Q1 2020 Earnings Call
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Good morning, ladies and gentlemen, and thank you for standing by welcome to be Carlyle group first quarter Twentytwenty earnings call.
At this time all participants are in a listen only mode.
Later, we will conduct.
A question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press star Zero I.
I would now like to have the conference over to your host Mr. Daniel Harris. Please go ahead Sir.
Thank you Tiffany good morning, and welcome to Carlyle's first quarter 2020 earnings call.
With me on the call today or co Chief Executive officers, Q sung Lee and Glenn Yoga, and our Chief Financial Officer Hurt you. Sir 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 in isolation from or it's a substitute for measures prepared in accordance with generally accepted accounting principles. We have provided reconciliations of these measures to gap in our earnings release.
Any forward looking statements made today do not guarantee future performance, an undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the risk factor section of our annual report on form 10-K, and other SEC filings that could cause actual results to differ material.
Lee from those indicated Carlyle assumes no obligation to update any forward looking statements at anytime.
Early this morning, we issued a press release and detailed earnings presentation, which is also available on our Investor Relations website.
The first quarter, we generated 129 million that fee related earnings and 175 million in distributable earnings with de per common share of 48 cents. We've declared a quarterly dividend of 25 cents per common share.
I'm sure participation by all those on the call. Please limit yourself to one question and then return to the queue for any additional follow ups and with that let me turn the call over to our co Chief Executive Officer, Glenn Youngkin.
Thank you Dan and good morning, everyone. Thank you for joining us.
To describe the current global health and economic crisis as unprecedented feels wholly inadequate.
The human toll, which tragic and the economic damage has been extensive.
I want to start by thanking all of the health care professionals in frontline workers, helping to protect and he'll our communities our thoughts and prayers are foremost with the people and families across the globe that have been and continue to be impacted by this pandemic.
As the situation has continued to unfold our top priorities at Carlisle have been and remain the health and safety of our people and their families as well as supporting our portfolio in every way, we can and ensuring that we can continue to deliver for investors and all stakeholders by mobilizing our extensive global platform and every research.
At our disposal.
Carlyle it was in a position of strength leading into this crisis.
Which has provided us great stability.
Pandemic has shock the world over the past four months, but we've been able to mobilize quickly and decisively thanks to the great work and continuity across our entire global platform.
Q and I are incredibly proud of the Carlyle team.
We have found an even greater level of both collaboration and commitment.
And compassion and service.
The first quarter of 2020 started off exceptionally well with our 2019 momentum continuing.
At the firm level, our outlook for the year was developing as envisioned with solid earnings growth substantial drypowder from our $110 billion fundraising campaign.
Our successful transition to a C corp, and a sturdy balance sheet.
In addition, our portfolios were in good shape, and performing well with strong investment and exit pipelines in the first quarter, we were able to execute several ipos secondary trades and announced transactions, including the IPO of one medical and the sale of sundial from our U.S. buyout portfolio.
Block trades in China, literature, and Microport, and our Asia buyout portfolios and numerous sales from our us real estate funds.
Fund raising momentum continued into the early part of the year was seven and a half billion dollars of new capital raised in the first quarter.
So while the pandemic has shock the world Carlyle It was sturdy and steady going into the storm.
Upon the onset of the crisis in January our China team took decisive action.
Which set the precedent for our other regions and accelerated our decision making process in Europe and the United States.
In March we quickly moved all of our U.S. and Europe employees to work remotely.
We then activated our business continuity plans and to date have seen near perfect execution.
Early on Carlyle's investment teams were active.
Stress testing every equity and credit position in our portfolio and making decisions for each asset based on varying levels of business disruption.
And one Carlyle our global resource platform has been an action like never before using all of our capabilities to provide support for our portfolio companies.
We've also been leveraging many of the company's unique offerings, particularly in healthcare and technology.
To help provide solutions to the most pressing issues as many of our companies have also been out front in the fight against the virus.
