Q2 2022 Carlyle Group Inc Earnings Call

July 28, 2022

[music].

Yeah.

Good day and thank you for standing by welcome to the Carlyle Group second quarter earnings call.

All participants are in listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone.

Be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Daniel Harris head of Investor Relations. Please go ahead.

Yeah.

Thank you Liz good morning, and welcome to Carlyle's second quarter 2022 earnings call with me on the call. This morning is our Chief Executive Officer sung Lee, our Chief Financial Officer Kirk user.

Earlier. This morning, we issued a press release and detailed earnings presentation, both of which are available on our Investor Relations website at IR Dot Carlisle Dot com.

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.

We have provided reconciliations of these measures to GAAP in our earnings presentation to the extent reasonably available.

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 factors section of our most recent annual report on Form 10-K that could cause actual results to differ materially from those indicate.

Carlyle assumes no obligation to update any forward looking statements at any time.

Turning to our results for the second quarter, we generated $236 million in fee related earnings and $529 million in distributable earnings with de per common share of $1 17.

We produced net realized performance revenues of $271 million and our accrued carry balance remains at $4 3 billion.

We declared a quarterly dividend of $32 five per common share to.

To ensure participation by all those on the call. Please limit yourself to one question and one follow up and then return to the queue for any additional questions and with that let me turn the call over to our Chief Executive Officer <unk> <unk>.

Thanks, Dan Hello, everyone and thank you for joining us today.

Carlisle once again delivered strong results for the second quarter.

We continue to drive growth and diversify the earnings power of our business and importantly, our investment performance remains strong amidst the volatility and uncertainty in markets around the world.

All of this is a result of clear strategic priorities and the hard work of our teams globally.

We're in a much different environment as inflation rising interest rates and uncertainty affect the real economy and financial markets.

At Carlisle, we have been preparing for this complex and challenging environment, which is likely to continue in the near term.

We are focused on continuously assessing risk recalibrating valuations and capturing opportunities as we move forward.

The strength of our diversified platform, well constructed portfolios and over $80 billion of dry powder positions us well as we have deliberately built carlyle into a more resilient firm that is setup to adapt and manage through all types of market conditions.

We are a different firm today and better positioned than ever before as we drive forward from a position of strength.

Given the environment, we know that questions about our portfolio of top of mind. So allow me to address this topic before we get into the point, we'd like to discuss today.

Thus far portfolios across the firm continued to perform exceptionally well.

Our focus on investment excellence and the diversification of our platform are supporting the firm's relative outperformance with carlyle's aggregate carry fund portfolio appreciated 3% in the second quarter, while various public benchmarks were down 10% to 20%.

I'll provide some perspective and Kurt will drill into more specifics.

Our global private equity portfolio appreciated 2%.

Driven by strength in infrastructure, and natural resources, and real estate and flat performance in corporate private equity.

Throughout the GP segment.

Our overarching view is that we are well constructed and well positioned portfolios are.

Our approach has been always to invest in good assets and established companies led by strong management teams that have a differentiated path for growth and value creation.

As a result, we have avoided the sectors that have been hardest hit our portfolio is only 7% publicly traded.

And we are benefiting from the strong demand that continues for high quality private assets, even as public market multiples are contracting.

And importantly, thus far taken as a whole the topline of the companies in our corporate private equity portfolio continue growing at double digit rates, while maintaining operating margins.

Now turning to our credit portfolio, we're seeing resilience in the underlying performance of our assets and higher yields are driving better performance for Lps as most of our investment strategies benefit from higher rates.

At this moment.

Credit quality remains strong and we have not seen any notable pickup in duress or non accruals. Although we are closely monitoring our portfolio.

We actively manage all of our credit positions and are very focused on managing risk exposures and maintaining balanced risk adjusted credit quality throughout our portfolios.

Before I hand things over to Curt there are five important points to listen out for as he talks about the quarter.

First.

Our focus remains on driving FRE growth.

What we have done over the past several years to grow and change the nature of our FRE is quite frankly underappreciated.

Just this quarter, we delivered a record $236 million of FRE up more than 60% from last year.

We're on track to achieve our previously stated $850 million goal and FRE for the full year 2022.

It's important to understand the vast amount of our fee revenue is agnostic to asset marks or evaluations and is instead based on committed or invested capital.

Giving us greater visibility on the level of fees and sorry that we will earn.

Second our deliberate effort to diversify the firm is paying off.

Our earnings mix is more diversified and more resilient than ever before and it continues to grow because we have reshaped our business to capitalize on those areas, where we see attractive growth in the private markets.

As a result, the largest share of the largest share of our fee, earning AUM is now associated with global credit.

Furthermore, FRE contributed 50% of day in the first half of 2020 to making our earnings stream more balanced distributable earnings more predictable throughout different market cycles.

Third the firm's capital formation efforts are powering us forward, even during changing dynamics for fund raising.

Importantly, please listen for the impact of the 4% to transaction and how it sets us up for the future as total capital formation for the quarter was nearly $60 billion with the addition of the highly scalable Fortitude advisory assets under management.

This includes the nearly $10 billion, we raised in new capital from Lps, but more than half this amount from global credit and global investment solutions, even as we continue to race in the more traditional private equity funds.

Next the firm is operating from a position of financial strength.

We have a nominal level of net debt our dividend is comfortably covered by our sustainable FRE and our balance sheet is positioned to help us to continue to grow.

Add to this over $2 billion in investments and more than $4 billion in net accrued carry in our balance sheet today comprises over $16 per share and value.

Finally, and perhaps most importantly from my perspective.

We're executing against our strategic plan and delivering on what we told you we would do.

Compared to just two years ago, Carlyle has more diversified growing faster and more profitable.

My job as CEO is to make sure we stay focused on the right priorities develop our people and shape. Our culture. We are doing just that.

Putting all this together we believe we are positioned well to navigate through a period of increasing market uncertainty and complexity and have confidence in our ability to deliver long term earnings growth and shareholder value.

With that over to you Kirk Thank you and good morning, everyone.

As <unk> highlighted we delivered strong results this quarter driven by the solid relative performance of our funds increasing diversity of our earnings streams and the significant impact from our recently closed strategic transactions.

I'll focus my remarks on three areas.

First fee related earnings and overall distributable earnings.

Had a strong start to the year.

Highlighted in an increasingly diverse business mix and better balance between FRE and performance income.

Second our global investment platform performed well and we continue to have a record level of net accrued performance revenues.

And third our global credit business took a major step forward in assets under management and earnings power.

Continue to see opportunities for further growth and performance.

Let's begin by discussing the strength of our second quarter results and more broadly the first half of 2022 by highlighting a few important metrics.

Fee related earnings were a record $236 million in the second quarter up 60% year over year with substantial growth in global credit and global private equity.

Our fee related earnings margin reached a record 40% in the second quarter and 38% in the first half up from 33% and full year 2021.

Distributable earnings of $529 million increase.

Increased more than 34% from last year and our earnings stream reflects an improving mix with fee related earnings contributing 50% of distributable earnings in the first half of this year.

Digging into the second quarter FRE total fee revenue of $594 million.

Increased 40% year over year.

Ported by strong organic and inorganic management fee growth as well as higher transaction fees and fee related performance revenue.

Management fees comprised almost 90% of total fee revenue for the first half and increased 24% compared to the first half of 2021.

Included in our results this quarter are $19 million in catch up management fees largely associated with follow on closings in our latest U S buyout fund as well as several smaller GP funds.

We also benefited from strong transaction fees in global credit largely related to aviation and insurance solutions activity.

Transaction fees and catch up fees helped drive our record FRE margins. This quarter, though it is important to note that these fees are dependent on the pace of future investment activity and fundraising.

We also generated $35 million in fee related performance revenues in the second quarter and $80 million for the first half of the year.

Looking towards the second half of 2022 GP fee related performance revenue will likely be lower due to the construct of the core plus real estate fund, but will likely increase again in 2023.

Global credit fee related performance revenues should be relatively stable.

I mentioned last quarter that you would see a material step up in our quarterly fee related earnings and margin owing to our recent global credit transactions, notably C band, which closed on March 21, and Fortitude, which closed on April one.

And Thats exactly what the second quarter produced global credit FRE surged to a record $72 million.

Nearly triple last quarter.

<unk> management fee revenue from these transactions and a high level of transaction fees.

Global credits FRE margin also nearly doubled quarter over quarter to 42%.

While this number may vary quarter to quarter, we expect it to remain well above prior year margins.

Our overall <unk> mix continues to skew further towards a higher level of FRE, even as continued realization activity supports the production of net realized performance revenues.

Diversifying our earnings stream has been a deliberate effort and for the first half of the year FRE comprised 50% of pre tax distributable earnings.

Moving on in what is a complex environment, our portfolio continues to perform well as <unk> noted.

With 3% overall carry fund appreciation.

