Q2 2021 Carlyle Group Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Carlyle Group second quarter 2020.
<unk> 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 then zero on your Touchtone telephone as a reminder, this conference call is being recorded.
I would now like to hand, the conference over to your host Mr. Daniel Harris head of Investor Relations. Please go ahead.
Thank you Whitney.
Good morning, and welcome to Carlyle second quarter 2021 earnings call.
With me on the call. This morning is our Chief Executive Officer, Tucson, Li and our Chief financial.
For a curb user.
This call is being webcast and 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 as a substitute for measures prepared in accordance with generally accepted accounting principles. We have provided reconciliations of these measures to GAAP and our earnings.
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 and the risk factors section of our annual report on form 10-K that could cause actual results to differ materially from those.
As indicated Carlyle assumes no obligation to update any forward looking statements at any time.
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 $143 million and fee related earnings and $395 million and distributable earnings.
Earnings with de per common share of <unk> 88.
We declared a quarterly dividend of <unk> 25 per common share.
And to ensure participation by all those on the call today. Please limit yourself to 1 question and 1 follow up and then return to the queue for any additional questions with that let me turn the call over to our Chief Executive Officer <unk> <unk>.
Thank you Dan.
Everyone and thank you for joining us today.
In February we unveiled a new strategic plan to accelerate growth and earnings over the next for years.
And we laid out the targets initiatives and changes we are implementing to drive our firm forward.
Central to our objective of performing well for our stakeholder.
<unk> is scale and speed, which is why our senior leadership team is focused on ensuring we are the best investors, we can be and leading the company to operate better and faster than ever before.
I am pleased to tell you that we are delivering results that are larger and occurring sooner than previously expected.
With our investment platform firing on all cylinders, we're confident and the momentum we are building to drive growth and earnings and the years to come.
We have built a talented and diverse leadership team that is executing well.
Together, we've made meaningful changes that are helping us deliver very attractive.
Some cases record results as we Usher and a new chapter of growth at Carlyle.
But our performance this quarter really underscores is that the changes we've made are paying off for our stakeholders, which I'd like to summarize with the same framework I outlined at our Investor day.
Think bigger performed better.
And and faster.
Let me start with moving faster as the velocity of virtually all aspects of our business has increased.
Deals are being completed on shorter timelines financings are being executed more quickly.
<unk> for exits are presenting themselves sooner.
And they're being raised faster.
Other than ever before and accelerating impact from disruptive technology and changes from the pandemic are powering and increased demand for private capital across sectors and regions.
The new direction of our organization positions Carlyle well to capture growth from the increased velocity within our industry.
More example, we've.
We've integrated our investing activities to take advantage of our global platform that is built around sector and regional expertise and to make better investment decisions, while deploying capital faster. We've also reduced our discontinued smaller less profitable strategies that historically distracted our firm.
As a result, our investment organization is operating and connecting more effectively than ever with an ability to pursue buyout growth and core strategies utilizing a common platform.
On the fundraising side the past year has demonstrated the benefits of adopting a hybrid approach that has helped us.
Raise capital faster and more efficiently.
We move quickly to adapt to virtual LP meetings diligence sessions and Roadshows we.
We now interact with our LP is more regularly strengthening already deep client relationships.
Not only are we able to move faster, but we're focused.
Scale and thinking bigger.
Notably we are successfully scaling up our largest funds organically.
If you look at our latest U S opportunistic real estate strategy, we have already closed on nearly $7 billion of capital and expect to hit the hard cap of approximately 8 billion.
By this fall at which point the fund would be 45% larger than its prior vintage.
Similarly, our recently closed secondaries and co investment strategies and investment solutions for each approximately 40% to 50% larger than their predecessors.
We continue to see healthy demand.
On strategies across our global platform.
We're also busy building large new businesses and global credit and capital markets for instance, and just a little over 3 years and opportunistic credit we built a team from scratch launched and invested a first time fund and are well on our way.
And we're raising our second fund.
Today. This strategy has almost $6 billion of AUM.
With further growth ahead.
Given we are moving faster and thinking bigger simply put we are performing better.
