Q2 2020 Carlyle Group Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Carlyle Group second quarter 2020 earnings call.
At this time all participants in listen only mode. After the speakers presentation. There will be a question and answer session ask a question Tony session you need to Prestart wine.
If you agree any further systems. Please press star Zero I would now like to enter conference over to your speaker for today Mr. Daniel Harris, you may begin Sir.
Thank you Dimitrius good morning, and welcome to Carlyle's second quarter 2020 earnings call.
With me on the call today is our co Chief Executive Officer, Kyu song Lee and our Chief Financial Officer, Kurt user. This call is being webcast a replay will be available on our website.
We refer to certain non-GAAP financial measures during today's call. These measures should not be considered in isolation from or is the substitute for measures prepared in accordance with generally accepted accounting principles. We have provided reconciliations of these measures to GAAP in our earnings release.
Any forward looking statements made today do not guarantee future performance and 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 our other SEC filings that could cause actual results to differ materially from those indicated.
Carlyle assumes no obligation to update any forward looking statements at anytime.
Earlier. This morning, we issued a press release and detailed earnings presentation, which is also available on our Investor Relations website.
For the second quarter, we generated 127 million in fee related earnings and 198 million and distributable earnings with de per common share of 53 cents. We've declared a quarterly dividend of 25 cents per common share.
To ensure 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 Q sung Lee.
Good morning, everyone and thank you for joining our call today.
We hope you are doing well and that you and your families are seeing safe and healthy.
So before we get started I want to thank Glenn for his partnership and friendship over the last several years, we accomplished a lot I am proud of the work, we did together to make Carlyle and even stronger from.
He is a culture carrier and a class Act.
I wish Glenn all the very best as he goes off into a life for public service.
Now on to Carlyle, our priorities and our results.
The combined health and economic crisis is a backdrop. Unlike anything we have lived through.
Im proud of how everyone at Carlyle has come together to do an amazing work and job on behalf of all of our investors now we'd like to thank our entire organization for their focus and commitment during these challenging times.
Despite the current environment, we're adapting well and our business continues to perform.
This is evidenced by our solid second quarter results, which includes strong fun depreciation a substantial increase in our net accrued carry and attractive distributable earnings for our shareholders.
These results reflect the hard work of all of our people to deliver on our strategic priorities, which remain on track.
Specifically.
We continue to grow our current fund families and we'll launch new investment strategies with the potential to scale.
We continue to drive growth in our global credit business and build upon strong momentum in our fortitude reinsurance platform.
And we continue to prudently manager operations to further enhance margins.
Executing these priorities will enable us to grow sustainable fee related earnings increase our dividend on a lag basis to fr.
Expand our distributable earnings over the long term underpinned by investment performance.
And invest further and corporate growth and are shareholder friendly actions with the excess capital that we generate in the future.
Looking forward in the near term.
Opened in other economic and geopolitical issues are likely to create headwinds in the environment, including a material drop in M&A activity, we global announced transactions down more than 50% in the second quarter from a year ago, and notably large transactions remaining difficult to complete.
Significant disruptions in certain industries, like energy aviation and travel and certain consumer segments.
And weakening financial conditions of many municipalities, which could have disruptive effect on the infrastructure sector as development projects slowdown, especially for public private partnership is required for example in our terminal rebuilding project at JFK.
Ill public markets have experienced a strong recovery across all types of assets.
We remind ourselves that we remain in the early stages of a global pandemic and are likely facing a multiyear recovery.
The potential for an uneven and uncertain recovery leads us to maintain a cautious perspective on the outlook for the real economy as regions sectors and asset classes are all affected differently.
But please do not conflate, our tonality and caution on the real economy with our ability to remain active to drive performance in the investment world.
It is certainly possible to have a cautious and prudent outlook, while remaining active and successful in our core business as demonstrated by our second quarter results.
The very uneven nature of the recovery is what provides us the opportunity to be selectively aggressive and appropriately circumspect, depending on region asset class and industry sector.
Turning to our fund performance.
Thoughtful construction of our portfolio is around the world helped us deliver solid investment performance in the second quarter.
And appreciation rebounded sharply where their corporate private equity funds appreciating 13% in the quarter, which was the main driver of our net accrued carry balance increasing by nearly 50% from last quarter.
Our portfolio of benefited from improved public markets as well as tighter credit spreads and better liquidity and the capital markets.
With respect to investing activities, we have found attractive new investment opportunities, notably in Asia as well as in global growth areas like technology and health care.
We deploy just under $6 billion of new capital in the first half of 2020, but we expect full year deployment to be below that of the past few years.
We have $73 billion in dry powder and are well positioned to deploy capital as opportunities emerge in the years to come.
With respect to exit activities years of hard work led to attractive sales of portfolio companies during the quarter, including among others Golden Goose Eggplant and Dealogic.
In addition, improved pricing and market liquidity allowed us to Opportunistically complete several secondary trades across corporate private equity in real estate and we're also able to execute ipos of several companies in the first half of this year from our us in Asia private equity business.
With respect to fund raising.
We have had a good start to the year raising new capital with approximately $12.4 billion raised across the platform with particular strength in investment solutions and global credit.
While we expect to see the firm's fund raising slow down later in the year.
Fundraising environment. Thus far has remained generally resilient since the onset of the pandemic.
Now a quick note on one of our most important strategic initiatives fortitude.
In June we completed a process that started nearly two years ago, which has resulted in carlyle and our partners owning 97% afforded to read.