Our diverse global portfolio has been carefully constructed with high quality investments and together with persistent exit activity supported positive appreciation despite significant declines in public markets.

Broad based portfolio strength in infrastructure and natural resources was supported by higher energy demand and pricing.

And our real estate strategies portfolio construction and an active disposition pipeline supported strong valuations.

We also saw growth in several of our European based private equity strategies, notably Europe growth, partially offset by weakness in our public securities. The majority of which are held our U S buyout strategy.

As <unk> also noted earlier the portfolio is depreciation supported yet another record level of net accrued performance revenues at $4 3 billion.

This quarter's accrual was partially offset by over $270 million and net realized performance revenues more than double the level in the first quarter.

Our U S Asia, and Europe buyout funds and U S real estate strategy for the biggest drivers of our net realized performance revenue this quarter.

In total we produced nearly $400 million of net realized performance revenue in the first half of the year.

In addition, we have several transactions slated to close over the next few quarters that will support performance revenues and distributable earnings.

The size and diversity of our net accrued performance balance and the quality of our investment portfolio gives us reasonable confidence. We can we can generate an average of $1 billion of annual net realized performance revenues over the next several years.

Though market conditions will impact the actual level in any given year.

Moving on I want to close with some thoughts on our global credit platform.

Solid investment performance strong fund raising and our recently completed strategic transactions drove fee, earning assets under management to $116 billion.

More than double the level a year ago today, the global credit segment is our largest source of fee, earning assets under management.

And the recent transactions have provided significant scale to this business.

The transformation of global credit over the past handful of years is remarkable.

Our opportunistic credit strategy is moving from strength to strength as it increases its scale and employees, it's available capital in a market that increasingly needs assurance and flexibility.

Our structured credit business with $48 billion in assets under management. Following the addition of the <unk> assets is the global market leader.

They are a long term track record of credit outperformance and are positioning their portfolio to balance risk and reward as we head into in an increasingly complex environment.

Which provides us with significant conviction in the earnings sustainability in this strategy.

Fortitude manages almost $50 billion in their general account and our new advisory relationship with them positions Carlyle to scale considerably as 42 deploys their nearly $4 billion of excess capital.

And we have a growing businesses and real estate credit infrastructure credit direct lending and aviation and we expect these strategies to be significantly larger in the next few years.

Broadly credit quality in our funds remains good.

And we are pleased with the diligence of our teams as they manage these portfolios in a rapidly changing environment.

In some in a difficult market, we posted strong results.

And are well positioned to deliver a solid year of distributable earnings.

Our strategic transactions are performing well our teams are focused on managing their portfolio to deliver attractive performance for our fund investors.

And we have substantial dry powder to capitalize on opportunities as they emerge.

With that let me turn the call over to the operator for your questions.

As a reminder to ask a question you will need to press star one on your telephone please.

Please standby, while we compile the Q&A roster.

Our first question comes from Alexandra <unk> with Goldman Sachs. Your line is now open.

Hey, everybody. Good morning, Thanks for taking the question.

Can you maybe I was hoping to start with digging a little bit more into a performance trends, you're seeing particularly within corporate private equity within Carlisle, obviously very impressive mark this quarter in light in light of macro conditions and I. Appreciate the portfolio selection comment, but I guess, even good companies are facing higher costs and slower economic.

Conditions, and obviously lower multiples for the public market. So just curious how you're thinking about the offsets.

These factors that drove positive performance within private equity for you guys. This quarter.

And as you think about the exit environment in the ability to actually monetize some of these gains how you're thinking about that for the next couple of quarters.

Sure Alex Thanks for the question look it's clearly a complex market, but we're really focused on controlling what we can control, namely our investing and how we manage our portfolios.

But I think the right way and the best way to answer your question.

As I said in my opening remarks, we're more diversified than ever and let me spend a few minutes walking through our various businesses and why I think we're still well positioned with respect to our portfolios and portfolio quality.

Question implies so first of all in corporate private equity.

It's important to understand we've got a world class dominant business at scale.

But what's really important depreciate is that for several years now Alex we've been running slower growth in our investment cases, and importantly, virtually all of our investment base cases contemplated contraction of exit multiples. So thats, what I mean, when I say, we've been preparing for these types of environments now.

We've always been focused on investing in great companies with a view to create growth and fundamental operating improvements to drive our returns.

So when you put all of this together, we've got great constructed portfolios across all of our CPE strategies and they are diversified across sectors regions themes and vintages and it's really why we've been able to avoid the hardest hit sectors. We've avoided the high flying companies that don't generate any profitability.

So when you take a look at that portfolio that you referred to.

It's our corporate private equity portfolio at the topline has been growing at about 14%. This year they've been maintaining their operating margins given all of the operating improvements that I just.

<unk> referred to and so the value creation is really coming from growth in operating improvements, which has offset the contraction in the valuation multiples that we've seen in the markets.

And with respect to the exit part of your question look you can't have good exits if you don't have good companies.

Great exits start with great investing we pride ourselves on being a great investment firm with a great investment ethos and so when you pick good companies partner with them to create value in a fundamental way. It sets you up for the exits and it's just a matter of how you decided to exit given what the <unk>.

<unk> and the conditions.

<unk>, so let's taking a step back we're at scale, we're very well diversified in corporate private equity we've got superior portfolio construction. Thus far has performed relatively well because of the operating performance and the fundamental nature of our value creation and who knows what the future has.

In store for everyone moving forward, but I like the way we are positioned as we are heading into this current environment.

Great. Thanks for all the detail there.

Thanks, Alex.

Thank you.

Our next question comes from Craig Siegenthaler with Bank of America.

Good morning, Kurt I hope everyone's doing well.

Hey, good morning, Greg.

So we were looking to get an update on fund raising so how crowded does the current backdrop feel to you, especially in private equity and especially with U S pension plans beyond the denominator effect and then how much of this is offset by new strength from sovereign wealth funds given there.

Stronger cash flows from higher energy prices.

Hey, Craig I'm going to start and just kind of level set a little bit and then Q will add some color. So let's just kind of recall, where we were 2021 was a great year for US we raised $51 billion two thirds of that game in credit real estate and our solutions business infra.

Structure renewables.

So really diverse in terms of our.

Capital raised and this year is kind of the same we expect to have 20 or more strategies in the market. This year again, emphasizing the diversity of the platform and we're off to a good start $19 billion raised in the first half $10 billion in this quarter and what we're seeing from Lps as theyre continuing to entrust us with an increasing amount of capital.

Which is really important in the current environment Q.

Thanks Kurt.

Hi, Craig look no doubt the fundraising market is challenging right now and this could persist for a bit as lp's adjust to market dynamics and it's most.

Challenging in the corporate private equity segment of the market, but I want to refer you to some of that purchased said, we've got 20 or more strategies in the market and it's important and let me refer you to my opening remarks about the diversity of our platform and the <unk>.

The benefits of that over half of our fund raising now is coming from global credit infrastructure renewables and solutions, where we're continuing to see strong and healthy demand.

And.

Want to broaden the conversation to that of capital formation and you. Just you just heard US talk about it just this quarter, we added $50 billion in perpetual capital from Fortitude and so I think the point being that there are multiple ways, we raised capital to drive the growth of Carlisle.

<unk>.

We are now at about $260 billion of.

AUM, which is which is a record and.

While there are some challenges in the private equity markets, which we expect to continue for a bit.

The breadth and the diversity of our platform gives us a lot of fund raising opportunities, especially when you broaden the lens to think about our capital formation across all of our strategies.

Thank you guys.

Thanks, Greg.

Thank you.

Our next question comes from Chris Kotowski with Oppenheimer. Your line is now open.

Hi, Yes, good morning, and thank you I wanted to.

Get a bit more color on what Curt said about fees and private equity.

Coming down in the second half versus first half or second quarter.

Is that a function of.

Just lower.

Catch up fees or.

Is that a function of realizations coming from from funds or what's driving that.

Hey, Chris Good morning, and thanks for the question so to be specific on what I called out was fee related performance revenues. So let me talking about in global private equity and CP in particular.

I should say real estate in particular is our core plus real estate fund. This has nothing to do with performance I mean, the fund has done really well continues to do really well both in terms of size attractiveness et cetera.

And but what we see just based on how it's constructed that it essentially generates incentive fees based upon capital when it was deployed so three years ago.

Second half of the year three years ago, lower amounts of deployment them and so the incentive fees that crystallized offer that are going to be a little bit lower we expect here in the second half and so I wanted to call that out for everybody, but I think that all solves itself over time and I would point you to.

Many footnote it's I come back on page 25 of our earnings release that shows that there is $64 million of net accrued incentive fees related to this strategy and.

Interestingly, that's about the same number last quarter, even though we had about $12 million or so net of compensation realized here in the current quarter. So it's essentially flat and strong and so we've got good visibility in terms of how that particular product will perform going forward with respect to catch.

Management fees, yes.