Our results are improving across the board as Kirk will detail in a moment.
For our <unk>, FRE and FRE margin carry or investment income our financial results are attractive and ahead of previous expectations.
Importantly, the day generation from our business in the coming years should provide strong retained earnings, which we intend to invest and growing FRE.
Generative businesses.
Let me give you some additional details on just how well our investment platform is operating.
Fund raising has increased nearly 50% year to date.
We remain confident and the plus of our $130 billion plus target by 2024.
This is made possible in large part because our funds are generating attractive returns and our net accrued carry balance is at record levels.
Our corporate private equity carry funds are up 28% this year and we've seen strong results across virtually all our investment strategies.
This appreciation drove our net accrued carry to.
For a record for $1 billion.
Which we believe is an important indicator of our future earnings power for shareholders speak.
Speaking of which realizations across our platform continued to accelerate with a growing pipeline of announced sales amounting to more than $40 billion of total enterprise value, which set.
To our range for increasing distributable earnings and the quarters ahead.
And finally, our deployment pace is also been robust more than double the first 6 months of last year as we continue our thesis based investing and attractive growth areas like technology health care and E Commerce.
We have.
The studios equating to almost $50 billion and enterprise value that will close and the next few quarters.
Our platform is investing in gross private equity investments like yoga, and <unk> and the United States and in Europe, and Hutch Med and Asia.
As well as and large buyout transactions like Medline.
<unk>, the largest deal and more than a decade and our industry.
As I said, our platform is really firing on all cylinders and benefiting from a virtuous cycle, where strong performance and increased return of capital results and commitments being made to reinvest back into our funds that are organically.
<unk> growing and scale.
Let me finish with some comments on the macro and industry conditions more broadly for.
Trends are providing tailwind to everything we are doing as a firm.
The recovery of the global economy continues for the United States growing at high single digit rates and both China and Europe currently expanding mid.
Mid single digits.
With respect to our customers.
Larger Lps continue to increase their exposure to private capital as our asset class continues to outperform public indices and this current low yield environment.
By way of example, our own global carry fund portfolio has delivered 900 basis.
Points of outperformance versus public markets since the end of 2019.
And importantly, <unk> continue to see fewer and more strategic relationships for.
And for instance, more than 80% of the capital from our largest L. PS is now in 4 or more strategies with us it's for.
And at times the level it was a decade ago.
And as I stated before our client relationships are deeper and broader than they've ever been.
Despite these tailwind we remained mindful and acutely aware that the pandemic is by no means over around the world.
We closely monitor geopolitical.
Basis regulatory and policy risks the threat of inflation and market conditions.
So while we have momentum on our business and are confident and the factors. We can control we remain vigilant to avoid complacency we.
We believe Carlyle is well positioned to navigate the environment.
<unk> risk and capture.
<unk>.
Before handing the call over to Kirk, let me pull this all together and summarize it very simply by stating IMAX.
Im excited about the momentum we have across our entire organization.
And we're delivering great results and we are ahead of schedule.
We know if we invest well and continued.
<unk> to build and operate the firm well.
We will accelerate our earnings and generate sustainable growth for our shareholders.
Thank you for your time this morning, and now over to you Kirk. Thank you Kim and good morning, everyone.
And my remarks, I will address 3 themes that complement and expand upon and Qs comments.
Opportunity.
Our fee related earnings growth is accelerating producing near term results greater than our prior expectations.
Second.
And the spigot for generating larger realized performance income is wide open and is likely to remain so.
And finally, we're focused on converting.
For value performance income and excess capital into higher value and sustainable out for re platform growth.
So let's begin by discussing the accelerating growth our fee related earnings.
As Kim mentioned fundraise and is ahead of schedule for our largest and most successful.
For funds.
Our capital markets activity is strong and our platforms are well positioned for growth.
Over the next year or 2 we expect topline fee growth will drive higher FRE and margins, even with an expected increase in expenses.
During the second quarter we.
General and $143 million of fee related earnings and year to date FRE of $272 million increased 20% over 2020, when adjusting for $30 million of expense recovery and Q1 of last year.