For example, PPA consulting has done great work coordinating efforts to source ventilators for patients in the UK and most recently ortho clinical diagnostics announced breakthrough work to rapidly deploy anti body tests.
With that said it is clear that the next few months and quarters will be challenging.
It is our view that the recovery will progress in fits and starts and will take longer than what we all would have hoped.
With this in mine, we remain fully committed to our top priorities, but also to our strategy as long term investors and partners to our portfolio companies and our Lps.
We're planning for and preparing for a wide range of outcomes and we do remain in a strong position was $74 billion of dry powder.
A $1 billion of cash on our balance sheet and 525 million in capacity on our revolver.
Global team and platform that are stronger than ever.
And deep experience across Carlyle as we have previously operated successfully through economic financial and market crises.
There's no doubt that we have much work to do and I'll hand, it over to Q to walk you through some of our thoughts for the future.
I again want to reiterate that our leadership team is active and focused on driving value for our fund investors and shareholders and we thank you for your commitment to us and we assure you that the Carlyle team remains equally committed to all of you.
With that let me turn the call over to Q.
Thank you Glenn and good morning, everyone.
And let me echo our sentiment of gratitude towards our health care professionals and frontline workers, serving our communities around the world.
I'm going to discuss our views on the impact of the current situation on our business and not get some financial commentary from Kirk will wrap up with thoughts in the future.
As Glenn noted Carlyle is well positioned before the crisis.
Our momentum has slowed but not stalled.
We believe there could be a continuing and significant impact from this pandemic.
The severity and duration of various health and economic issues and the shake the nature of the recovery are still unknowns and therefore, all of this will take longer to play out than not.
Experience managing through disruptions in cycles in the past inform us of our path now.
We are taking a cautionary stance and maintaining a balanced and patient perspective.
Doing so we're confident that overtime, our shareholders as well as public pensions endowments and foundations will benefit as we use are well positioned global platform to drive value from our existing $143 billion of assets in the ground and put our $74 billion of dry powder.
Our towards attractive opportunities as they emerge around the world across various sectors in all asset classes.
We'd like to share our thoughts on how our business and the industry could be affected by this crisis in an effort to be as transparent and helpful as possible. So.
So let me address three important dimensions deal activity valuations and fundraising.
First the volume of traditional private equity investments is likely to declined significantly in the short term.
Investors will step back and assess the real economic impact of the pandemic on businesses their prospects in valuations.
In our experience financial buyers mark to market faster than sellers and thus there is likely to be reduced traditional deal activity for several quarters are more until some of this uncertainty abates.
The majority of EUR $74 billion or dry powder was recently raised we can afford to be patient and disciplined and we look forward to many attractive opportunities, but it will take some time.
Similarly, traditional exit activity will be put on hold as ipos or delayed and sales processes are put on pause until M&A activity and more confidence returns.
Keep in mind, our fund structures do not have liquidity risk and at Carlisle, We're never forced sellers and have the ability to hold assets through periods of market volatility and continued to build value in our companies and portfolio.
We believe investment activity will recover at different rates and vary by asset classes regions and sectors as the path that recovery becomes clear.
One bright spot is that credit deployment has already seen a significant increase as several of our funds are exceptionally well position to capitalize on current market dislocations, particularly in credit opportunities distressed and special situations.
In addition, we're starting to see interesting new opportunities in Asia, and in our secondaries business and certain global sectors benefiting from structural changes like technology in health care may present opportunities earlier than more cyclical sectors.
Certain industry sectors may experience more than just a short term impact, notably the energy sector is undergoing a significant structural dislocation on both the supply and demand side that is likely to take more than a few quarters to play out.
However over the long term, we have more than $4 billion and dry powder to invest into new opportunities across our energy related funds and put couldn't be attractive valuations.
Let me now turn to the second important factor and speak to valuation challenges that could last beyond the quarter.