Dip here, probably in the third quarter hard to predict exactly kind of how it plays out over the balance of the year more broadly outside of the GP segment. We do have some transaction fees that were good in this quarter and.

It's hard to predict exactly when they will come in but I feel good about our $850 million of FRE for the full year and Thats.

I think is the key that you really want to focus on.

Okay. So it's not the base management fee and it's not the catch up fees and just as a reminder, how long do you have built your breakfast.

The catch up management fees do impact there was $19 million of catch up management fees in that base.

Based on fund raising that'll play out but in order to be able to say that a 50 year I'm confident in our growth in core management fees and management fees make up 90% of our fee revenues and they are performing really well and incredibly sticky.

Okay great.

Is it for me thank you.

Thanks, Chris.

Our next question comes from Robert Lee with <unk>. Your line is now open.

Great. Thanks, Good morning, everyone. Thanks for taking my questions maybe.

First one just.

So from quarter to read.

Can we I think you called out.

There is about $4 billion.

Available capital could you kind of.

Well, maybe two things there number one what would that translate into an asset should we assume something like 10 to one.

Well, maybe two things there number one what would that translate into an asset should we assume something like 10 to one leverage to that potentially.

And then what's the current environment.

<unk> offering or impacting the.

Reinsurance opportunity with <unk> in the marketplace.

Theres different businesses that.

Present more opportunities than others, so any color there would be great.

Helpful. Thanks.

Robert Thanks for the question why do we do this curmudgeon tackle the first part of the question and I'll try to tackle the second yeah. So Rob I think you got it right.

Picked up on really an important metric they've got nearly $4 billion of excess capital that Ford is who's going to use to continue to grow its business and as it does that youre right that that translates into the 10% 10 to 15 times from a size standpoint, so as we've previously.

I think in Fortitude is in great position to double its business over the next handful of years, So let's say somewhere over the next five years, they are well positioned without really doing a whole lot else to double the business.

Yeah, and Robert Let me just add on to that so so.

First fortitude is performing very well and we are exceptionally happy with how that platform has developed its got double digit ROE at the moment reserves are in great shape and as Curt mentioned and you rightly pointed out it's got about 4 billion excess capital which is incredible.

Our capital base to support future growth as you know as fortitude grows because of our aligned strategic advisory arrangement as fortitude grows Carlisle benefits through our investment platform.

With respect to the areas and sources of future growth.

The current environment of volatility and higher rates actually.

Leads us to believe there is going to be more deal activity because what that volatility does is it puts pressure on insurance companies to manage their capital more effectively.

And as a result, they are going to be much more inclined to want to.

Sure.

Divest and to sell legacy liabilities portfolios that are capital consumptive or enter into reinsurance transactions with folks like fortitude. So at the moment our pipeline is very busy very robust.

You've seen us announce.

Deals with Prudential with T&D in Japan, and there are lots of other areas for us to continue to grow.

Via reinsurance, but also scaling up via acquisition. These types of things are not predictable month to month or quarter to quarter.

But.

As I look out over the next several years.

Excess capital and the momentum that Fortitude has it leads me to believe you're going to see real scalable growth coming out of fortitude in the years to come.

Great, Thanks, and maybe as a quick follow up Kurt.

Thank you guys had guided to $850 million of FRE for this year can you maybe just update us on your thoughts around that your comfort level with that.

The reasonable goal.

Yes.

Firm that in his prepared remarks, and we feel very comfortable with the $8 50.

And again the business is performing well and so I think that's a good target and a good expectation for us.

Great. Thanks for taking my questions.

Our next question comes from Ken Worthington with Jpmorgan.

Hi, good morning.

Q a couple of questions on inorganic growth.

Has the environment for inorganic growth change given market conditions.

And then maybe there had been a gap between public and private market valuations.

For alternative asset managers, presenting a nice arbitrage opportunity.

For public market buyers.

That arbitrage I think narrowed.

Private market valuations come down with public market alternative asset manager valuations and ultimately what is your outlook here today for the second half of 2022 into 'twenty three.

For executing the inorganic.

Of your growth strategy.

Alright, let me let me take the first part of that question, which is the <unk> and then maybe Kirk can jump in and give some color as well on your fulsome question with respect to inorganic growth, let me take a step back.

Our corporate development done very strategically and thoughtfully is absolutely one very important element as we continue to diversify our platform.

You've seen us do this.

And it has been done to great success. Thus far however, we're going to be very disciplined about it there is no quota or budget or timetable.

That we're on we're going to be very measured and deliberate and this type of environment may create opportunities.

And we are very carefully.

But the environment has to bring but also doing it from a perspective of where do we want to build out and our platform and I've told you in the areas that most likely would represent areas for continued growth would most likely be in.

Credit in our solutions and our infrastructure.

Platform.

But.

The big bigger theme, though that needs to be appreciated is the criteria that we're looking for are strategic adjacencies.

FRE intensive.

Ideally more perpetual capital oriented high.

Highly scalable big markets Big strategies for.

Where things can move the needle over time for us. So these are the types of criteria. We're looking forward to the extent that something fits that bill, yes, we would be willing to move forward, but like I said, no quota time pressure or anything imminent that.

I want to talk about Kurt yes, thanks, Ken.

And thanks for the thoughtful questions from a valuation perspective.

Talking here about <unk> and possible opportunities from us from an acquisition standpoint, and continuing to build inorganically and similar to what we see kind of in our own portfolio. It really comes down to the quality of the asset that you're looking at and really good quality assets those.

<unk> demands are still really high and those things that are lacking in attribute obviously get a lower value and are under more pressure now and so as you think about it in terms of what we're looking at we like things that have lots of FRE and with great margins, we like things that have a great <unk>.

Growth trajectory, we like to see can execute this on their own or are they deficient in their ability to execute.

Are they scaled and once their infrastructure and technology et cetera, how is that kind of look or are they missing and if they are missing in those things they get a lower.

The ability to ask for an amount is lower than where it can execute on all of these things. So look we'll often kind of look at things that only possess some of the attributes and then the question is can we supplement it and get an arbitrage advantage on that economy as you pointed out in our own analysis. So look it's the it's the whole.

Full scale I mean, but it's.

Continue.

Continuous discovery process between buyer and seller.

Awesome. Thank you.

Okay.

Thanks, Ken.

Our next question comes from Michael Cyprus with Morgan Stanley .

Hey, good morning, Thanks for taking the question I just wanted to come back to some of your early commentary on the call here, maybe just for some on the fund raising commentary just around a more challenging backdrop for raising in private equity just curious how you see that potentially impacting carlyle's own outlook for raising in corporate private equity just in terms of magnet.

<unk> and timing does have an impact there at all and then to your comments on the strong portfolio appreciation in the quarter, but just given the tougher macro backdrop here just curious how you see that impacting the realization outlook into the second half of the year as compared to the $390 million that you generated in net realizations in the first half.

Thank you.

Hey, Mike It's Q1, only why don't we try this curt when you want to take the first part and I'll take the second sure. So my vote on fund raising again theres good momentum.

As we start this year for all the things I've already said.

<unk> $19 billion raised.

20 different strategies and having very good success.

On a multitude of fronts youre, absolutely right that the world has changed in particular around some of the traditional private equity strategies and that's fundamentally going to result in some of those raises taking longer in general and maybe not raising the same amounts that they would have otherwise.

<unk> in a different environment all of that said I still like our play I still like what we're doing and I still like our momentum.

Yes, and with respect to your second question on exits.

Look I mean, the general M&A environment today, the state of the equity capital markets. One would lead one to think that realizations would dropdown significantly, but you got to keep in mind, how big our portfolio with how broad it is how diversified it is and.

And we've had $4 3 billion accrued carry in place for several quarters now and there are lots of transactions that were signed up.

Several quarters ago.

Three quarters ago that continue to close.

As we play out the rest of this year.

<unk>.

So number one that gives us a lot of line of sight, which is why Curt in his comments was fairly comfortable that.

Year to year it'll.

It'll be about $1 billion worth of net realized performance fees give or take for market conditions and timing and the vagaries and whatnot, but the size and breadth of our portfolio gives us that comfort to say that I would also state.

And just want to reaffirm what I said earlier.

To Alex's question, we have great.

Portfolios that have been constructed in our investment approach is always to pick out what we believe are great companies with real differentiated plans for value creation driven by fundamental.

In fundamental ways growth and operating improvements.

I just wanted to point out 80% of the IRR is in carlyle's corporate private equity portfolio historically are driven by growth.

And operating improvements not by leverage and multiple expansion just gives you a sense for the nature of our value creation because of the way we do things in our investment ethos, we feel very good about the quality of the companies that we have in portfolio, which of course, then leads to good exit outcomes.

Thus far this year, despite the challenging markets in the market and the valuation multiple contraction that you've referred to the.

Sales of our private assets have been at very good prices.

Which reflects the nature of these companies and the quality of these assets.

So we feel pretty good about the construction of our portfolio the realizations to date.

