approaches that we have so hopefully that's helpful.
Thanks.
Okay. Thank you. Our next question comes from my carrier with Bank of America. Your line is open.
Good morning, and thanks for taking the question.
Do you guys continue to see good growth in credit and you mentioned fund raising growth ahead, both in credit solutions.
Can you provide some color on the strategies and I didnt see the old performance stable and the new deck. So any color on just credit performance, whether it's for the quarter of the year I'm just given the strain that youre seeing on the fundraising side.
So Mike it's Chris Let me just start and then Q can add in so there's a number of our traditional strategies, we feel really good about whether it's in liquid crowded illiquid credit or some of our asset backed programs, especially in aviation performance. There has been good.
What we generally what we have provided you before is the carry fund depreciation which is just a portion of really the business. So the data is online to support all of the appreciation for all of this segment is just as we have done before but it's really not the right thing to kind of.
Look out from the carry business, we're deploying a lot of capital in that business continuing to raise more funds. It's a very good fr Reed business for us, especially as we go forward and we'll expect to see improvements there and which you can see the appreciation in the earnings release is on each of the segment pages really for.
For the those segments, which are really carry businesses hopefully have some helping you out theres thing you want to add to that well well, Mike Hi, its Q, let me just add a little bit of color to our credit business, which is the headline is we're really were exceptionally pleased with the team that we brought in and the progress that we've made and we're also pleased.
With the patients that all of you have given us as we try to build this business out in the right way.
As you know we're building a broad platform and we have very core very important core strategy set up from sea lows to direct lending credit opportunities.
Distressed and now in the real asset side of the thing of the equation with our aviation and launches in infrastructure credit.
It's a broad solutions based platform and we have found real good traction with a lot of our existing Lps, but also new Lps as we grow the business.
As a little bit less than 50 billion right now we have added virtually all the expenses. We've wanted to add to build this team out over the past two three years, we are expecting to see revenues grow much faster than expenses moving forward as the benefit of our patient and organic approach. So.
Parts to pay off this is going to be important year for our credit business I hope the environment.
Is conducive, but we will I think see strong growth coming out of this unit and then eventually much more accretive fr re contribution moving forward.
Hi, Thanks, a lot.
Thank you. Our next question comes from Bill Katz with Citi. Your line is open.
Okay. Thank you very much I appreciate the expanded disclosure, maybe just coming back to sort of your framework as you think about fr re margins looking up at longer term and appreciate your sort of the timeline you're laying out there as you sort of institutionalize the businesses scale little bit more sort of wondering as you think about your business versus peers, what is sort of the structural differential that.
Couldn't help close that Fob margin gap a bit more.
Bill It's Karl start maybe Glenn accumulate will add in so first I think it's important to kind of think about how we approach fahri. We are very focused on going if our E and as the CFO I went nothing more than to be lean forward and really pushing the business to grow out Ferrari and our margins.
Grown FRG from $192 million in 2000 $17 million to $350 million in 2000 $18 million to $453 million in 2019.
And over 50% growth rate for the past two years and we're looking forward to continue to do that we've put we've given you guidance in terms of what we think is reasonable to do going forward and as you think about margins. We've made the same kind of progress over the last two years RF free margins went from 17% in 2017 to 25.
<unk> percent in 2018, 28% this year as I said, we're going to push these up above 30 and get to the mid Thirtys. During our next multiyear fundraising campaign, obviously, we would like to do more but what we're also doing here is making sure that we do right in terms of how we manage our portfolio we continue.
You to invest institutionalize the business make sure we drive the right results we have more funds.
No more investment professionals and we're doing the things that Glenn can elaborate on in terms of the do already spoke about in terms of really institutionalizing that and so I think thats really key to what we are as an investment firm.
And Bill it's Glenn let me just add two comments. The first is we've said before that we have no.
Aspiration to be the low cost provider in this industry.
From an effort re standpoint, and yet we recognize that we have great opportunity to continue to increase our margins, which Curt has elaborated.