We're now focused on driving attractive returns on capital maintaining prudent risk and searching for growth by acquiring additional runoff insurance blocks.
Fortitude is performing well and we expect it will be an important source of growth moving forward.
Finally.
As I said when I started I am proud of our people in the work we are doing.
Our people and culture are the most important priority, we're more focused than ever on diversity equity and inclusion.
We are in the judgment business and diversity of thought and perspectives perspectives is what gives us our investment edge.
It's critical that we continue to push forward on cultivating and inclusive culture at Carlisle and incorporating TSG and all that we do.
We are committed to drive positive change not only on our firm, but also in the companies that we influence and in the communities where we work.
So in summary, putting all this together.
Carlyle is in great shape, and very well positioned for the future.
While of course, there will be comp complications and challenges.
Total confidence in our entire global team the strength of our platform and our ability to make businesses better increased impact to drive performance with our investment activities.
Let me stop there and hand, the call over to our Chief Financial Officer, Kirk user then I'll come back and offer some final thoughts.
Thanks, Good morning, everyone.
In my remarks, I will briefly discuss the second quarter 2020 results.
And dig further into some key topics of interest to investors.
Let's begin with our results for the quarter.
The related earnings were $127 million in the second quarter of 2020 with a 31% margin.
Slightly lower than the $133 million in the second quarter of 2019, though that result included $28 million and catch up management fees as compared to less than $2 million of such catch up fees in the current quarter.
Year to date fee related earnings were $256 million, which also includes the positive effect of the $30 million expense recovery. We discussed last quarter and is ahead of the $236 million of fee related earnings we generated in the first half of 2019.
Fee revenues were mostly in line with a year ago. After adjusting for the decrease in catch up management fees and the $10 million in transaction fees. This quarter as a result of closing the 42 transaction.
Our net deferral of COO subordinated management fees was $4 million in the current quarter.
Resulting in a cumulative deferral of $8 million as of June Thirtyth.
Up from 4 million at March 31.
That said our CLL performance is thus far stronger than we initially thought at the beginning in the pandemic and is trending favorably.
Compensation was $210 million in the second quarter and first half 2020 cash compensation was approximately 1% higher than the first half of 2019.
We continue to closely manage our compensation expense, including equity based compensation.
And the $66 million in first half 2020.
15% below the first half 2019 level.
DNA expense was $58 million in the second quarter down from $80 million, a year ago, reflecting lower travel and conference expenditures as well as the recovery of certain afforded to transaction expenses and continued expenditure management.
Net realized performance revenues were positively impacted by several attractive exits during the second quarter Askew discussed earlier.
We produced $71 million in net realized performance revenues, largely driven by our us real estate and our Europe technology funds.
Year to date net realized performance revenue of $119 million is well above the 28 million generated in the first half of 2019.
That said, we expect the second half of 2020.
I will likely be well below the first half level.
Overall distributable earnings were $198 million in the second quarter and first half 2020 de of $373 million was nearly $60 million higher than the first half of 2019.
The per share was 53 cents in the quarter a dollar one year to date and we declared our quarterly 25 cents per share dividend.
Strong portfolio and fund valuations drove our net accrued performance revenue balance to $1.8 billion up 49% sequentially.
Substantially all of the increase is attributable to our appreciation in our six us buyout fund.
Remaining fair value in public securities across our carry fund portfolio increased to 14% from 8% of total remaining fair value.
As we IPO zoom info and our public securities and total appreciated more than 80% in the quarter.
However, we acknowledge that volatility in either direction in the public markets could affect our accrual moving forward.
Let me now shift to a discussion of the impact of fortitude on our results and our fee related earnings guidance.
As part of the afforded to transaction this quarter, we raised $2.1 billion of capital.
Upon which we will learn management fees.
Fortitude is already rotated or committed to rotate nearly $4 billion into specific Carlyle funds.
And we expect fortitude to reach at $6 billion rotation target by next year.
Let me now briefly explain the second quarter, GAAP loss, which reverses prior GAAP earnings on Fortitude.
None of which has been included an f. Ari or distributable earnings.
For Us GAAP, we previously accounted for investment in Fortitude by recording our proportionate share afforded to GAAP earnings inclusive of unrealized gains and losses, resulting from changes in the fair value of embedded derivatives related to certain reinsurance contracts.
With the closing of this transaction, we now account for our investments at net asset value.
Which still reflects a 10% appreciation above our entry price.
Moving to our fee related earnings outlook.
As I mentioned earlier, we have generated $256 million in year to date fee related earnings relative to the full year 2020 range, we discussed last quarter of $400 million to $450 million.
Given the strong first half of the year and incorporated in our expectations for the remainder of the year, we're increasing our target 2000, 20-F R E range to 440 million to 475 million.
We are incrementally more comfortable than last quarter, but still cognizant of the many uncertainties that could impact results in the back half of the year.
Finally, let me summarize where we are following our corporate conversion.
Following our transition to a full C. Corp. on January one 2020, we have seen many of the expected benefits emerge.
Trading liquidity has nearly tripled.
Our top shareholders include many new high quality names and we've been added two important indexes that Russell and Sci and Crs paid.
Overall has been a positive set of developments.
I'll now turn the call back over to queue for some final thoughts.
Thanks, Curt and again, thank you all for joining us this morning.
We're pleased with the from strong results for the second quarter and more broadly we're confident we are well positioned to navigate through these uncertain times.