Indicate.

<unk> breadth and good quality and good portfolio construction and longer term.

If we can keep this up I think we are pretty confident in what Curt said, which is about $1 billion of year a year in terms of net realized performance fees coming out of our very substantial $4 3 billion of accrued carry.

And just add onto that Mike I mean, you heard the confidence and what <unk> was saying about the portfolio and we've been seeing a lot of activity a lot of discussions. So good exits here in the quarter, we've got a good pipeline of assets.

And sitting here today My bet is the second half is actually stronger than the first half.

Not to the same level. It was last year of course, but I think the second half from a carrier production perspective.

I don't have a perfect crystal ball, but I think the second half will be better than the first half.

Great. That's super helpful. I'm hearing a lot of confidence in the pipeline and the portfolio of the receivable I guess would you be surprised if you hit the $1 billion. This year on the net carry realized investor.

Investment realized carry.

Look I mean, the portfolio is incredibly well setup I've told you kind of it I think the second half is going to be better than the first half so.

The.

Can we do really well sure can we missed it a little that's always possible. So it's hard to give you an exact number.

Okay. Thanks, so much I appreciate it.

Our next question comes from Glenn Schorr with Evercore ISI.

Hello, there thanks.

So just just came out obviously, but we've been talking about this for years. So quick question on management and sure. It seemed like they struck a clean energy deal and part of the pay for is carried interest.

Sure I am not alone when I got a ton of questions already this morning, I know we've talked about in the past I think it would be tough for people to hear from you.

Part of what's it mean for your portfolios and then most importantly stocks right now.

What does it mean anything for the shareholders, whose issuing assuming higher carried interest taxes goes great. Thanks.

Hey, Glenn Thanks for the question look I mean.

This news just came out last night, there's a long way still to go on in all of the details aren't yet our teams are on it looking at it and research and it just like you would expect but it's really premature for us to comment on it.

Look generally in terms of how our people are tax that we got people all over the world subject to all kinds of different tax rates.

That's not kind of changes in local taxation doesn't affect kind of our corporate play and we're already a.

C Corp.

Full fully loaded corporate tax provision.

Maybe I wanted I know it just came out but I know, we've also talked about it for years.

I think the shareholders.

101 thing no matter what the rules are.

Is the public shareholder on the hook for a higher carried interest costs.

Is that the employee getting paid in cash.

That's what I'm getting.

Amit.

Already our carry is already fully tax on the corporate side.

So.

Capital gains rates arent, it's not kind of we're paying on essentially a fully loaded ordinary income tax rate on our carry.

I appreciate that that's the point I want to get across thank you.

Last quickie is.

You see all these hung deals some of US cover all the big banks to forget that they took mark says the music stops.

They are still holding on to a lot of inventory there is a lot of leverage loans hung out there.

Coincides with the wider bid ask I'm just curious just what does that mean to you is that fully incorporated in your comments. So far on this appointment of monetization is there any other.

Does that that leads to good or bad things for you. Thank you so much.

Hey, Glenn it's Q I'll handle that question I think it's important to take a step back and put the current situation in perspective and compare that to maybe what we're all remembering with what.

What happened right after the great financial crisis set in and right now I think.

My Best guess is there's probably $80 billion of.

Hung loans or backlog today in the system.

That compares to if you go back a bit $325 billion, which is the comparable number back at the time of the great financial crisis, but I think what's really important to appreciate is that the entire leveraged.

<unk> market is 3% to four times bigger.

So not only is the absolute amount much smaller, but the total market is much bigger and on top of that.

My view is that our banks and our partners at all of our banks.

They are well capitalized they are well run so yes, there is.

Our backlog today that they are trying to move off their books I have no doubt that's going to happen in time.

It is a much smaller issue and headache now than it was.

At the CFC.

And it's just a matter of time before this clears out.

And hopefully activity resumes.

Thanks Kew.

Our next question comes from Robert <unk> with Bank of Montreal.

Great. Good morning, Thanks for taking my question.

Hoping you could provide an update on the solutions business, how do you see activity that developing in the coming quarters and why.

The dislocation youre seeing in the markets translates into potential upside for that business and can you also update us on potential fundraising opportunities and solutions and pipeline of new products. Thank you.

Let me start maybe Q will add in so so look the solutions business, we remain optimistic and bullish there lots of good things happening.

As I said I'd, probably last quarter given that there is a couple of things to keep in mind. It is still a little bit of a stair step business. So as this cycle.

Cycles of funds come back to market. It grows a little bit more in stair step second that.

That business has made real progress in terms of improving its performance in margin to get you got hurt a little bit this quarter in terms of FX. It's one of the places where we're probably a little bit more exposed to FX because most of that business a lot of it is denominated in.

Euros, and the like and so as the dollar strengthens its hurt us a little bit on some of that.

But overall trajectory is good there is also a white space there that they are taken advantage of and the potential to add new products that they are very much focused on and so looking forward to some of that that will take some time to really play out but it gives me a lot of confidence in long term growth and I think that's where this business can go and then laugh I'll simply say that the secondary.

Free market, let me now is a great time for it and so.

Continue to take advantage of that and play well, they're a very well known player Alpha Linzess has done a great job their knowledge of the data and of the market is fabulous their performance here in the quarter aided a little bit here. It helps us it aided a little bit by FX, but still remains very strong and their knowledge of what's happening very good.

So we're well set up there, especially for the long term.

Yes, I don't have much to add Curt other than if you string together a few of these questions.

Volatility the denominator effect that somebody mentioned on a previous question.

All of this leads our Lps to want to optimize reconstruct.

And tailor their very large alternatives portfolios.

And that need that necessity for the Lps to do that really.

Runs right into into the sweet spot of what ALP invest is designed to help our Lps do.

So whether it's secondaries, whether its single asset.

Strategies, whether it's co investment strategies.

<unk> is very well positioned as a market leader to take advantage of this more broad secular trend that all of this volatility all of the multiple contractions in the swings you're seeing.

<unk> needed to optimize and tinker with their portfolio at large levels and that I think is going to continue for several years to the benefit.

Of our App and desk platform.

Okay.

We have a follow up question from the line of Alexander <unk>. Your line is now open.

Hey, thanks, so much for the follow up again.

Wanted to go back to the FRE dynamics, you've described for this year and it's really nice to hear obviously, the reaffirmation of the $850 million of FRE for.

For 2022, but as you think about carlyle's growth algorithm for FRE beyond this year, obviously, you're going to get the benefit from annualized <unk> from some of the deals and kind of the big flagship fund raising so that will help but curious how you would think about growth in FRE. Besides these tailwind for 2012.

Three I understand it's kind of early don't expect you guys to have full guidance out, but just as a framework of how to think about beyond some of these annualized Asian dynamics.

Alex I'll start and <unk> may add.

Add in here. So look we've done really well in terms of growing the business, especially over the last several years.

We've taken FRE, if you think about over the last five years, we've more than tripled fee related earnings.

If you do the math, that's about a 30% CAGR over that time period.

At the 850, we'll end the year up about 40% over last year.

Market picture.

Markets everything we're reading and what we've experience would say that the <unk>.

Private markets will go from about a $10 trillion dollar size to about double that over four or five years, which would imply about a 15% CAGR if that all happens we'll be right there with it I mean, our brand our diversity our strength of performance really sets us up to to really benefit from all of those <unk>.

And I think that we can do better, especially as we use our balance sheet and and grow new products, there's more things that we can do but.

To be determined in terms of kind of how all of those things shape up over time, and we'll see how it plays but I like where we've been and what we've been able to do and we remain focused on growing the business.

Yeah, Alex let me.

To give you a few thoughts and it ties into the fact that we have deliberately diversified our platform to create.

Meaningful platforms that can continue to scale growth and give us many avenues to drive growth in earnings over time. So just taking a step back just wanted to remind you. Obviously, we have a world class dominant corporate private equity business, it's global in scale it cuts across all.

<unk> and.

And I've got no doubt that business will continue to motor along.

In addition to that we've now supplemented by organically and with some inorganic help we've built a great credit business. It is now the fastest growing part of our business. It is a more scalable asset class than private equity and even within credit we see white space in areas like infrastructure.

Real estate credit to continue growing and just want to remind you. We've had great success in our opportunistic strategy, which we started from scratch and our aviation platform has more than doubled since we bought it. So credit is a great platform that we believe still has real secular tailwind, especially.

As I have noticed our Lps continue to allocate away from traditional public fixed income into private credit and especially since we continue to see inroads of private credit solutions.

From that of the banking system.

The third major business, we have setup is now our infrastructure and renewables business, which I believe will really benefit from the secular tailwind of energy transition, but also the significant investment dollars around the world that have to go to improving infrastructure, whether it's <unk>.

Digital infrastructure hard infrastructure countries are going to have to be rebuilt you are talking about significant amounts of capital that's going to be required in infrastructure to support energy transition.