As the full impact of global global shutdowns and an uncertain recovery becomes more evident there could be additional pressure on fund valuations.
Interim marks are important the more significant driver of realized earnings in the future is the improvement in gross and performance of our portfolio companies over the long term, which is why one of our major priorities as an investment organization is to focus on our invested assets and drive value creation at or portfolio.
Please.
We thought it would be helpful to share with you the diversification and how some of our most important portfolios are constructed in aggregate.
With respect to the remaining fair value of our entire corporate private equity portfolio.
We have very little direct consumer retail exposure at about 5%.
Relatively low exposure to commercial aviation at approximately 7%.
We have very little energy exposure at 2%.
And less than 1% exposure to lodging and hotels.
Finally, only 7% of the remaining fair value of our corporate private equity portfolio is in publicly listed securities.
Similarly in the United States real estate portfolio, which represents far and away our largest holdings of real estate assets, we had only 2% of our us real estate fair value invested in hotels.
2% in traditional office and only 1% in retail.
Our energy exposure is largely concentrated in separate funds, which account for approximately $13 billion of fair value or roughly 9% of total firmwide fair value.
The segregation of these energy focus funds, which is a conscious design of our and that's been platform is important because the performance and carry potential of our corporate private equity and other carry funds is independent of the results from these energy funds.
Without a doubt we will have some issues and troubles in each of our funds that will be problematic and need to be work through.
But our diversification and the way we have constructed our portfolios gives us confidence that over the long term, we are well positioned to continue driving performance and significant value creation.
And having done so in the past we believe our limited partners have come to appreciate our ability to deliver relative outperformance compared to public market indices.
Finally, let me address fund raising which in aggregate is likely to slow down in the short term as investors try to understand the current environment and their own specific needs.
Lps are assessing the impact of this crisis on their portfolios and evaluating the denominator impact allocation targets and liquidity scheduled in light of market volatility.
Our experience is that their pace of new commitments will slow down temporarily while they continue to fund their existing commitments.
Having said this with the industry as a whole some lps will be more aggressive about continuing to lean into alternatives and there will be opportunities to raise capital for tactical strategies in the near term to take advantage of dislocations, particularly in the credit asset class in the short term we are in good shape as we have just completed a multi year.
Or 110 billion dollar fundraising campaign.
And over the medium to longer term and what we have great confidence in is that fund investors will describe increased value to relationships with their most trusted well resourced and experienced partners.
We believe this positions Carlyle wells to the potential to gain more wallet share from our limited partners as a fund raising environment stabilizes in the future.
Given these comments with regards to deal activity valuations and fund raising.
It's understandable there is more uncertainty with respect to near term financial results and we feel it is therefore prudent to remove prior guidance and for the moment refrain from providing comprehensive guidance for the future.
We have a strong handle on our business and the factors affecting us but believe it is appropriate to take our time to better understand the nature and path the recovery in the real economy and markets.
To be clear removal of our guidance should not be interpreted as anything other than our continued desire to build long term credibility with our shareholders.
Before I hand, the call off Dicker, let me conclude with this.
The private capital industry has experienced attractive growth over the past several decades.
This trend is likely to continue as private markets will remain an important source of capital in play an important role as the economy recovers.
With every investment we make we drive value creation and serve the pensions endowments and foundations that will need our performance now more than ever.
Let me turn the call over to occur to go through our financial results and then I'll come back with some final thoughts over to euchre.
Thanks skew.
In my remarks, I will briefly discuss first quarter 2020 results and then frame some of the important issues were watching.
Let's begin with our results for the quarter.
Fee related earnings were $129 million with a 33% margin up from $103 million in the first quarter of 2019.
We recovered $30 million of litigation costs in connection with the final settlement the Carlyle capital Corp. litigation, which is included as a reduction of DNA expense.
Excluding this recovery efforts, we would have been $99 million with a 25% margin, which reflects some specific revenue shortfalls that developed in March due to the pandemic related to see lows in transaction fees.