But from a structural standpoint, let me just repeat we have an incredibly global footprint.
We have a presence around the world plus through our one Carlyle network that allows us to fundamentally improve companies and projects in a way that we think is quite unique and that supports a multek fund platform that we think provides an advantageous realize performance fee profile as.
Well, so we can grow both FRB and realized net performance fees overtime I think that model is actually unique we think we do very well and so yes, we'll continue to drive margins up we'll continue to grow FRB, but we also think a holistic approach to driving our financial results isn't the best interest of all of.
Our stakeholders.
Thank you.
Thanks, Phil.
Our next question comes from Craig Siegenthaler with Credit Suisse. Your line is open.
Hi.
Thanks, Good morning, everyone.
Good morning, Greg.
Could you give us an update on your long term strategy both in the aviation and also your appetite to enter into additional asset based lending segments, which could also be attractive for insurance companies, including point its.
Hey, Craig its Q, Yes, let me let me just touch on.
On your your good question Aviation again, I think the headline is it's right on track its doing everything we wanted and we're quite pleased.
Revenues last year were about 40 million and bottom line or furry contribution was 10 million and obviously, we think it's going to go up from there.
Most importantly last year, we fully integrated and successfully integrated the business into Carlyle global credit.
The teams are functioning quite well and we're in the midst right now and I don't want to be specific about it because some of these funds are in registration there that we are in.
We're fundraising for not only successor funds, but new product launches.
In early life aircraft Securitizations as well as to capture.
Some fund raising as it relates to pre delivery financing opportunities. So we're very pleased with the progress.
And the prospects are there to do a lot more with this platform and.
It's on track vis-a-vis to expectations, we had for this for this company when we acquired in terms of other areas in real assets, the particularly area of focus for us this year, but it's we're going be quiet about it is to develop our infrastructure credit business I know one or the talk about a lot of that right now more when we have more details to share with you, but so.
Except to say we have some teams that we have put in place and we're starting to think about how we're going to bring that strategy to our Lps This year.
Thank you.
Thank you. Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.
Thanks, Good morning, everyone.
Just another follow up around the incentive fee outlook for 2020, thanks for the updated guidance it looks like about $500 million in pre tax incentive fees can you help us gauge that may be degree of confidence around that naturally Carl is obviously going through the realization cycle, which is of course, good to see but how much that is dependent on public market access exits.
Versus some of the kind of strategic sales either corporates or other sponsors. Thanks.
Thanks I'll answer your question. So look I feel really good about our ability to grow net realized performance revenues are big funds are on track. They are consistent with the predecessor funds, but just to make sure everyone's clear 2020, I think is like a double to 2019. So your 500 million dollar.
A number we're going to get probably not in 2020, so again double off of the Onesix before that we have for 2019 and then we'll grow through that our prior average was 600 million I think we're going to grow through that and then thereafter, all that's going to do is going to light lead to distributable earnings.
Growth in the 20% to 25%.
A little lower here in 2020, but over the next five years that growth rates, the right growth rate, because our d. and our realized performance revenues are what we think is that a trough level and we're feeling really good about the capital that's in the ground, which is higher than all of our prior years and the performance of the funds so hopefully that frames that right.
Yes.
Great. Thanks.
Thank you. Our next question comes from Brian Bodell with Deutsche Bank. Your line is open.
Great. Thanks, good morning.
Yeah, because if you.
We can sort of characterize the next fundraising campaign.
Now turning to slide 2021, but.
Is that off are you thinking about that is also roughly a four year timeframe that implied.
830 billion based on that.
You mentioned.
Just in terms of characterizing.
Maybe if you could just give some color on how much you think credit.
And other new areas.
The next round of your flagship funds and whether there's any other.
Elements like.
Transactions within that or those could be over the top.
From that.
Thanks, Brian It's Glenn.
First of all we do continue to see a very healthy fundraising environment as I said.
And as a result, we expect.