With the creation of resilience on a regional level.

In our industrial complex, so theres going to be a lot of money and a lot of growth in infrastructure. Then we just talked about our solutions business ALP invest as our industry leading platform.

As the alts industry grows this just going to be even more need for <unk> to help our Lps with our portfolio management solutions we.

Talked earlier about fortitude.

$50 billion.

Of assets already.

It's got excess capital that is set up really nicely to scale and grow.

And then don't forget we have set up a capital markets business, which as our deal activity continues to pick up across our platform will continue to drop incremental.

Fees to our bottom line. So all of that has been set up over the past few years.

It is a much more diversified platform it creates a much more resilient.

Earnings base, but we have lots of areas by which to grow moving forward and thats, even before we talk about corporate development and inorganic initiatives, which obviously over the past couple of years and the selective ways. We've done it had been very select successful and additive. So if you marry.

<unk> thoughts bigger picture, where the industry is going and then if you marry that with what we've been doing to execute against our strategic priorities and set up a diversified platform for growth.

Kind of like the way, we're positioned to keep driving this firm moving forward.

Great. Thanks, Thanks, very much again.

We have a follow up question from the line of Craig Siegenthaler. Your line is now open.

Thanks for taking the follow up.

Im assuming this is not an issue just given your commentary on the resilient credit quality in your global credit business, but I'm curious in terms of how your CLO managers fee deferrals work.

And can you help us frame the risk that you might have a decline in management fees, if we enter a severe economic recession.

Hey, Craig Thanks for the question look we're now the largest player in the CLO space and that gives us a lot of opportunity and strength.

The portfolio is exceptionally well positioned and the team has been incredibly active in terms of how to position the portfolio for these challenging times. So they traded about $9 billion buys and sells across the platform here in the second quarter.

And with the goal of reducing exposure to industries that had higher commodity costs or a little pricing power. So it was all about making sure that we really kind of positioned it well for some potential rough rough waters as a result, the risk metrics look really good.

Our exposures on Triple CS are below industry averages in the index the quality of the portfolio on all of the basic indexes that have scored well an a rating really well from a quality perspective, our defaults continue to be below market averages.

We expect some kind of increase in that but the underlying cushion in the overcollateralization tests is strong so we feel really well positioned and as long as that remains so which we currently expect it to be there is not really the risk in terms of any of the sub fees shutting off.

The portfolio is well positioned and hence the confidence you have heard in our tone.

Thank you Kurt.

That concludes today's question and answer session I would like to turn the call back now for closing remarks.

Thank you everyone for listening on what I know is a very busy day. If you have any other follow up questions feel free to reach out to investigations, although as we look forward to talking with you again in the fall. Thank you.

This concludes today's conference call. Thank you for participating.

Now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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[music].

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Sure.

Good day and thank you for standing by welcome to the Carlyle Group second quarter earnings call at.

At this time, all participants are in listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Daniel Harris head of Investor Relations. Please go ahead.

Thank you Liz good morning, and welcome to Carlyle's second quarter 2022 earnings call with me on the call. This morning is our Chief Executive Officer sung Lee and our Chief Financial Officer Herb user earlier.

Earlier. This morning, we issued a press release and detailed earnings presentation, both of which are available on our Investor Relations website at IR Dot Carlisle Dot com.

This call is being webcast and a replay will be available on our website.

We have provided reconciliations of these measures to GAAP in our earnings presentation to the extent reasonably available.

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 factors section of our most recent annual report on Form 10-K that could cause actual results to differ materially from those.

<unk> Carlyle assumes no obligation to update any forward looking statements at any time.

Turning to our results for the second quarter, we generated $236 million in fee related earnings at $529 million in distributable earnings with de per common share of $1 17.

We produced net realized performance revenues of $271 million and our accrued carry balance remains at $4 $3 billion, we declared a quarterly dividend of $32 five per common share.

Thanks, Dan Hello, everyone and thank you for joining us today.

Carlisle once again delivered strong results for the second quarter.

All of this is the result of clear strategic priorities and the hard work of our teams globally.

We're in a much different environment as inflation rising interest rates and uncertainty effect, the real economy and financial markets.

At Carlisle, we have been preparing for this complex and challenging environment, which is likely to continue in the near term.

We are focused on continuously assessing risk recalibrating valuations and capturing opportunities as we move forward.

The strength of our diversified platform, well constructed portfolio and over $80 billion of dry powder positions us well as we have deliberately built carlyle into a more resilient firm that is set up to adapt and manage through all types of market conditions.

We are a different firm today and better positioned than ever before as we drive forward from a position of strength.

Given the environment, we know that questions about our portfolio our top of mind. So allow me to address this topic before we get into the point, we'd like to discuss today.

Thus far portfolios across the firm continued to perform exceptionally well.

Our focus on investment excellence and the diversification of our platform are supporting the firm's relative outperformance with carlyle's aggregate carry fund portfolio appreciated 3% in the second quarter of various public benchmarks were down 10% to 20%.

I'll provide some perspective and Kurt will drill into more specifics.

Our global private equity portfolio appreciated 2%.

Driven by strength in infrastructure, and natural resources, and real estate and flat performance in corporate private equity.

Throughout the GP segment.

Our overarching view is that we are well constructed and well positioned portfolios.

Our approach has been always to invest in good assets and established companies led by strong management teams that have a differentiated path for growth and value creation.

As a result, we have avoided the sectors that have been hardest hit.

Our portfolio is only 7% publicly traded and we are benefiting from the strong demand that continues for high quality private assets, even as public market multiples are contracting.

And importantly, thus far taken as a whole the topline of the companies in our corporate private equity portfolio continue growing at double digit rates, while maintaining operating margins.

Now turning to our credit portfolio, we are seeing resilience in the underlying performance of our assets and higher yields are driving better performance for Lps as most of our investment strategies benefit from higher rates.

At this moment credit quality remained strong and we have not seen any notable pickup in duress or non accruals. Although we are closely monitoring our portfolio.

We actively manage all of our credit positions and are very focused on managing risk exposures and maintaining balanced risk adjusted credit quality throughout our portfolios.

Before I hand things over to Kirk there are five important points to listen out for as he talks about the quarter.

First.

Our focus remains on driving FRE growth.

What we have done over the past several years to grow and change the nature of our FRE is quite frankly underappreciated.

Just this quarter, we delivered a record $236 million of FRE up more than 60% from last year.

We are on track to achieve our previously stated $850 million goal and FRE for the full year 2022.

It's important to understand the vast amount of our fee revenue is agnostic to asset marks or valuations and as instead based on committed or invested capital, giving us greater visibility on the level of fees and FRE that we will earn.

Second our deliberate effort to diversify the firm is paying off.

As a result, the largest share the largest share of our fee, earning AUM is now associated with global credit.

Furthermore, FRE contributed 50% of day in the first half of 2020 to making our earnings stream more balanced distributable earnings more predictable throughout different market cycles.

Third the firm's capital formation efforts are powering us forward, even during changing dynamics for fundraising.

Importantly, please listen for the impact of the 4% to transaction and how it sets us up for the future as total capital formation for the quarter with nearly $60 billion with the addition of the highly scalable Fortitude advisory assets under management.

Next the firm is operating from a position of financial strength.

We have a nominal level of net debt our dividend is comfortably covered by our sustainable FRE and our balance sheet is positioned to help us to continue to grow.

Add to this over $2 billion in investments and more than $4 billion in net accrued carry in our balance sheet today comprises over $16 per share and value.

Finally, and perhaps most importantly from my perspective, we are executing against our strategic plan and delivering on what we told you we would do.

Compared to just two years ago, Carlyle has more diversified growing faster and more profitable.

My job as CEO is to make sure we stay focused on the right priorities develop our people and shape. Our culture. We are doing just that.

With that over to <unk>, Thank you and good morning, everyone.

As <unk> highlighted we delivered strong results this quarter.

Driven by the solid relative performance of our funds increasing diversity of our earnings streams and the significant impact from our recently closed strategic transactions.

I'll focus my remarks on three areas.

First fee related earnings and overall distributable earnings.

Had a strong start to the year.

Highlighted in an increasingly diverse business mix and better balanced between FRE and performance income.

Second our global investment platform performed well and we continue to have a record level of net accrued performance revenues.

And third our global credit business took a major step forward in assets under management and earnings power and we continue to see opportunities for further growth and performance.

Let's begin by discussing the strength of our second quarter results and more broadly the first half of 2022 by highlighting a few important metrics.

Fee related earnings were a record $236 million in the second quarter up 60% year over year with substantial growth in global credit and global private equity.

Our fee related earnings margin reached a record 40% in the second quarter and 38% in the first half up from 33% and full year 2021.

Distributable earnings of $529 million increase.

Increased more than 34% from last year and our earnings stream reflects an improving mix with fee related earnings contributing 50% of distributable earnings in the first half of this year.