We remain focused on delivering attractive returns for our fund investors and growing earnings for our shareholders over the long term.
And we'll do this with one of the best teams in the World I will say again I am proud of how are people have adapted and excelled amidst all that is going on.
That is what we do best at Carlisle and all of US are excited for what's ahead.
With that let's turn the call over to the operator and take your questions.
As a reminder to ask the question going into fresh start working on your telephone slip just your question. Please press the pound Keith.
Please stand by will be compared to Q any roster.
And our first question comes from Green short with Evercore.
You May proceed.
Okay.
Hi, Thank you wonder if I could just get a follow up on on your comments on Florida too.
You on a couple other players continue to invest in this space, it's a big space. So I wouldn't call at crowded there's just more people focusing on it. So you had mentioned buying additional runoff portfolios as part of the core growth plan.
Im curious what you see out there more importantly, how did those deals get priced.
Ali I'll leave the general let you go work, where you where you see fit.
Hey clan its Q how are you.
Thanks for your question on Fortitude. So look we're really pleased how afforded to us is progressing and.
Just just to point out.
It's a globally diversified book of liabilities at Fortitude, it's largely be to be meaning we don't really directly originate anything from the consumer it's definitely not model line.
And from a financial perspective, we're really pleased with affected this capital ratio is higher than our target and regulatory thresholds is generating an attractive call. It mid teens rate of return on equity.
And with the recent raising of additional monies from our limited partners and strategic investors, we and them now control approximately 97% of this platform that like I. Just mentioned is performing well. So we're now turning to managing this.
Platform for attractive growth and prudent growth, so while maintaining into an emphasis and policyholder surplus and making sure our risk management policies or are appropriate.
As you know Glenn there are.
The julians of dollars of legacy liabilities out there.
That need to be moved off the balance sheets of these of the insurance industry, because it's not efficient for them to be holding onto these types of liabilities.
We are very well positioned with this platform.
It's a proven team it's a diversified book and now that weve been able to with our partners.
Actively gain control of Fortitude, we do look forward to growing vis-a-vis acquisition of these types of businesses in terms of how do you have price. These books of very carefully.
These are complicated books of business I'm glad we got incredibly talented management team at this platform.
And we're going to be very carefully looking at these books to understand what makes sense to acquire into fortitude. So that we can grow.
I can't spelled Bajillion, but I appreciate that.
Maybe just one quick follow up.
One quick follow up just I don't remember what watching lockup on Blumenthal.
You know granted it's Curt Yes go ahead. So just in terms of the public securities in our portfolio, it's not our practice to talk about individual securities.
And so but as we look in on our practice has been is really to.
No us as the markets open up we remain liquid in healthy, we obviously look to whats right for our respective funds and stakeholders across and look for attractive opportunities to sell remember, we're not forced sellers will look for the right windows and when the securities are trading where.
Alan We think it's in the best interest of all stakeholders will sell blocks, but no comment on any specific of physician.
Okay.
Okay. Thanks for all that bank.
And our next question comes from like carrier with Bank of America.
You May proceed.
Hey, guys. This is deemed stepping on for Mike carrier just a question around the C CLL subordinated fees.
Although the deferral the sub fees hasn't been too material. So far year to date at only 8 million wondering how we should think about the risk of additional sub sea deferrals moving forward kind of the puts and takes around that.
Maybe what you guys are forecasting has the potential impact over the next couple of quarters. Thanks.
A dance card hey, thanks for that question really appreciated so let me start with maybe a little bit of background, we have a large COO business.
Probably top three market share manages $27 billion of us and European CLL funds.
It's an experienced team they've been through the awards before included in the Great financial crisis, and we came through that really well. The we have some sub fees back then that turned off and we were we turned them all back on them all turned back on in recovered all of those fees before our COO lows.
Are performing better quarter over quarter and.
The performance and the trajectory is better than we initially thought at the beginning of this pandemic.
Probably if I knew what I knew.
Now I, probably wouldn't even as mentioned the CLL as a whole as much as we did in the first quarter, but one lease get that out there.
I would say our team is what I'm really proud of is the activity of our team. Yeah. There has been probably $3 billion of activity that the teams have taken into account here in the second quarter really to reposition the portfolio make sure. We're in the right place manage our default rates up get the the portfolio.
Structure, the right way, it's appreciated signals not on our own balance sheet, which isn't necessarily the same thing, but it's our seal ASM amount balance sheet is up about 13% quarter over quarter, reflecting kind of that improved performance none of our European sales have turned off while the U.S CEO.
Renewing did show some deferrals, we expect that either by the end of this year are beginning in 2021, we'll see those fees start to turn back on and possibly recoup all those deferred fees.
Activity that we've had is really been really good in terms of focusing on cash and really default rates at the end to the day is what you want to really look out and our default rates continue to track very favorably to all kind of industry stats.
And this is a missed a time period, where rating agency downgrades leap year to date have far exceeded.
Anything that than before really into broadly syndicated loan space and so.
This is despite all of that so again I'm pleased with where we are but.
Look risks are ahead, you get a second wave things get beds the world changes obviously.
What I've, just said could be impacted but right now I'm feeling pretty good about our COO book.
Very helpful. Thanks.
Thanks.
And our next question comes from Patrick Davitt.
Kind of thing.
You May proceed.
Hi, Good morning, guys. Thank you.
My question is more broad I guess in terms of the cadence of economic.
Shifts you are seeing kind of geographically and and by vertical across the portfolio, maybe compare and contrast versus.