All aspects of the business across the segments to in fact grow over this time period, the 20% to 30% is indeed, and an apples to apples kind of comparison in our mind over a period of time and Thats why we wanted to frame it for you.
To be clear over the last four years or so we were running at $25 billion to $30 billion a year on average with a range that was kind of 20 to 40 billion during that time period, and we just expect that averaged to increase although there will be.
Much bigger years.
During the during the period of time I.
I think finally as I as I mentioned.
We do see strong support from sovereign wealth funds are high net worth individual channel and the insurance area and those are those those investors seem to be growing a bit faster than the overall market.
But overall, we feel good about this outlook.
I can't give you a framing specifically on funds in sectors right now, but that will unfold over time.
And then obviously there's no other.
It's sort of acquisitions embedded in this in terms of.
Deals with insurance companies were.
Is it basically inorganic.
You for the campaign.
Brian Yes. It is okay, great. Thank you.
Thank you.
Our next question comes from Gerry O'hara with Jefferies. Your line is open.
Great. Thanks for taking my questions morning, I was hoping to get update around Carlo strategy as it relates to to retail actually is so that's proceeds to.
Very pretty significantly across to peer groups. So perhaps you can give us an update on approach outlook expectations.
Perhaps solutions currently in the market that's sort of thing. Thank you.
Great.
Jerry it's Glenn Youre going again so.
First of all in general we have focused on the high net worth individual side of individual investors, we think that bet that segment really does.
Match, our investment strategy as well.
Historically, it's been about 13% of what we've done call it $40 billion of our current a U M.
And we anticipate that it'll continue to play that kind of role in our fund raising of course, there's some strategies that tend to appeal more to individuals and others that tend to appeal to slightly less but we're going to continue to tap that market.
As it is a growing one.
And we have good products and good performance that I think we'll continue to.
Track those kinds of investors to us.
Thank you.
Thank you please.
Yes, any additional questions at this time. Please press Star then one are you touched on telethon. Our next question comes from Robert Lee with KBW. Your line is open.
Great. Thanks, Thanks for taking my question this morning.
Just curious in investment solutions and I think.
Touched on it on the initial comments, but.
Business, where you've been raising some capital is pretty good amount of assets, but profitability F. R. <unk> D. There's pretty modest so talk a little bit about what's been holding that down and maybe how we should expect that segment to accelerate and then I'll squeeze in the second one you also Curt maybe update us on.
Your tax rate assumptions, when you're talking about the for next couple of years.
Great.
So.
Well I start with the tax rate and then we'll follow up on investment solutions. So on tax rate just as I said in our prepared remarks, 2020 via high single digit tax or not.
Current provision what we currently expect to pay measured against distributable earnings then it'll increase related to high teens.
In the next year, and then it'll be a little harder to kind of tell but it will move over several years will move into the low twentys on on a current provision basis as measured pursuant to de that's what we've been saying well be some some fluctuations on a quarterly basis within that.
But that's I don't really see and then kind of related moving that significantly from from where we are today.
On investment solutions, you're right. It is a little bit masa keep in mind from a carry perspective, we didn't buy their historical carry when when we acquired Alpinvest.
The end those funds our European style waterfalls, and so you will start to see more of that come to Carlyle overtime. Secondly from a now far re perspective, we will I expect to see fee related earnings increase here in 2020, especially considering the fund.
Raising campaigns that are in place I don't want to talk about those campaigns to specifically, but we know we're going to raise a fair amount of money in but in for our Alpinvest funds in particular that will drive our Ferrari in 2020 for that business and fee, earning AUM.
Another thing that the only thing I would add is stepping back.
Over the last couple of years Theres been a specific.
Evolution in the solutions business as some of the old a use them that we acquired has been kind of running off it doesn't really have a lot of fees with it. So we've seen kind of AUM flattish, but the big picture evolution has been the growth in secondaries and co investment in the industry.