Digging into the second quarter FRE total fee revenue of $594 million increased 40% year over year supported by strong organic and inorganic management fee growth as well as higher transaction fees and fee related performance revenue.

Management fees comprised almost 90% of total fee revenue for the first half and increased 24% compared to the first half of 2021.

Included in our results this quarter are $19 million in catch up management fees largely associated with follow on closings in our latest U S buyout fund as well as several smaller GP funds.

We also benefited from strong transaction fees in global credit largely related to aviation and insurance solutions activity.

Transaction fees and catch up fees helped drive our record FRE margins. This quarter. So it is important to note that these fees are dependent on the pace of future investment activity and fundraising.

We also generated $35 million in fee related performance revenues in the second quarter and $80 million for the first half of the year.

Looking towards the second half of 2022 GP fee related performance revenue will likely be lower due to the construct of the core plus real estate fund.

We'll likely increase again in 2023.

Global credit fee related performance revenues should be relatively stable.

I mentioned last quarter that you would see a material step up in our quarterly fee related earnings and margin owing to our recent global credit transactions, notably see Bam, which closed on March 21, and Fortitude, which closed on April one.

And Thats exactly what the second quarter produced.

Global credit FRE surged to a record $72 million nearly triple last quarter or in the management fee revenue from these transactions and a high level of transaction fees.

Mobile credits FRE margin also nearly doubled quarter over quarter to 42%.

While this number may vary quarter to quarter, we expect it to remain well above prior year margins.

Our overall <unk> mix continues to skew further towards a higher level of FRE, even as continued realization activity supports the production of net realized performance revenues.

Diversifying our earnings stream has been a deliberate effort and for the first half of the year FRE comprised 50% of pre tax distributable earnings.

Moving on in what is a complex environment our portfolio continues to perform well as Q noted with 3% overall carry fund appreciation.

Broad based portfolio strength in infrastructure and natural resources was supported by higher energy demand and pricing.

And our real estate strategies portfolio construction and an active disposition pipeline supported strong valuations.

As <unk> also noted earlier the portfolio appreciation supported yet another record level of net accrued performance revenues at $4 $3 billion.

This quarter's accrual was partially offset by over $270 million and net realized performance revenues more than double the level in the first quarter.

Our U S Asia, and Europe buyout funds and U S real estate strategy for the biggest drivers of our net realized performance revenue this quarter.

In total we produced nearly $400 million of net realized performance revenue in the first half of the year.

In addition, we have several transactions slated to close over the next few quarters that will support performance revenues and distributable earnings.

The size and diversity of our net accrued performance balance and the quality of our investment portfolio gives us reasonable confidence we can we can.

Can generate an average of $1 billion of annual net realized performance revenues over the next several years.

Market conditions will impact the actual level in any given year.

Moving on I want to close with some thoughts on our global credit platform.

Solid investment performance strong fundraising and our recently completed strategic transactions drove fee, earning assets under management to $116 billion.

More than double the level a year ago today, the global credit segment is our largest source of fee, earning assets under management.

And the recent transactions have provided significant scale to this business.

The transformation of global credit over the past handful of years is remarkable.

Our opportunistic credit strategy is moving from strength to strength as it increases its scale and employees, it's available capital in a market that increasingly needs assurance and flexibility.

Our structured credit business with $48 billion in assets under management. Following the addition of the <unk> assets is the global market leader.

They have a long term track record of credit outperformance and are positioning their portfolio to balance risk and reward as we head into an increasingly complex environment.

Which provides us with significant conviction in the earnings sustainability in this strategy.

Fortitude manages almost $50 billion in their general account and our new advisory relationship with them physicians Carlisle to scale considerably as fortitude deploys their nearly $4 billion of excess capital.

And we have a growing businesses and real estate credit infrastructure credit direct lending and aviation and we expect these strategies to be significantly larger in the next few years.

Broadly credit quality in our funds remains good.

And we are pleased with the diligence of our teams as they manage these portfolios in a rapidly changing environment.

In some in a difficult market, we posted strong results.

And are well positioned to deliver a solid year of distributable earnings.

Our strategic transactions are performing well our teams are focused on managing their portfolios to deliver attractive performance for our fund investors.

And we have substantial dry powder to capitalize on opportunities as they emerge.

With that let me turn the call over to the operator for your questions.

As a reminder to ask a question you will need to press star one on your telephone.

Please standby, while we compile the Q&A roster.

Our first question comes from Alexandra <unk> with Goldman Sachs. Your line is now open.

Hey, everybody. Good morning, Thanks for taking the question.

<unk>, maybe I was hoping to start with digging a little bit more into performance trends, you're seeing particularly within corporate private equity within Carlisle, obviously very impressive mark this quarter in light in light of macro conditions.

I appreciate the portfolio selection comment, but I guess, even good companies are facing higher costs and slower economic conditions, and obviously lower multiples for the public market. So just curious how you're thinking about the offsets.

The factors that drove positive performance within private equity for you guys. This quarter.

And as you think about the exit environment.

And the ability to actually monetize some of these gains how you're thinking about that for the next couple of quarters.

Sure Alex.

For the question look it's clearly a complex market, but we're really focused on controlling what we can control, namely our investing and how we manage our portfolios.

I think the right way and the best way to answer your question.

With your question implies so first of all in corporate private equity it's.

It's important to understand we've got a world class dominant business at scale.

But what's really important depreciate is that for the several years now Alex we've been running slower growth in our investment cases, and importantly, virtually all of our investment base cases contemplated contraction of exit multiples. So thats, what I mean, when I say, we've been preparing for these types of environments now we've always.

<unk> been focused on investing in great companies with a view to create growth and fundamental operating improvements to drive our returns. So when you put all of this together we've got great constructed portfolios across all of our CPE strategies and they are diversified across sectors regions themes and vintages and it's really <unk>.

We've been able to avoid the hardest hit sectors. We've avoided the high flying companies that don't generate any profitability and so when you take a look at that portfolio that you referred to.

Our corporate private equity portfolio. The topline has been growing at about 14%. This year they've been maintaining their operating margins given all of the operating improvements that I just referred to and so the value creation is really coming from growth in operating improvements, which has offset the contraction.

The valuation multiples that we've seen in the markets.

And with respect to the exit part of your question look you can't have good exits if you don't have good companies.

Great exit start with great investing we pride ourselves on being a great investment firm with a great investment ethos and so when you pick good companies partner with them to create value in a fundamental way. It sets you up for the exits and it's just a matter of how you decided to exit given what the <unk>.

Market and the conditions afford you so look taking a step back we're at scale, we're very well diversified in corporate private equity we've got superior portfolio construction, thus far it's performed relatively well because of the operating performance and the fundamental nature of our value creation and.

Who knows what the future has in store for everyone moving forward, but I like the way we are positioned as we're heading into this current environment.

Great. Thanks for all the detail there.

Thanks, Alex.

Thank you.

Our next question comes from Craig Siegenthaler with Bank of America.

Good morning, Kurt Hope everyone's doing well.

Hey, good morning, Greg Alright.

So we were looking to get an update on fund raising so how crowded does the current backdrop feel to you, especially in private equity and especially with U S pension plans feeling the denominator effect.

Then how much of this is offset by new strength from sovereign wealth funds given the stronger cash flows from higher energy prices.

Renewables.

So really diverse in terms of our.

Capital raised and this year is kind of the same we expect to have 20 or more strategies in the market. This year again, emphasizing the diversity of the platform and we're off to a good start $19 billion raised in the first half $10 billion in this quarter and what we're seeing from Lps as they're continuing to entrust us with an increasing amount of capital.

Which is really important in the current environment Q.

Thanks Kurt.

Craig look no doubt the fund raising market is challenging right now and this could persist for a bit as lp's adjust to market dynamics and it's most.

The structure of renewables and solutions, where we're continuing to see strong and healthy demand.

And I want to broaden the conversation to that of capital formation.

And you just you just heard US talk about it just this quarter, we added $50 billion in perpetual capital from Fortitude and so I think the point being that there are multiple ways, we raised capital to drive the growth of Carlyle.

Now at about $260 billion of.

AUM, which is which is a record and.

While there are some challenges in the private equity markets, which we expect to continue for a bit.

The breadth and the diversity of our platform gives us a lot of fund raising opportunities, especially when you broaden the lens to think about our capital formation across all of our strategies.

Thank you guys.

Thanks, Greg.

Thank you.

Our next question comes from Chris Kotowski with Oppenheimer. Your line is now open.

Yes, good morning, and thank you I wanted to.

Get a bit more color on what Curt said about fees and private equity.

Coming down in the second half versus first half or second quarter.

Is that a function of.

Just lower.

Catch up fees or.

The function of realizations coming from from funds or what what's driving that.

Hey, Chris Good morning, and thanks for the question so to be specific.

What I called out was.

Fee related performance revenues, so when we're talking about in global private equity and CPE in particular.

And but what we see just based on how it's constructed.