When we were talking three months ago.
Hey, Patrick it's it's queue. Thanks for the question you know.
It's a great question because footwear noticing is that this recovery is really uneven.
In different regions and different industries in different sectors are being affected very differently.
From a regional perspective clearly.
He is out ahead.
And by our estimates, China, probably won't even enter into a recession this year.
I would also point out that in that part of the world of particularly China.
Much of their recovery has been organic with very little fiscal stimulus.
So they have a lot of ammunition lift to deploy from a macro economic perspective.
Clearly, what we're seeing there though is.
Consumer behavior, even there is changing with skittishness.
Travels not yet fully recovered consumer discretionary is not as high as it used to be and of course, the big issue is at some point if the rest of world doesn't pick up what does that have implications to the China.
Europe is probably doing a little bit better than we thought.
And dependent on country, but in general.
It's correlating to the fact that they may have made more progress in the healthcare front than we have and as such we're hopeful it would they are not out of the woods, but we're hopeful that there's a little bit of a step in Europe America, you see what I see.
It's uneven.
Certain states are doing better than others.
Certain industries are certainly going to be affected more than others and I think it's fair to say.
Theres still there's still more to go with respect to the.
Two declaring victory as it relates to healthcare, but also a progress.
Economic recovery front in terms of industries look I think it's very clear there is some industries.
That had been very badly hit by coated and quite frankly, there are others that are just.
Moving along and even have had their growth accelerated because of copel, especially those are tech enabled E commerce collaboration based or cloud based.
And so so really.
It's one of the reasons why having a global platform like ours, having deep industry expertise like ours and being in all the asset classes with really strong investment teams is truly an advantage in this type of an uncertain in an uneven recovery it's CLI.
From my comments, we can be cautious about the real economy, but are quite a selectively aggressive in the areas, we like and are going to maintain a bit of caution and prudence as expected as as it relates to those companies in industries that are going to get hit harder so its.
Very difficult to characterize or answer your question with just a very slipped monolithic statement. It is a very uncertain of uneven differing recovery based on region industry sector and asset class, but that's exactly the type of situation, which quite frankly Carlos.
This is well positioned to handle.
And our next question comes from Michael Savage with Morgan Stanley You May proceed.
You had some strong performance appreciation in the funds this quarter I, just hoping you could share a little bit more color around the performance in the fund what are you seeing in terms of EBITDA and revenue trends among the portfolio companies and what portion of the book would you say is more impacted here from this environment versus what portion of the.
Book would you say is not impacted or or maybe even benefits from this backdrop and how is that evolving relative to your expectations last quarter.
So so Mike let me I'll start and then Q might add on a little bit. So just again as we look at it and you saw a really good appreciation in our corporate private equity funds and also real strength in our global credit business and I'll just point out that the numbers that.
We do share on appreciation and global credit religious relates to the 20, 25% of the book that is in traditional carry funds. So it doesnt really talk about the COO lows, which make up half an hour told you that thats up a lot.
Or the outcome of the other areas like direct lending and alike and again good performance across that entire book.
In in corporate private equity look the public markets are incredibly volatile we've had real fortune with respect to some of the public companies that we've been able to take public as well some of the existing ones may have not only performed well, but the market as appreciated by and large and so you see real appreciation there a lot of that is engine.
The areas that you mentioned, we're strong in healthcare and were strong in technology not just in terms of our public portfolio, but that's really makes up a good percentage of the way we've constructed and again, what I like about where we are in even real estate, our us real estate team has done a fabulous job of diverse.
Supplying our portfolio don't have exposure really in any material way to hotels no material exposure to big office building no material exposure to retail so we've done a nice job of really being diversified and constructing our portfolios of both in the buyout business and in the real estate business.
And the footprint in global credit is really starting to take off nicely. So I think thats. Good now the one thing I will point out is that I mentioned in my opening remarks is to our appreciation in carry.
Was a lot driven by notches corporate private equity, but our six us buyout fund, which is great and I'm glad that that's a good placed out a little bit of concentration risk, but I want everyone to be aware of that concentration risk, but it's in the.
The look part my own dollars Thats, a good place for maybe part of my dollars than with that team I'd like to seem a lot.
Yes.
Current does a great answer Michael I'll, just add maybe just two quick thoughts which is first.
We're really pleased with two quarters worth of portfolio performance, but I just want to make sure everybody appreciates.
We and.
The industry, we're by no means out of the woods in terms of there is still a lot to play out with respect to this recovery.
So having said that.
I can't emphasize enough the importance of how well we have focused on portfolio construction.
Look while every fund will have one or two deals that aren't going away, we'd like them to in general our funds have been constructed very well.
Case in point is are you as real estate.
Portfolio, where they have virtually no exposure to office hotel or retail sectors in that portfolio, and thus performing exceptionally well, but to kurtz point.
It's a lot of hard work that's going in over the years with respect to constructing these portfolio as well and assuming we can stay focused and work with their management teams.
Stay up stay vigilant, we're hoping to continue to navigate through this environment.
Because of the effect of the portfolio is being constructed so well. So look it's it's it's a great quarter of but by no means are we going to be complacent theres a lot more work to do all of which we look forward to doing moving us towards the second half of the year.
Okay, great. Thank you.
Okay.
Our next question comes from Carol Cara with Jefferies. Sir you May proceed.
Good morning, perhaps picking up on the increased target for the for the F. R U range.
Appreciate the.