And we've just seen extraordinary growth in these sectors and that really does play to the strength of both our private equity and real estate activities within the solutions group. So as I said earlier in our fund raising targets for 2020, the solutions business does have a big role in that and so I think we.
I would expect to see real pickup in some financial contribution over the course of this year and even more into 2021.
Great. Thank you.
Thank you. Our next question comes from Michael Cypress with Morgan Stanley. Your line is open.
Hey, good morning, Thanks for taking the question.
I guess, just when you think about the net realized performance fees doubling in 2020, and then heading the 600 million or so it sounds like that's perhaps more like a 2020 to 2023 timeframe. So I guess when when do you anticipate that 2014 vintage flagship becoming a more meaningful contributor in your view imagine 2020 near term probably not as much so but.
It's a more meaningful fair to say in 2021 or 2022, and then could you also touch upon some of the net IR dynamics in your 2014, Europe and Asia Flagships, I guess, what's holding that down to 8% and how much is higher R&D to improve to hit your 600 million performance the expectations looking out a couple of years.
Michael Thank you so as I said feeling really good about the increase in 2020.
Roughly doubling that's mostly from funds prior to that so Carlyle partners, four and five our us real estate platform.
And the number of other funds across across the platform. So the older vintage seeing lots of realizations there in Carlyle partners six.
Europe for Im sorry, Yeah, Europe for and Asia for you'll also see lots of realizations this year.
With the potential for some of that to start to generate Kerry hard to say exactly on which year, probably it's really more 2021 2022 timeframe. The net IR ours as long as were above 8%. That's the hurdle so staying above 8% as key from yes.
Being in accrued carry im feeling really good about where these funds are now keep in mind. These are long life funds hedge generally four to seven years from a maturation perspective on any given investment and so over time.
I'm feeling good about how these will play out there on track with the prior generation funds and you'll see on Carlyle partners six it's doing very well well above as hurdle and that's the Big fund and so I'm feeling pretty good about these projections that I've just given you.
Yes, Hey, Michael its Q, let me, let me give a little bit more color to what Kurt just said, which is first of all let let's just take a step back.
Predicting precisely carry and realization is not.
Incredibly it's not a precise science.
What we're trying to tell you is that with all the assets in the ground over the years and with all of the hard work that we see our investment teams as they are on these deals day by day, we're actually seeing last year being the trough year and as business activity picks up as markets continue to be open and robust.
As value creation plans continue to be implemented we are seeing a trajectory.
On our performance fees are realizations and eventually performance fees, which is up into the right.
And so I think everything that Kurt as told you is right on its directional and you are seeing that trajectory that we we feel pretty good about as we sit here today.
As it relates to year to specific questions in Asia. In Europe are these are two very important flagship funds for us we're not in the quarter to quarter annual basis. We're in the long term business. Our focus is very much on creating value over the long term.
Timeframe.
As we sit here today, we feel good about how each of those portfolios are constructed the they are on track with what predecessor funds have created in terms of MOIC and value creation.
And so.
We also feel very good about the construction of those portfolios. So.
To support what Curt said as it relates to those two funds we do see.
Performance value creation, and eventually realizations in line and tracking.
So what we're expecting and what we've always been able to do what these funds.
Great. Thank you.
Our next question is follow from Patrick Davitt with Autonomous Research. Your line is open.
Hi, Thanks.
Could you update us on how much of your invested capital in PE in real assets.
In mainland China, and also any broad thoughts on how the portfolio is performing or is exposed to the krona virus would be helpful.
Sure Patrick its Q.
I mean look clearly the car of the Corona virus is having a short term impact in the Gulf Global economy, it's hard not to to say that there isn't.
In effect on on travel or retail establishments or the potential disruption for supply chain dynamics I think it's way too early to draw conclusions on the longer term impact.
And it's dangerous to speculate at this point in time, the most important thing for US is to focus on our people and to make sure they are safe.
We have Carla taken some prudent steps established and protocol and we're doing what we can to help in China.