It essentially generates incentive fees based upon capital when it was deployed so three years ago in the second half of the year three years ago lower amounts of deployment them and so the incentive fees crystallize off of that are going to be a little bit lower we expect.

<unk> here in the second half and so I wanted to call that out for everybody, but I think that all solve itself over time and I would point you to a tiny footnote. This I'll come back on page 25 of our earnings release that shows that there is $64 million of net accrue.

<unk> incentive fees related to this strategy and <unk>.

Management fees, yes.

It's hard to predict exactly when they will come in but I feel good about our $850 million of FRE for the full year and Thats.

I think is the key that you really want to focus on.

Okay. So I mean, it's not the base management fee and it's not the catch up fees and just as a reminder, how long do you have built your breakfast.

The catch up management fees do impact there is $19 million of catch up management fees and that was based.

Based on fund raising that will play out but in order to be able to say that a 50 year I'm confident in our growth in core management fees management fees make up 90% of our fee revenues and they are performing really well and incredibly sticky.

Okay great.

It for me thank you.

Thanks, Chris.

Our next question comes from Robert Lee with <unk>. Your line is now open.

Great. Thanks, Good morning, everyone. Thanks for taking my questions maybe.

First one just.

So from quarter to read.

Lee I think towards you called out that there's about $4 billion.

Available capital could you kind of.

Well, maybe two things there number one what would that translate into an asset should we assume something like 10 to one level.

Well, maybe two things there number one what would that translate into the math, but should we assume something like 10 to one leverage to that potentially.

And then what's the current environment how is that.

Altering or impacting the <unk>.

Reinsurance opportunity with <unk> in the marketplace, there's different businesses that present more opportunities than others. So any color there would be.

Very helpful. Thanks.

Robert Thanks for the question why do we do this current market tackle the first part of the question and I'll try to tackle the second one yeah. So.

So Rob I think you got it right.

Picked up on really an important metric they've got nearly $4 billion of excess capital that Ford is who's going to use to continue to grow its business and as it does at Youre right that that translates into 10 to 10 to 15 times from a size standpoint, so as we previously said.

I think in Fortitude is in great position to double its business over the next handful of years. So I would say somewhere over the next five years, they are well positioned without really doing a whole lot else to double the business.

Yes, and Robert let me just add on to that so so.

First fortitude is performing very well and we are exceptionally happy with how that platform is developed.

Got double digit ROE at the moment reserves are in great shape, and as Curt mentioned and you rightly pointed out it's got about $4 billion excess capital, which is incredible capital base to support future growth as you know as fortitude grows because of our aligned strategic advisors.

Arrangement as fortitude grows Carlisle benefits through our investment platform.

With respect to the areas and sources of future growth.

The current environment of volatility and higher rates actually.

<unk>.

Leads us to believe there is going to be more deal activity because what that volatility does is it puts pressure on insurance companies to manage their capital more effectively.

And as a result, they are going to be much more inclined to want to.

Divest and to sell legacy liabilities portfolios that are capital consumptive or enter into reinsurance transactions with folks like fortitude. So at the moment our pipeline is very busy very robust.

You've seen us announce.

Deals with Prudential with T&D in Japan, and there are lots of other areas for us to continue to grow.

Via reinsurance, but also scaling up via acquisition. These types of things are not predictable month to month or quarter to quarter.

But.

As I look out over the next several years.

Excess capital and the momentum that Fortitude has it leads me to believe you're going to see real scalable growth coming out of fortitude in the years to come.

Great, Thanks, and maybe as a quick follow up Kurt.

Thank you guys had guided to $850 million of FRE for this year can you maybe just update us on your thoughts around that your comfort level with that.

The reasonable goal.

Yes.

Confirm that in his prepared remarks, and we feel very comfortable with the $8 50.

And again the business is performing well and so I think that's a good target and a good expectation for us.

Great. Thanks for taking my questions.

Our next question comes from Ken Worthington with Jpmorgan.

Hi, good morning.

Q a couple of questions on inorganic growth.

Has the environment for inorganic growth change given market conditions.

And then maybe there had been a gap between public and private market valuations.

For alternative asset managers, presenting a nice arbitrage opportunity.

For public market buyers.

That arbitrage I think narrowed.

Private market valuations come down with public market alternative asset manager valuations and ultimately what is your outlook here today for the second half of 2022 into 'twenty three.

For executing the inorganic part.

Of your growth strategy.

Our corporate development done very strategically and thoughtfully is absolutely one very important element as we continue to diversify our platform.

You've seen us do this.

And it has been done to great success, thus far however, we're going to be very disciplined about it there is no quota our budget or timetable.

That we're on we're going to be very measured and deliberate and this type of environment may create opportunities.

And we are very carefully.

Credit in our solutions and our infrastructure.

Our platform.

But.

The big bigger scene, though that needs to be appreciated is the criteria that we're looking for are strategic adjacencies.

FRE intensive.

Daily more perpetual capital oriented high.

Highly scalable big markets Big strategies.

But things can move the needle over time for us. So these are the types of criteria. We're looking forward to the extent that something fits that bill, yes, we would be willing to move forward, but like I said, no quota time pressure or anything imminent that.

I want to talk about Kurt yes, thanks, Ken.

Good morning, and thanks for the thoughtful questions from a valuation perspective, we're talking here about <unk> and possible opportunities from us from an acquisition standpoint, and continuing to build inorganically and similar to what we see kind of in our own portfolio. It really comes down to the quality of.

The asset that you're looking at and really good quality assets. Those valuation demands are still really high and those things that are lacking in attribute.

Obviously get a lower value and are under more pressure now and so as you think about it in terms of what we're looking at we like things that have lots of FRE and with great margins. We like things that are a great growth trajectory, we like to see can execute this on their own or are they deficient in their ability to.

To execute.

Are they scaled and once their infrastructure and technology et cetera, how is that kind of look for are they missing and if they're missing in those things they get a lower.

Their ability to ask for an amount is lower than where it can execute on all of these things. So look we'll often kind of look at things that only possess some of the attributes and then the question is is can we supplement it and get an arbitrage advantage on that kind of as you pointed out in our own analysis. So look it's the it's the.

Full scale I mean, but it's.

Continue.

Continuous discovery process between buyer and seller.

Awesome. Thank you.

Okay.

Thanks, Ken.

Our next question comes from Michael Cyprus with Morgan Stanley .

<unk> and timing does it have an impact there at all and then to your comments on the strong portfolio appreciation in the quarter, but just given the tougher macro backdrop here just curious how you see that impacting the realization outlook into the second half of the year as compared to the $390 million that you generated in net realizations in the first half.

Thank you.

Hey, Mike It's Q1, only why don't we try this curt when you want to take the first part and I'll take the second sure. So my vote on fund raising again theirs.

Good momentum as.

As we start this year for all of the things I've already said.

$19 billion raised.

20 different strategies and having very good success on them.

A multitude of fronts youre, absolutely right that the world has changed in particular around some of the traditional private equity strategies and that's fundamentally going to result in some of those raises taking longer in general and maybe not raising the same amounts that they would have otherwise.

In a different environment all of that said I still like our play I still like what we're doing I still like our momentum.

Yes, and with respect to your second question on exits.

Look I mean, the general M&A environment today, the state of the equity capital markets. One it would lead one to think that realizations would dropdown significantly, but you got to keep in mind, how big our portfolio with how broad it is how diversified it is.

And we've had $4 $3 billion of accrued carry in place for several quarters now and there are lots of transactions that were signed up.

Several quarters ago.

Three quarters ago that continue to close.

As we play out the rest of this year.

<unk>.

So number one that gives us a lot of line of sight, which is why Curt in his comments was fairly comfortable that yeah.

Year to year it.

And just wanted to reaffirm what I said earlier.

To Alex's question, we have great.

Portfolios that have been constructed in our investment approach is always to pick out what we believe are great companies with real differentiated plans for value creation driven by fundamental.

In fundamental ways growth and operating improvements.

I just wanted to point out 80% of the IRR is in carlyle's corporate private equity portfolio historically are driven by growth.

Thus far this year, despite the challenging markets in the market and the valuation multiple contraction that you've referred to the.

Sales of our private assets have been at very good prices.

Which reflects the nature of these companies and the quality of these assets.

So we feel pretty good about the construction of our portfolio the realizations to date.

Indicate.

<unk> breadth and good quality and good portfolio construction and longer term.

And just adding onto that Mike I mean, you heard the confidence and what <unk> was saying about the portfolio and we've been seeing a lot of activity a lot of discussions. So good exits here in the quarter, we've got a good pipeline of assets.

And sitting here today My bet is the second half is actually stronger than the first half.

Not to the same level. It was last year of course, but I think the second half from a carrier production perspective.

I don't have a perfect crystal ball, but I think the second half will be better than the first half.

Realized carry.

Look I mean, the portfolio is incredibly well setup I told you kind of I think the second half is going to be better than the first half so.