The outlook, there, but perhaps a little bit of color on on what gives you comfortability on that increased range and then also if theres any expectation around sort of fiery margin I think you talked a little bit about kind of grinding towards 30% in the past and now that we're sort of at that level.
What we might expect.
In this kind of new new an updated range if anything thank you.
Jerry and Kurt Thanks for the question, let me just kind of levels given that backdrop, and then dig into it a little bit for you. So as everyone. As we've said 256 million year to date effort now and that has some benefit in the first quarter of the $30 million CCC expense recovery and then.
Obviously again with afforded to transaction we recovered some expenses there. So I would say were naturally tracking to the middle of our range of or 40 to 40 75.
But there is linings I'm really pleased with at this point time as a fee growth and the fund raising that we've seen really in our investment solutions business, particularly at Alpinvest.
Has been fantastic improvements that I've already talked about in our CLL platform is good.
In addition, we recently activated fees on our latest.
The Asian Fund and we also expect to activate fees on our most recent Japan fund here in the second half of the year, although that will have some timing dependency upon completing the deployment of the existing funds and we have further initiatives underway specifically in credit, which should also give us some uplift as is.
Everyone knows the pandemic has helped curtailed some expenses specific, especially travel and conference costs.
And look forward continues to be very diligent on expense management.
So if all of that can continues and if we get some further help from transaction fees and but as Q mentioned I'd be careful there because large emin M&A deals may be tough to do this year, but if things were to pop favorably. We could end at the top end of the range, but to be clear I would guide.
Did you really at this point in time to that middle in the middle point of our range, but we remain focused on continuing to grow out fahri over the long term and as it relates to our margins, but we're hovering Cana 28 to 32 this year, whereas.
32%, you know a year to date, 31% here in the quarter and we'll balance right around that so yes, we would achieve that we'll get higher in terms of.
Mid Thirtys and higher upon completion of the fund raising for our big flagship funds as that occurs that's when you'll see the next major step up until then I would think that will be kind of in the same kind of ballpark Zip code.
And our next question comes from Bill Katz with Citigroup you May proceed.
She was taking the questions. This morning.
You may be won't come back to you mentioned some cautionary comments on the massive infrastructure. Alec that's one of you might be able to expand on that a little bit and perhaps tied into where Kurt just slipped off how should we thinking about maybe some of the flagship fund raising as we look down to 21 22, given your comments about some second half.
As for minuses. Thank you.
Sure. Thanks Bill.
Look as a sector.
Infrastructure is something that has been affected by coated.
Clearly.
The finances and municipalities.
And the tax base has been hit.
And there are other a weird ways that.
Implications of the current environment effect infrastructure for instance, general can't contractors with work in safety rules have difficulty completing projects. So so clearly.
Certain types of projects development projects in general are their complex to begin with they get even that much more hard harder to us to complete in this type of environment. So I would expect to see deployment be more of an inch of an issue broadly speaking in the infrastructure sector.
Now having said that.
It's the type of conditions, which over the medium to longer term present, great opportunity.
When you have disruptions like this and dislocations clearly.
Capital and.
Third to complete important projects and to invest in infrastructure and so this is one of these things where I do believe in the short term there are issues, but over the medium to longer term the wind up at the back of the infrastructure asset class in general.
With respect to your question on the on.
Fundraising.
For some of our flagship funds.
All of this is interrelated to pace of deployment and pace of exits.
And to the extent of that gets pushed out a little bit it shouldn't be a surprise that fund raising would similarly get pushed out a little bit.
I think it's too early right now to tell you precisely exactly when we think will be raising money for our next cycle of funds.
So stay tuned for that but clearly mission critical right now is just to make sure portfolios in good shape.
Is to find these opportunities as the environment.
And adapting environment to find these new opportunities and as our pace picks up and no doubt as our exits pick up you will start hearing from us much more about beginning the next leg of fundraising.
And I'll, just add to that even even with all of those challenges in issues.
Fund raising first six months of this year 12, and a half billion and thats without really anything significant in corporate private equity really just showing the strength of been raising in global credit and solutions and more to come. So we're always having activity from a fund raising perspective, it just may not.
Be at those Super larger amounts.
Lots of funds.
Thank you both.
And our next question comes from Robert Lee with KBW. Please proceed.
Thanks for taking my questions and even though is not on the call them through the listening so Glenn the best of luck.
Endeavors.
Congratulations.
Anyway.
One business and what the focus on was.
Investment solutions doesn't get a lot of pension but.
Secondaries business it seems like play so this would be pretty.
Healthy growth double that Bari there.
Yes, maybe update us on that.
Got it feels like may be that business is finally reached some type of inflection point.
How should we think of that.
As an outsized source of growth could be opportunity there.
You know on this one Robert it's Q, let me start with some very high level comments, and then can help you a little bit.
With some with some of the some figures look we're really happy with our investment solutions.
Team.
I have to be careful they are in the market right now raising.
Secondaries fund.
But suffice it to say when you have a strong team and a great track record.
Even in a co bid type of fundraising environment.
It's a lot easier because of their ability to due to market their track record.
So I got a lot of confidence in that team and I think you're exactly right.
We are seeing broadly speaking opportunities.
In secondaries as limited partners and other owners of of Alts are looking to find ways to manage liquidity and manage their portfolio.
And managed allocations across their investment portfolio. So it's actually a very good time to be thinking about secondaries types of strategies, which positions.
Our solution segment and our Alpinvest team.
Very good in a very good way.