The FRE increased owes both the topline growth and.
And continued strong focus on expense management.
Our previously expected 2021 FRE to be at a similar level for 2020, when excluding the expense recovery, but.
But now expect the first half of 2021, FRE run rate to be generally sustainable and the back half of the year.
While premature to predict 2022, we believe we are set up for even greater FRE growth next year.
Our confidence and near term FRE acceleration is underpinned by fundraising cap.
Capital markets activity and platform construction.
First fundraising act.
<unk> substantial not only and real estate, but various growth vehicles buyout funds CLO formation credit strategies, and alpha and thus platform activity.
Our strong first calls on our new opportunistic real estate fund is a great example of what we expect across our our platform as we close larger successor funds.
As a reminder, we recognized fee revenue when a fund starts its investment period, which may not be and the same period of the initial close.
Second we expect long term fee growth from our capital markets team assets.
And its reach and larger fund strategies come on line.
Transaction fees net of rebates.
And the $4 million across the firm and the first half of 2021 and increased more than 60% compared to 2020.
Our current run rate is about $30 million to $40 million annually just from capital markets activities and we believe we can at least double this over the next couple of years.
And finally investments, we have made and our people and platform allows us to scale with high incremental margins.
Over the next few years, we expect significantly higher topline growth, while compensation expense should grow at a slower rate.
And our progress can be seen on our FRE margin expansion to 34%.
For Twitter, although margins could be subject to volatility over the next several quarters as we continue to scale.
Let me now switch to the strong growth opportunity ahead and performance income.
We expect a very strong back half for this year and performance revenues are on pace to achieve our.
This quarter million dollars goal this year <unk>.
Far sooner than 2024, we.
We have line of sight to more than $500 million of incremental net realized performance revenues from already announced exits and other tech PPD, bountiful and meals, Nevada and others that are likely.
<unk> and the second half of this year.
As long as capital markets remains supportive I foresee us delivering and annual average of $800 million or so and net realized performance revenue for at least the next several years if not longer.
Averaging $800 million annually is about 25%.
To closer than our prior average of just under $650 million and net realized performance revenues that we generated from 2012 to 2017.
The remaining value in the ground of our traditional carry fund portfolio is at a record $116 billion.
And is.
And almost 90% higher than it was during our last realization cycle.
As we highlighted earlier net accrued carry hit a new record for $1 billion.
Reflecting a quarterly net increase of more than $800 million.
In addition to performance revenues, we generated $68 million.
<unk> largest investment income and the first half of 2021 on.
Most 80% more compared to the first 6 months and 2020.
Over the past decade, we have methodically invested into our funds and strategies and today have $1.9 billion and balance sheet investments that we believe will support a sustainably.
A higher level of investment income.
The last topic I wanted to discuss is how to flush out further and what <unk> alluded to in his earlier comments, namely how we think about converting lower value performance earnings and the higher valued fee earnings.
And there are several areas we are focused on.
First raising.
A real and co investing into larger funds.
Our balance sheet will continue to co invest as we scale our funds and while those investments should drive higher investment income over time larger fund sizes will help drive substantially higher FRE and the near term.
2.6.
Seeding new products, we're also seeding and launching scalable new strategies like real estate credit infrastructure credit and renewables amongst others.
And as these areas also attract outside capital that will drive higher top line growth and over time, increasing levels of fee related earnings.
Third providing.
<unk> capital to underwrite a growing capital markets business.
We've already seen a significant uptick in revenues.
And with various transactions on the horizon and our capital markets group increasingly integrated with our deal teams, we expect to see a sustainably higher level of revenues going forward.
And of course, providing capital for M&A.
We've largely been focused on growing our business organically, which we believe produces the highest return on invested capital for shareholders, but.
But we also see opportunities to Inorganically and Accretively build our business like we've done with aviation and Fortitude and the recent past and our focus will be on building new capabilities with a high degree of fee earnings.
During the second quarter, we also saw an opportunity to raise $500 million and junior subordinated debt with a 40 year term at attractive rates. We will use this capital to help with what I just discussed and.