Can we do really well sure can we missed it a little.

As possible. So it's hard to give you an exact number.

Okay. Thanks, so much appreciate it.

Our next question comes from Glenn Schorr with Evercore ISI.

Hello, there thanks.

So Jeff just came out obviously, but we've been talking about this for you guys. So quick question on management's remarks, it seemed like they struck a clean energy deal and part of the pay for is carried interest I'm sure I'm not alone when I got a ton of questions already. This morning, I know we've talked about in the past I think it would be good for people to hear from you to park.

What's it mean for your portfolios and then most importantly for your stock right now.

What does it mean anything for the shareholders, whose issue. It is it assuming higher carried interest taxes goes great. Thanks.

Hey, Glenn Thanks for the question look I mean.

This news just came out last night, there's a long way still to go on in all of the details aren't yet our teams are honest looking at research and it just like you would expect but it's really premature for us to comment on it and look generally in terms of how our people are tax that we got people.

All over the world subject to all kinds of different tax rates.

That's not kind of changes in local taxation doesn't affect kind of our corporate play and we're already a full C Corp.

For the full fully loaded corporate tax provision.

Maybe I wanted I know it just came out but I know, we've also talked about it for years.

I think the shareholders.

No one thing no matter what the rules are.

Is the public shareholder on the hook for a higher carried interest cost or is that the employee getting paid in cash.

That's what I'm getting.

We're already our carry is already fully tax on the corporate side.

It Werent capital.

James rates arent, it's not kind of we're paying on essentially a fully loaded ordinary income tax rate on our carry.

I appreciate that Thats the point I want to get across thank you.

Last quickie is.

You see all these hung deals some of US cover all the big banks to forget that they took mark says the music stopped.

They are still holding on to a lot of inventory there is a lot of leveraged loans hung out there.

Coincides with the wider bid ask I'm just curious.

What does that mean to you is that fully incorporated in your comments. So far on this appointment of monetization is there any other.

Does that that leads to good or bad things for you. Thank you so much.

Hey, Glenn it's Q I'll I'll handle that question I think it's important to take a step back and put the current situation in perspective and compare that to maybe but we're all remembering what happened right. After the great financial crisis set in and right now I think.

My Best guess is there's probably $80 billion.

Hung loans or backlog today in the system, but that compares to if you go back a bit $325 billion, which is the comparable number back at the time of the great financial crisis, but I think what's really important to appreciate is that the entire leveraged.

Finance market is 3% to four times bigger.

So not only is the absolute amount much smaller, but the total market is much bigger and on top of that.

My view is that our banks and our partners at all of our banks.

They are well capitalized they are well run so yes, there is.

Our backlog today that they are trying to move off their books I have no doubt that's going to happen in time.

It is a much smaller issue and headache now than it was.

At the PFC.

And it's just a matter of time before this clears out.

And hopefully activity resumes.

Thanks Kew.

Our next question comes from Robert <unk> with Bank of Montreal.

Great. Good morning, Thanks for taking my question.

He can provide an update on the solutions business.

How do you see activity that developing in the coming quarters and the dislocation youre seeing in the markets translates into potential upside for that business.

And can you also update us on potential fundraising opportunities and solutions and pipeline of new products. Thank you.

Let me start maybe Q will add in so so look the solutions business, we remain optimistic and bullish there lots of good things happening.

As I said I'd, probably last quarter.

There's a couple of things to keep in mind. It is still a little bit of a stair step business. So as it is.

Cycles of funds come back to market. It grows a little bit more in stair step second that.

Euros, and the like and so as the dollar strengthens its hurt us a little bit on some of that.

But overall trajectory is good there is also white space there that they are taken advantage of and the potential to add new product that they are very much focused on and so looking forward to some of that that will take some time to really play out but it gives me a lot of confidence in long term growth and I think thats, where this business can go and then laugh I'll simply say that the secondary.

The market now is a great time for it and so.

Continue to take advantage of that and play well they are a very well known player Alpha Linzess has done a great job their knowledge of data and end of the market is fabulous their performance here in the quarter aided a little bit here. It helps us it aided a little bit by FX.

But still remains very strong and their knowledge of what's happening very good. So we're well set up there, especially for the long term.

Yes, I don't have much to add other than if you string together a few of these questions the volatility.

The denominator effect that somebody mentioned on a previous question.

All of this leads our Lps to want to optimize reconstruct and.

And tailor their very large alternatives portfolios.

And that need that necessity for the LP to do that really.

Runs right into into the sweet spot of what ALP invest is designed to help our Lps do.

So whether it's secondaries, whether its single asset.

Strategies, whether it's co investment strategies.

<unk> is very well positioned as a market leader to take advantage of this more broad secular trend that all of this volatility all of the multiple contractions in the swings you're seeing.

<unk> needed to optimize and tinker with their portfolio at large levels and that I think is going to continue for several years to the benefit.

Our <unk> platform.

Okay.

We have a follow up question from the line of Alexander Bernstein. Your line is now open.

Hey, thanks, so much for the follow up again.

I wanted to go back to the FRE dynamics you described for this year and it's really nice to hear obviously, the reaffirmation of the $850 million of FRE.

Three I understand it's kind of early don't expect you guys to have full guidance out, but just as a framework of how to think about beyond some of these annualized <unk> dynamics.

Alex I'll start and <unk>.

Add in here. So look we've done really well in terms of growing the business, especially over the last several years.

We've taken FRE, if you're thinking about in the last five years, we've more than tripled fee related earnings to.

If you do the math, that's about a 30% CAGR over that time period.

At the 850, we'll end the year up about 40% over last year Big market picture if markets everything we're reading and what we've experience would say that the private markets will go from about a $10 trillion dollar size to it.

The double that over four or five years, which would imply about a 15% CAGR if that all happens we'll be right there with it I mean, our brand our diversity our strength of performance really sets us up to to really benefit from all of those <unk> and I think that we can do better, especially as we use our balance sheet.

And and grow new products, there's more things that we can do but.

Yeah, Alex let me.

Give you a few thoughts and it ties into the fact that we have deliberately diversified our platform to create.

<unk> and.

And I've got no doubt that business will continue to motor along.

In addition to that we've now supplemented it by organically and with some inorganic help we built a great credit business is now the fastest growing part of our business. It is a more scalable asset class in private equity and even within credit we see white space in areas like infrastructure.

Credit real estate credit to continue growing and just want to remind you we've had great success in our opportunistic strategy.

Got it from scratch and our aviation platform has more than doubled since we bought it. So credit is a great platform that we believe still has real secular tailwind, especially as I've noticed our Lps continue to allocate away from traditional public.

Fixed income into private credit and especially since we continue to see inroads of private credit solutions.

From that of the banking system.

Infrastructure hardened structure countries are going to have to be rebuilt you're talking about significant amounts of capital that's going to be required in infrastructure to support energy transition.

Creation resilience on a regional level.

In our industrial complex, so theres going to be a lot of money and a lot of growth in infrastructure. Then we just talked about our solutions business ALP invest as our industry leading platform.

As the alts industry grows there's just going to be even more need for alpha invest to help our Lps with our portfolio management solutions we.

<unk> talked earlier about Fortitude 50.

<unk> $50 billion.

Of assets already.

<unk> got excess capital that is set up really nicely to scale and grow.

And then don't forget we have set up a capital markets business, which as our deal activity continues to pick up across our platform will continue to drop incremental.

Fees to our bottom line. So all of that has been set up over the past few years.

It is a much more diversified platform it creates a much more resilient.

Earnings base, but we have lots of areas by which to grow moving forward and thats, even before we talk about corporate development and inorganic initiatives, which obviously over the past couple of years and the selective ways. We've done it happened very select successful and additive. So if you marry.

<unk> thoughts bigger picture, where the industry is growing and then if you marry that with what we've been doing to execute against our strategic priorities and set up a diversified platform for growth.

Kind of like the way, we're positioned to keep driving this firm moving forward.

Great. Thanks, Thanks, very much again.

We have a follow up question from the line of Craig Siegenthaler. Your line is now open.

Thanks for taking a follow up.

Im assuming this is not an issue just given your commentary around the resilient credit quality in your global credit business, but I'm curious in terms of how your CLO management fee deferrals work.

And can you help us frame the risk that you might have a decline in management fees, if we enter a severe economic recession.

Hey, Craig Thanks for the question look we're now the largest player in the CLO space and that gives us a lot of opportunity and strength.

Buys and sells across the platform here in the second quarter and with the goal of reducing exposure to industries that had higher commodity costs or a little pricing power. So it was all about making sure that we really kind of positioned it well for some potential rough rough waters.

As a result, the risk metrics look really good.

The portfolio is well positioned and hence the competence you've heard in our tone.

Thank you Kurt.

That concludes today's question and answer session I would like to turn the call back now for closing remarks.

In the fall thank you.

This concludes today's conference call. Thank you for participating.

You may now disconnect.

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