With that let me turn it over to occur.
So thanks to the thing that I have always been really pleased about our investment solutions business. Its performance. So if you think about just our most recent the prior Secondaries Fund for example, which is fully invested so fund fund five from 2011 18 per se.
Net IR if you look at page 27.
Our materials in the earnings release, and they often does funds on a net basis and these are primary secondary and co investment blends to a 12% net IR M&A is really good performance for these products. The investors really appreciate it has allowed us to scale.
This business and you're right that's contributing to a real nice uptick in fee related earnings gone from call. It $6 million in Q2 last year to call it $12 million.
This quarter and they're not done detailing that I liked about this business is when we bought it we didn't buy the embedded Kerry.
And these are European style.
Waterfalls, which means it takes a while for that carry to come in the end to be in a really be attributed to us. So while it you'll see a low net carry numbers coming off of this business, because most but going out to other owners.
As we move forward our percentage of that will increase and that will make this also a stronger driver of the going forward. Now again. This business is not going to be like a corporate private equity business, but it will be a bigger component and I like it's increasing contribution to our overall platform.
Great. Thank you very much.
And our next question comes from Alex Blostein with Goldman Sachs. You May proceed.
Hi, Good morning are two different jacoby filling in for Alex Thanks for taking my questions.
Not to beat a dead horse here, but just to clarify a little bit on the updated guidance I guess two questions. One is what does it contemplate in terms of.
Alone subordinated fee deferrals, so kind of the range.
Subsea deferrals are you assuming it's in that fourth quarter you to of course 75 range. I mean, just just for comparison say because we think about.
Increased.
At our re range with the impact could be 42 transaction contemplated in the prior quarters for hundreds of core 50 to that.
Something that wasn't.
In that four to 100 report could be guidance.
So let me let me take a shot at these answers and thank you for the good questions. So this close just to kind of it remind everybody we earn about a $120 million year annually on management fees out of the feel of business. So it's an important part of our business again, it's a 27 billion.
In a OEM business for us.
So significant now about two thirds of that number.
Roughly speaking our subordinated fees that could be shut off.
And so therefore the concern at the beginning the year was that could obviously have a significant impact.
Rating downgrades were significant that's proven not to be the case, thus far on so I'm feeling good about that that has obviously helped us in terms of thinking about expectation for the balance of this year, but as I said earlier, there's one other thing that think about the expectation.
For two transaction coming through obviously help.
And as we look forward.
Our alpinvest business, performing very well and thats been been great and so all of these things together has helped me things through kind of the increasing our range.
From from where we were from the 400 450 to the for four to 475.
On top of this yes, the comments really around.
Anchor the other part of that was what drives it and again its these factors that that kind of get us there and so hopefully that's that's responsive to your question and but I just do a caution people the things Theres a lot of uncertainties that continued to pop up in 2020, and so we just have to.
Can you to be cautious while actually.
Actively executing what we do.
Thank you Thats helpful and.
Ask Apollo.
Sure Dan go ahead please.
Thanks, just maybe you've touched on this.
Although maybe just to kind of title together.
Some of the fund raising that you expect kind of between now and that funding Super cycle, what should we keep now port.
So so this year, we've done about 12, and a half billion dollars year to date.
Early in the year, we had indicated 20 billion.
Still possible I want you to put that down as a hard number we've told we installed in the second half could be lighter that's still a possible number for this year.
And somewhere in kind of hovering in that no high teens to that level is what the business generally will be doing on an annual basis prior to.
Super cycle coming back in.
Got it that's helpful. Thank you.
And our next question comes from Jeremy Campbell with Barclays. Please proceed.
Sorry, juggling a couple call. This morning. So forgive me if you address is already in your your every step up walk through but I was hoping give us some context and how to think about management fee rates the way our calcs it looks like stepped up little bit quarter over quarter in both investment solutions and credit after you adjust the siloed sub fee.
No drag now I know, obviously, when tripping or your changes more dramatically like it did the quarter over quarter that there can be some denominator averaging issues involved so maybe that's the culprit, but just wondering if you can give us an update on management fee rate than any potential impacts from here around either new fund turning on or any fortitude impact.
Sure. So generally speaking the funds that we have been raising from a fee rate perspective had been either equivalent to or in some cases slightly better than other predecessor funds. So the movements that you see up or down.
Generally have to do with mix.
And also the other key factor is when you get the new funds also coming in and you get the big step up.
From a larger fund at full committed capital levels that helps and then you need to also take into account. Some places in particular, our global credit business those fees tend to be more on invested capital rather than committed capital and so as you vet invest more you earn more in management fee.
Obviously, which makes sense and that from an operating margin perspective that is obviously very helpful. Because you're generally not adding the same type of expenses to the equation as as you are from a management fee perspective, So I would not get too focused on the effect of rates at this time, because there is a lots of given.
Tags, but the overall piece that I really would think about is that generally on a like for like basis, we're not seeing any decreases in terms. The terms are generally flat to better.
Great and then neo another 40 is all buttoned up any any potential impact to call out on that one too.
I guess I would look the I wouldn't call corn team or pandemic or uncertainties buttoned up you know as Q mentioned I think we're still at the early stages of kind of recovery and seeing how things really play out but from what I do like is our core business.
Our core business model, 98% of our fee, earning AUM is not subject to redemption.
The.
90% of our fee revenues, our long term oriented.
And.