And it positions us with near term firepower to continue to grow our platform.
And some we're right on track to grow our fee earnings.
And our distributable earnings while also investing and longer term growth.
Our portfolio is performing well and early feedback on fund raising is positive.
Our firm and people are firing on all cylinders and we're excited about what we can deliver for our shareholders over the next few years with that let me turn the call over to the operator for your.
<unk>.
Ladies and gentlemen, if you have any questions at this time. Please press star and then the number 1 on your Touchtone telephone and for your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Yeah first question is from the line of Ken Worthington with Jpmorgan.
Hi.
Good morning, and thank you for taking my questions on.
And maybe let's start on fund raising you set up the target of 130 billion at analyst day.
And the price is suggesting good investor feedback on your funds and the market and.
And both Q and Curt you both highlighted how things are doing much much better.
<unk>.
More funds, reaching their hard caps are expected to beat their hard hard caps.
Versus just their targets yet your expectations are on a $130 billion plus.
So maybe help us out what might be the upper end of your comfort zone.
Assuming that this consumer.
Instructive environment would persist.
And is 130 billion plus could that be a 150 is at 160 like how how high might that be if everything were to go.
Perfectly and you were to hit the hard caps on the majority of the funds that you expect to be.
Market over the next few years.
Hey, Ken it's Kew. Thanks here. Thanks for your question.
Look let's focus on the plus of the $130 billion plus.
And things are just go on great right now as you pointed out and market conditions are strong and we very much are ahead of schedule.
We're seeing real success and driving organic growth and our biggest and best established funds and I look that all funds are going to keep growing at the 40% to 50% rate that we've been seeing more recently, but having said that it's about <unk>.
Our performance and it's about the Lps.
And the view of us as a consistent trustworthy partner over time, it's about our ability to deploy well.
And it's about our ability to return that capital back to them and so this is a multiyear campaign.
And we've got several years ago, but we're really confident based on the reception that we've seen thus.
From the market.
With respect to the plus of that target that you pointed out and then finally I'd say look you know.
The trends, we're seeing with our Lps and the fact that the cross selling opportunities just continue to increase the fee.
Fact that.
The fund raising.
Thus far and for US it's happening fast and in other words velocity of fundraising is higher and all of this bodes well and I'm really proud and excited for our team, but it's early days, we have several more years to go but suffice to say the initial feedback is positive and we very much are focused on the plus.
Cycled the $130 billion plus target we laid out for you.
Okay. Thank you I tried to put you on a number but you know at least it was worth a try.
And then Q you suggested things are happening faster.
Raising investing and harvesting all all happening faster how much of the lifecycle of.
<unk> fund.
It is.
As compressed like what what is the lifecycle of a fund now versus what it might have been and the last cycle and this is compression purely cyclical and really just a function of a great environment or is there something more secular here.
And if.
For more secular.
Ultimately the dividend is still 25 cents, if if things are feeling so much better and feel like they're sustaining themselves.
Why not increase that twenty-five thanks.
Thanks.
Okay. Let me let me tackle the first part of your question first and I guess, the answer and AR and AR.
And at 50 way is yes to all the factors you laid out clearly there are cyclical reasons why things are happening great right now because of the current environment that we're in but there are also some secular and structural things happening and our industry.
Let's start first with just the change.
Change of the.
And the changes that are happening because of COVID-19 and because of technology disruption. The fact that entrepreneurs just want to stay private for longer. The fact that all types of companies, whether they are growth disruptors or large incumbents are approaching private capital to partner with us because.
Because we can help them make their companies better and we can help them accelerate their growth.
All of this longer term bodes well for the fact that our opportunity set and private and private equity continues to grow.
And a second.
Yeah. The speed is is it's accelerating.
There are changes to how deals get done these days because of the hybrid environment I personally think some of those will stick.
Post and I want to be careful in terms of even saying post pandemic book when we get through the worst of this I do believe you're going to see some of those changes stick because its just more efficient the way.
They also sees are handled these days and finally I think we as a firm because we're better connected because of the big investments we've made to build out teams deep sector expertise, we just have conviction and can move faster.