We're monitoring the situation closely and we're going to continue monitoring it closely.
As it relates to kind of our presence there we've got about 20 companies and portfolio and corporate private equity about.
Think a little more than 110 employees in China. It represents about 1.6, a little bit less than 2% of our total asset base and about five 6% of the fair value of our corporate private equity portfolio. Hopefully that's helpful color for you, but fair. Thanks.
Thank you our next follow up comes from Alex Blostein with Goldman Sachs. Your line is open.
Great. Thanks for taking the follow up as well.
Another one for you guys around performance trends I guess, taking a step back corporate private equity appreciate about 8% in 2019 natural resources were down a little bit so both a little below that kind of longer term truck or do you have highlighted so any areas in particular that weighed on performance in 19, I am assuming some of that was energy related so maybe secondly give.
As an update on your overall energy exposure, maybe as a percentage of fair value invested capital for Carlyle as a whole. Thanks.
Alex It's Glenn let me, let me start in Q will jump in I am sure. So first of all the energy portfolio is little bit less than 10% about 10% of our overall AUM.
And to say that the backdrop was choppy over the course of the past year might be a bit of an understatement.
But I think the key to that Choppiness in the market was where it fell on how we've invested.
The Choppiness was was really seen most in exploration and services companies and in public companies.
And while that had a knock on effect.
Over our performance in 2019 over the last five years.
Our energy portfolio is appreciated in excess of 10% annually and that compares to a benchmark of minus 10% over that same period.
So we are very closely paying attention what's happening in the energy world today, but we think our portfolios are well constructed.
The funds are all in positive territory and in fact, some of our funds are performing extraordinarily well like our international Energy Fund.
Which has got well over 20% growth in mid teens net return.
The interesting dynamic and energy right now is really the investment opportunity one of the great great assets, we have as we've raised a fair amount of good capital in the last couple of years, which puts us into a front foot position with investing so from a traditional energy oil and gas, particularly we see.
Lots of good companies with.
Really low prices entry prices and high cash flow and our operating approach in hedging approach provides a very attractive if I might say value opportunity in investing in traditional energy, but at the same time, the energy transition is creating a ton of opportunities and renewables.
And that that backdrop is accelerating and so we also have strategies and renewables and so at this time, where we hear people talking about the energy transition, we think we're really well position to invest well in both sides of it so.
So I hope that gives you a good frame.
Yes.
Not much more to add to what Glenn just said on the energy side, but just just taking a step back investment performance is the most important thing we do across the entire firm.
On the private equity side.
Over the past five years were up 14%.
On an annualized basis and our large funds are tracking in line with predecessor funds with respect to value creation I could also tell you are newer funds in us real estate in our buyout.
With Us Asia and Europe.
As well as in our credit side of the equation with credit offs, they're all off to tremendous starts and we also at Carlisle have a bunch of private equity funds that are smaller butter quite focused funds targeting Japan Asia growth financial services in European technology. All of those funds are doing really well 20 per.
Percent even 30%.
Type of returns and so.
We feel very good about how our funds our position now that doesn't mean that net any any given fund there isn't one or two situations that aren't going as we expected, but thats where portfolio construction comes in.
And we're very focused at Carlisle across all of our asset classes through our investment committees and our fund heads to make sure that each fund is well diversified bites the deal size sector and vintage year.
And as a result, we construct our portfolios to perform well and to be consistent in both good times in bed. So we're very focused on this it's the most important thing we do we think everything is on track that's not to say there won't be a bump here or there, but we feel that our approach at Carlisle and the way we think about.
Deals and construction from our of our portfolio serves as quite well to keep doing what we've done in the past in the future.
Thank you all know currently showing no further questions at this time I'd like turn call back over to Daniel Harris for closing remarks.
Thank you very much we appreciate your time and thank you for joining us as our first caused corporation. If you do have any follow up questions feel free to contact Investor Relations and otherwise, we'll look forward to talking with you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].