That's all good and then with respect to Fortitude itself, you know that for into transaction no changes essentially the dynamics around how we operate so you saw the GAAP charge, but from an investment perspective that business as well with smart 10% above what we have a carry for its performances.
Is right on track things are going well.
With this closing there is to $2 billion amount of capital, we raise which will earn management fees on you only saw a one month here in the second quarter from that so that additive going forward and then you have.
Essentially as they continue to rotate capital in essentially about 4 billion about now and are close to either committed or starting in and then get up to the 6 billion. We'll see further uptake as that all rotate then and then if we're fortunate to grow that business I would expect further growth from said growth.
Great. Thanks, a lot.
And our next question comes from adding Adam Beatty, but can you be yet you may proceed.
Thanks for taking the question.
Just a follow up on COO is maybe maybe add to your regret having quite a bit before but I wanted to ask about the environment. There I mean, it sounds like your team is doing really good job kind of managing it is it a case of your team kind of outperforming in a weak environment or not to take anything away but.
Is the fuel oil environment generally just better than than folks would have expected. Thank you.
Yeah. So thank you, yes. So let me just give you a little bit of color. So so from a.
Macro environmental perspective, clearly one thing that that really effects. This business is our rating agency downgrades and that came in spades.
Last quarter it has slowed down.
And if.
If all continues as current Lee right now.
To Kurtz earlier comments I think we'll be in good shape of course.
If the real economy.
Going a different direction, then the downgrades accelerate.
Then I think thats, a that does pose headwinds for for the CLL business up in terms of new issuances of what we Didnt quite mentioned earlier or maybe we did but we didnt highlighted but we did partake in two recent issuance is one in Europe one in the us.
I would say those two does not a trend yet make.
But certainly it's encouraging that we're starting to see some life with respect to a new issuances of of CLL structures.
An important aspect of.
Execution in this business is quite frankly, our team's ability to trade in and out and manage the COO portfolios.
And to that to your question on this front I think our team did an amazing job.
Over the past three four months trading out of certain positions and trading into higher yielding physicians with dislocations in the market.
Such that our positions are better.
Yielding and performing today than they may have been during the depths that crisis, so hats off to the team, but to your point about what's environmental versus floods.
What are we doing I think thats, one element where.
Having great investment teams and having the scale in the breadth that we do have really helps in this business.
So when you throw all those things together you can see that it's a big business that we have we think we've got a great team. The portfolios had been repositioned in the way that I think makes a lot of sense, we're all keeping an eye on rating agencies and what they're up to.
And quite frankly, we were among the first if not the first in terms of being able to issue new see lows and hopefully that will pick up in the second half of the year, but but no promises on that because I think.
It's not quite yet.
In a in a place where you're going to see sustained new siloed structures emerging.
Great Thats really valuable contacts thank you.
Then just a quick follow up if I may on flows in FY, a U M. Maybe to a housekeeping, but seems like a little lumpy in corporate private equity and investment solutions on the outflow side.
I am assuming something that was some funds exiting the investment grade is that correct or any other color. Thank you.
So keep in mind as we sell we you know thats our goal here. Our goal is not too in these closed end fund structures, which is kind of driving 90% of our revenues. Our goal is to invest it and then to sell it at a multiple and make money.
For our investors and so you should always expect in our business to see outflows not redemptions again, 98% or fee, earning AUM is not subject to redemptions, but it's from realizations and so we had good realizations this year and that's a big part of which which we'll see and obviously things that can contribute to that are some.
Stepped down when you move around fee, earning AUM when you move from the committed to.
In the post the investment period. So you can see a step down at that time, but generally most of the activity is from access and then inflows are obviously as we're raising capital around it naturally has been the big piece you also see some inflows as we activate for fee, earning AUM. So as we activate funds that we have raised.
Which would be otherwise included in totally around but not including fee, earning AUM and so we activate them and so they'll come in there and then some of the funds which are dependent upon us investing though flow into fee, earning AUM as we invest that capital. So those are what really accounts, where some of the ups and downs in in the roll forward.
Fair enough. Thank you very much.
And our next question comes from Ken Worthington JP Morgan you May proceed.
This is we'll cut its tony per cap.
Morning, while focusing on.
So focusing on your energy business.
And GBP 12 is about half invested so getting to the rent or we can think about the next vintage, but we have returned after fees negative and GP 10 and 11.
What are the prospects for reading energy assets going forward.
Do you think energy assets are going to be asset classes investments will investing or dedicated energy fund to think of the past.
[laughter], Hey, well it's Q.
So looking at our.
Your question.
It has a lot to do with.
What's going to be happening with carbon and alternative forms of energy and clearly there is a transition going on but this transition in argues can take a long time.
And.
In the short term, obviously, the energy markets right now.
I've been very impacted with demand destruction as well as destruction the supply side.
And a whole bunch of geopolitical factors.
That are impacting conditions in the energy market.
But.
The switch over to alternative is not as easy or as quick as as as people would would want it to be and so our view is theres going to be a period of time, where both.
Traditional forms of energy as well as new and emerging forms of energy are all both going to be.
Viable.
Now from an investment perspective, how we play this.
Is very dependent on values.
Calculations.
As well as the ability of of management teams that we partner with two actually drive operational improvement irrespective of commodity prices.
And sufficed to say I think in the short term, we're in a little bit of a wait and see cautious mode because of all the issues that are affecting the energy sector of broadly speaking.
We do have a lot of.
Optimism for finding great investment opportunities and renewables and alternative forms of energy and we have teams that are looking at that.