Both of which I will come on further in a minute.
Net realized performance revenues began the year on plan with several carry producing exits, which then slowed as the crisis emerged globally in March.
Overall pretax distributable earnings were $175 million in the first quarter.
Compared to $101 million in the first quarter of 2019.
With markets still unstable and exit slowing the pace of realizations over the next few quarters is expected to slow in quarterly realized performance revenues are likely to be below this quarter for the next several quarters.
Our valuations were lower in the quarter, our corporate private equity funds depreciated, 8% in the first quarter.
Compared to the MSC all country World Index decline of 23% over the same period.
Real estate was generally stable down 1% in the quarter.
While our natural resources funds, which have a large energy component.
Depreciated, 22%.
Investment solutions appreciated 1% in the quarter, reflecting the standard one quarter lag in portfolio valuation for this segment.
As a result in total net accrued performance revenue on our balance sheet declined to $1.2 billion from $1.7 billion at year end.
It's important to note that our crude clawback remained in significant and unchanged from year end and while it's possible that our net accrued carry could further decrease to decrease should values continued to decline we do not expect a material change in our accrued clawback.
As Q said, given the very high level of uncertainty for the rest of 2020, we're not able to provide comprehensive forward guidance at this time, but let me frame certain aspects of our fee revenues and expenses starting with fee revenues.
One key point is that approximately 98% of our management fees arise from fee, earning AUM located in closed end fund structures with no redemption risk.
Furthermore, approximately 90% of our fee revenues are from traditional closed then long dated funds for which our fees are highly predictable and stable and have very little exposure to fund valuations.
Well, we have 12 and a half a billion dollars a pending fee, earning AUM that has not yet activated fees.
Further management fee growth relies on new vintages or new carry fund families.
To the extent fund raising is delayed growth of this revenue base will be similarly delayed.
With regards to the other 10% of fee revenue, we earn about $120 million annually from management fees on RC lows in the form a base fees and subordinated fees.
Subordinated fees represent about 70% of this revenue base.
Credit rating downgrades across the industry may cause the subordinated fees to be deferred.
These deferred fees can be subsequently turned back on and recaptured based on the actual default rates in cash returns within the CLO structures.
During this quarter, we did not recognize $4 million of subordinated fees, which were deferred.
If the rating agencies further downgrade bonds in loans and what's the Filos have invested it's likely that's the olos across the industry will experience revenue deferrals over the course of this year.
During the great financial crisis, we saw the majority of siloed across the industry shut off subordinated fees.
But 100% of our CLL subordinated fees were turned back on and all of our deferred revenue was recovered.
Finally transaction and advisory fees generated $53 million a fee revenue in 2019 and are likely to trend lower with the slower pace of closed investments.
Shifting now from revenues to expenses.
Cash compensation was $204 million in Q1 2020.
Generally in line with the first quarter of 2019.
In a given you're a little over a half of total cash compensation and benefits expense is due to variable year on compensation.
We will actively manage this level based on actual results for the year.
We have control over our professional fees travel and entertainment and general and administrative expenses, which in some cases like travel will be lower and in other cases, where we'll even more tightly manage expenditures.
When you put all of this together.
It's really hard to say where exactly are 2020 distributable earnings will land.
Forecasting furry is more doable, but given the current economic uncertainties. We are currently estimating a wide range of $400 million to $450 million for our 2000 20-F our outlook.
Two last items.
First we continue to manage equity based compensation expense and the 32 million an equity based compensation expense compared to $39 million in the first quarter of 2019 and represented 19% decline.
Second as Glenn noted.
We are in a strong liquidity position and accordingly declared a dividend of 25 cents per share in line with our plan fixed dividend of one dollar annually.
With that let me turn the call back over to Q.
Thank you Kurt.
Let me end with a few thoughts in the future.
The crisis has slowed but by no means stalled the momentum we've established coming into this year.
Our focus has not wavered and we are uninterrupted in our work of driving value in our companies.