We have domain expertise, we have huge platform resources, we bring it to bear on.
On deals and it enables us to move quicker, while still having great investment judgment on.
On opportunities now finally, you marry that with the fact that when we raise our funds.
Typically we've as a as a rule of thumb have thought about investing our fund across let's say.
Wait for maybe 5 year time horizon, but that clearly has sped up.
Because of the opportunity set and increasing because of the demand for private capital increasing 5 has become for in some instances 3 years, maybe even sooner and certain high velocity asset classes like credit so the so the timeline.
Say, a flame to deploy a fund has in fact increased but look none of this matters. If you don't perform well.
We're focused on being the best investing for them. We can be we can drive great returns over the long term the fund raising will continue to be easy so let.
Well, let me let me just stop there.
<unk> respect to your dividend kind of and let me, let me ask Kurt to comment on that so count on dividends just as you'll recall what we've consistently said is we look at dividends first and foremost to make sure that fixed and sustainable I don't want fluctuations and definitely do not want on going down and do wanted to grow.
With over time, and what we've said there is we're looking to growth and fee related earnings and looking at that in arrears on an after tax basis.
And we all know we're reading the price for seeing what's going on and we'll probably see some increases and taxes, you've seen an increase and our own tax rate and so we're looking at all.
All of that on a after tax basis, but look I'm, feeling really comfortable about our FRE growth and feeling really good about the 800 million and and.
And we'll be assessing that in due course, but pursuant to the guidelines and I just laid out.
Great. Thank you very much.
Thanks, Kevin.
And next question is from the line of Alex Blaustein with Goldman Sachs.
Okay.
Great. Good morning, Thanks for and thanks for taking the question.
I was hoping you could spend a couple of minutes on your capital priorities.
Obviously carlyle was going to be generating.
A lot of cash flows and when the next couple of years as you enter the sort of <unk>.
I called for performance fees can.
Can you help us frame how this will be used.
And what are the areas of inorganic opportunities you might be looking at and if you were to use some of this cash to see the additional products at Carlyle and what are some of the areas of new investments Youre looking to deploy that capital.
Great.
Super spec, Alex let me I'll start on this 1.
So you really just taken off on what I, just said and in the prepared remarks, you're absolutely right that we're going to be accumulated and a fair amount of cash over the next few years, and particularly as we grow FRE and and the carry gains that we see really embedded and as well as the balance sheet investments.
That's come through.
And we've been focused on growing organically, which we believe is the highest return on invested capital for our shareholders and we see plenty of opportunity from doing that and quite frankly, the forecast that we gave at Investor day was really predicated on that organic growth and so what are we going to do here and the near term.
First we're going to do just what I said was we're going to invest into our larger funds.
We're going to seed new products things like real estate credit things like infrastructure credit things like infrastructure more broadly renewables. There is plenty of space in terms of new products for us to continue to seed and invest.
And drive growth. We're also our capital markets business look it's a natural adjacency, we see real growth there, but you have to also have the balance sheet capital to support those activities out you are and I know this most of all given where you're from so.
That's 1 of the areas, we're focused on and then last obviously.
Obviously, we'll take a look at M&A prices are high right now and so that's why we also like organic growth, but just as Q as outlined before we when things are going to make a difference we want things that will help us grow, particularly in our credit business, where we think that scale also helps and look we've not lost sight of insurance.
Other things that we're looking at but want to make sure that things fit and right and if you can give us the right ability to scale the firm.
Great Operator, I think we can move on.
<unk> for the next question is from the line of Glenn Schorr with Evercore ISI.
Hi, Thank you very much.
Maybe a very high class problem to have but if you look at all the performance revenues.
80, and 90% and continues to get per despite private equity because that's where.
The big bases, so curious yes.
If you even think about it that way in terms of balancing apple for them over time and and and.
And while we're on that topic, we could just touch on where you think youre at in and credit build out by by product.
Product distribution fees, or however, you want and slices.
Glenn Let me take a shot.