But but clearly this is not.
Just a switch over all and in a snap a finger one whole sector.
Is is gone in another whole factor has phased in.
It's going to take time.
They're going to be bumps, along the road theres going to Theres clearly a transition on and filed that transition plays out my personal perspective is there will be great investment opportunities in both worlds.
It's up to our platform to try to figure out how to best navigate that.
Okay, great. Thanks for answering the question.
And we have a follow up question from Michael Cyprys with Morgan Stanley You May proceed.
For taking my follow up question.
Just on fee related earnings about two thirds nearly of your distributable earnings this quarter, I guess, where do you see that in the medium term obviously, there's some moving puts and takes near term performance. She is a little bit more subdued and then you raise the next flagship funds, which should help on the free but at some point performance you'd get to more of a normalized level, which I think maybe what would drive.
For re contribution lore, I guess, where do you see that going anything through the puts and takes him and where would you like the every contribution to be longer term.
So my I, just read I think you're asking about the performance fees currently and longer term.
The mix of effort, we were breaking up longer term.
As far as longer term.
Some kind of mix so effort.
Okay. So look on on fee related earnings we have been really clear in terms of growing up already and committed to growing margin.
Given our guidance for this year for 42 for 75, and then as we go forward.
The real question is I got to get 2020 done before I can really definitively answer what happens going forward I think the right way to think about near terms call. It 21 is probably flattish to slightly up again.
Dependent upon all of these issues from an environment perspective that we've talked about.
And then I think you see a real recovery in a further opportunity to really expand upon f. Ari end margin again, as we've said when the flagship funds return.
And so I think will be really but even before then.
Just it'll just be more subdued, but we're going to be doing everything we can to drive growth in that near term period.
On a net realized performance fees.
I like the fact that we are $1.8 billion of accrued carry I like where some of our larger from our physicians.
But in short term what you saw here in the first half of this year was essentially we are really good it focused on exits I congratulate our teams for doing that across the board and the pulled forward some of the carriers that I thought would happen later in the year into the second quarter and so that's why.
The realizations and Carrie will likely be well below first half levels in the second half and look we can all others. There's always things that people are working on that we could get surprised you know in Q4 by something kind of comment but I.
I think the more realistic place is well below kind of first half levels for 2020.
And then again on 21 and 22.
No I think the engine set up right to get us back to historical levels on much more you know a half a billion dollars at 600 million of net Terry per year, but when that happens patients is the right word, especially in this world where big transactions are tough to do so.
On timing on that is really hard and my crystal ball as it doesn't work that good right now.
Great. Thank you.
And our last question comes from Robert Lee with KBW, Sir you May proceed.
Thanks, Thank you for taking my follow up.
Thanks.
Real quickly to you kind of touched on the resiliency is so far fund raiser, but maybe.
Drilling into that a little bit.
Others.
For the different pockets, where it's been more resilience than others are part of I would assume.
Now before.
Headset.
Or the or read is that.
Eric.
Other investors just trying to get a sense.
Since our baby.
Section the fundraising have different parts of the marketplace reacting.
Sure.
Robert Thanks for the question so yeah in General fund raising the environment has been more resilient, but I think you know in.
Rituals video co bid type of World obviously.
That has implications so what are those so first of all.
Re ups are easier than first time funds.
Mhm dealing with existing LTC is easier than trying to meet new Lps and new investment committees over.
Video technology.
And in certain asset classes.
Things like credit and credit opportunities.
Things, where you can take advantage of dislocation like in our secondaries.
Area, all areas, where else these are showing real appetite.
My General view is that for the most part.
Lps are.
The largest Lps are very sophisticated.
They have a plan they are fine tuning it but we are not experiencing are seeing any dramatic changes in their.
Appetite or their desire to keep allocating and keep investing.
In the asset class.
The two last things I would state.
Our first.
In times like these I think our brand in our platform has particular appeal.
Lps are comforted by the fact that we have enormous resources, our global platform being what it is that we can really engage with our portfolio companies and bring full force to bear to help these companies.
Navigate through a turbulent times all the functional resources, we have procurement specialists supply chain specialist human capital experts capital market experts all that comes to bear Carlyle around the world as we're working with our portfolio companies that is that is just a huge advantage to our platform.
That I think.
Lps appreciate and they become more aware of in times like this.
The second thing I would say enough finished with this.
Taking a big step back back we're in a world where interest rates could be zero for a very long period of time.
And I'm exaggerating a little for effect, obviously interest rates right now are going to be in my mind could be low for a very long period of time.
In that type of an environment.
There is no better way for our Lps to meet the needs of their investment objectives, then have to allocate and continue.
Their investment into alternatives and so from a longer term perspective.
I think the current economic.
Environment and current outlook is such that it further supports and reinforces.
The tailwinds that our asset class has and within those Tailwinds I do believe Carlyle and with our platform and our global presence and in the history in the in the depth of our teams I think we're extremely well positioned so that makes fundraising for us easier, but you know.
Let's let's be clear, it's logistically more challenging if you're trying to deal with new Lps and obviously first time funds are also are also little bit harder.
Great I appreciate you taking my follow up question. Thank you.
Thanks, Rob.
And this now concludes that your any question today's conference elegant like a turn to Kotick open taking your parents, bringing coast right.
Thank you offer listening and for your time and attention. This morning, if you have any role or questions. Please follow up with.
Investor Relations at any point, otherwise, we'll look forward to speak with you again next quarter have a nice day.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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