Our 2020 financial results will reflect our solid start to the year and the relative stability of our fee earnings as we now adapt the emerging opportunities and trends and take advantage of our strong position to deliver on 2021 and beyond.
To that end.
Our investment strategy remains on track.
We are global investment firm with a long term orientation seeking to generate attractive and consistent performance for our investors who are relying on us now more than ever.
We are focused on generating as much value as possible from our existing and highly diversified portfolio for our fund investors and our shareholders. We're also patiently investing our dry powder and believe many attractive investment opportunities will emerge in the years to come.
Our business strategy remains on track.
We're growing our best positioned and most scalable investment funds, managing our expenses prudently and finding the right opportunities to selectively expand and diversify our business.
Our financial objectives are unchanged, we are focused on driving fr each year generating significant distributable earnings over the medium to long term, which in combination with FRB provides for a long term attractive earnings growth profile.
Continuing to controlled equity dilution overtime, and protecting and increasing our dividend overtime on the lagging basis to RF Ari as it grows.
No one could have predicted this pandemic, but we had already been preparing our organization and investing with the mindset that we were late cycle in the economy.
Over the last three decades, we have become an industry leader given our ability to build better businesses in partnership with great management teams through all sorts of economic and market cycles.
We have confidence that our platform positions us well to navigate through and adapt to a new environment as we continue to find attractive investment opportunities and fund our strategies by raising significant amounts of new capital.
We thank you for your support and partnership and hope that all of you stay safe and healthy.
With that let's turn the call over to be operator, and take your questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your Touchtone telephone. If your question has been answered or do you wish to remove yourself from the Q. Please press the pound.
Please hold for the first question.
Your first question comes from the line of Bill Katz with Citigroup.
Okay. Thank you very much and hope everyone is safe and healthy on your end as well thanks for the commentary.
Just they could be self relatively wide range on the F. Ori I was wondering if you might be able to help us sort of frame the upside downside to that range, what lets them the underlying assumptions might be either micro or company specific that would range between the for the 450.
Thanks, Bill for your question and no good to talk to you. This morning. So so first I just want to reiterate we remain really focused on growing fee related earnings and also improving our up are you margin overtime, we have a great handle on our business, but even with having a great handler business theres still much the.
We don't know about how the pandemic will play out and how will impact us. So for example, I don't know what further downgrades to expect from the rating agencies and how that could potentially affect our COO subordinated fees as I described in my opening remarks, I'm hopeful that it has really.
Material effect and you can kind of see we only 4 million here in the first quarter, but if you look back to the great financial crisis, obviously, it had a bigger impact that said there are a lot of great aspects of our business model that clearly help 98% of our fee, earning AUM has no redemption risk 90% of our fee revenues is.
From predictable and stable management fee streams, and our LP defaults have historically been non existant. So we remain committed to growing our furry, but right now it's hard really to kind of exactly how this plays out we have a lot of good levers and right now I think it's the right thing to kind of you know appropriately.
At this and the 400 to Fourfifty.
Bill It is a wide range I wish I could give you much more precision, but it's just too early in the year to give you that kind of precision.
Okay. Thank you.
Your next question comes from the line of crack taken Taylor with credit Suisse.
Thanks, Good morning, everyone and hope you're all healthy I just wanted to start with the credit marks with a at 21% Mark for your credit carry funds I wanted to see what were the marks in the businesses that are not in carry funds like seal lows direct originations and I'm not sure.
Include aviation in structure credit or not I was interested in that mark tail.
Craig anything thanks for your answers. So you know as again as we think about our global credit carry funds. The 21% is just the carry funds and the carry funds are about 25% and that number is inclusive of the aviation business, but it doesn't include the.
Correct lending it doesn't include the other aspects of the business, including the sale of the Siloed fundamentally really don't drive off of their remarks right. They drive off of the default rates within the underlined siloed and so really not as relevant I need.