So look we've laid out our priorities really well in terms of growing earnings and focused on FRE focused on improving margins don't obviously want and be the lowest cost provider, we want and Goldman and best well, we think that that will deliver a higher distributable earnings for in terms of balance.
On the balance sheet right.
And not all AUR is necessarily equally profitable. So the way we really think about you know our growth is how to drive earnings first and foremost and.
And then what we're also looking at is with.
Sheet, and we have coming on and we think we can get very nice topline growth with respect to credit. There's a lot of growth. That's already occurred so credit. If you look at really the numbers from an AUM perspective as of June 30, and we're up about 22% and <unk>.
Over last year, and the credit business going from call. It 50 billion to 61 billion and total AUM and edition is very good top line growth about 10%.
Year to date over the prior year now whats confusing some of those numbers is what you are probably also seen as the app.
The thing and margin hasn't ticked up the way I think it will tick up and this is a business that we think we're going to double here in the next couple of years.
What's what's really happening now in terms of some of what Youre seeing on comparison remember and the first 6 months of last year, we had the fault and transaction generated a lot of transaction fees.
Fees as well from cost recoveries first half of last year, obviously not recurring in this quarter. Now second thing is you have a little bit of a drag from energy business and the distress business.
The energy business you all know is winding down and this is not the right time on the road from a distress play.
So we have a little bit of pressure, there, but the growth and our direct lending business for CLO business is really performing exceptionally strong aviation is doubling I mean things are really happen on on really and are doing very well and I'm really proud of that team and think that we're going to see some very nice growth.
And forward.
And then Glenn this is Dan as it relates to the accrual on your question on concentration look just by the way. These products have been put together youre going to see most of the performance revenues emanating from our global private equity platform.
Credit is much more of a fee business and then what I would say is if you.
On solutions from just a couple of years ago, where we had virtually zero net accrual that's up to about $250 million plus and within global private equity we have good diversity across the U S Asia Europe real estate and so we think about it more broadly even though we report.
Within global private equity a single segment Theres a whole.
Lot of strategies and there that make up that accrual. So it is diversified you will always see the majority of the net performance fees from global private equity, but keep an eye on solutions as well as that continues to grow.
On Cove point, Thank you I appreciate it.
And again to.
Ask a question. Please press Star then the number 1 on your telephone keypad.
Your next question is from the line of Adam Beatty with UBS.
Hi, Good morning, Thanks for taking the question wanted to ask about the capital markets business I appreciate the outlook. It looks like it's very strong on track to meet.
See you know the financial contribution objectives, just wondering you know and the semi early days.
There were any qualitative takeaways from how that business is going obviously the backdrop is strong.
Any evolution in terms of how you see the purpose of it and and the size and function you know 3 to.
And 5 years out for Carlyle and thank you.
And thanks for the question. So first we did some work here to really kind of refocus and energize the group and its really playing out well the business. Thus far is well say ahead of plan, we're seeing nice growth in and our activity.
<unk> as well as the transaction fees that we've been seeing we're already at a run rate of about $30 million to $40 million and.
Net net fees out of just the capital markets part of the business and I can see that growing very rapidly and b and a double that in the next couple of years if not sooner.
Sooner.
And 1 of the things that we've really focused on is making sure that we have the balance sheet capacity to support that growth and what's really nice about what's happened and as the team is engaged and across the entire platform. So much more integrated across everything we do both and credit as well as within.
The various private equity functions and so there our ability to capture the appropriate op.
<unk> out of our existing deal flow is fantastic and then look for the time being we're focused on our own business and our own deal flow before going out and doing things elsewhere, but.
And we've not lost sight of that opportunity as well.
I do think very early days very good on where we're headed.
Yes. Thank you Kurt that last part was kind of what I was curious about as well. So I appreciate that thanks again.
Yes.
Yeah.
Okay, and I'm showing no.
Questions at this time I will now turn the call back to Daniel Harris.
Thank you operator, and thank you everyone for listening on what I know is a very busy day should you have any follow up questions feel free to reach out to investor relations at any time, otherwise, we'll look forward to speaking with you again next quarter.
Yeah.
Ladies and gentlemen.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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