Q1 2023 Carlyle Group Inc Earnings Call
Thank you for standing by and welcome to the Carlyle group's first quarter 2023 earnings conference call at.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
A question during the session you will need to press star one on your telephone.
I would now like to hand, the call over to head of public Investor Relations Daniel Harris. Please go ahead.
Thank you Latif.
Good morning, and welcome to Carlyle's first quarter 2023 earnings call.
With me on the call. This morning is our Chief Executive Officer, Harvey Schwartz, and our Chief Financial Officer, Kurt user.
Earlier. This morning, we issued a press release and a detailed earnings presentation, which is also available on our Investor Relations website.
This call is being webcast and a replay will be available on our website.
We will refer to certain non-GAAP financial measures during today's call. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. We have provided a reconciliation of these measures to GAAP in our earnings release 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 annual report on Form 10-K that could cause actual results to differ materially from those indicated carlyle.
Assumes no obligation to update any forward looking statements at any time.
I'm going to begin with a quick discussion of our results and then hand the call over to Harvey for.
For the first quarter, we generated $193 million in fee related earnings and $272 million in distributable earnings with de per common share of <unk> 63.
We raised $6 8 billion of new capital and deployed $3 8 billion in capital across our carry funds our accrued carry balance remains at a robust $4 billion.
We declared a quarterly dividend of <unk> 35 per common share.
We know it's a busy morning, and as we already have a long queue. Please limit yourself to one question and move back into the queue for any additional follow ups and with that let me turn the call over to our Chief Executive Officer Harvey Schwartz.
Thanks, Dan Good morning, and thank you for joining us today.
It's great to be here with all of you. Some of you I've worked with in the past and others. It would be great to meet you soon.
There are three things I plan to review today, our first quarter performance the.
The macro environment, and our general outlook and lastly, I will end with some initial thoughts on my first 80 days here at Carlyle.
First with regards to our performance, let me be clear, we're not pleased with our first quarter results.
Kirk will walk you through the details, but our activity levels and investment realizations and fund raising were more muted than our prior expectations.
We continue to navigate one of the most complex financial markets in recent memory, which is clouding, the near term outlook and impacting market sentiment.
It is our expectation these effects will last throughout the remainder of the year and impact both FRE and distributable earnings.
That said importantly, we are confident that Carlyle is well positioned for end market stabilized and activity levels ultimately pick up.
We don't invest and we don't run the firm quarter to quarter.
<unk> has a long history of successfully investing through all cycles.
We are a leading private equity business for the long term track record of fast growing global credit business and a high performing investment solutions business.
We have $381 billion in assets under management, and 73 billion in capital available to deploy across strategies and geographies.
And we have long standing very deep relationships with our largest and most sophisticated global investors.
There is substantial and very attractive white space for Carlyle to continue to grow our platform, which alongside a disciplined approach to running the firm will ultimately expand margins expand FRE and grow distributable earnings.
Shifting now to the macro environment.
For the past 30 to 40 years, there were several mega trends at play.
These mega trends underpinned economic activity.
Our long term downtrend that interest rates supporting an upward trend in equity markets and asset prices broadly.
Markets benefited from historically low inflation and increased globalization and technological innovation allow global economies to thrive.
Today for the first time in many investors' lifetimes some of those trends are slowing or even reversing.
Our cost of capital has gone up.
Discount rates and cap rates have increased and are pressuring valuations as well as expected returns.
Of course, we are shifting trends will take time to work through global markets and asset prices.
Adding even more complexity, while the banking system in the U S and abroad generally have healthy balance sheets from years of capital building Theyre now tightening underwriting standards and.
And regional banks following recent stress are likely to face increased regulation and capital requirements.
In my experience this will almost certainly lead to a further tightening of lending standards dampening the pace of economic activity.
While companies are not raising capital at the same frequency as prior years bear core needs haven't changed.
They need capital to grow and capital to refinance liabilities.
Is where our global credit business is taking share from traditional lenders.
And just this week you will see in Fortitude announced a major reinsurance transaction that will accelerate the growth of their business.
For our Lps will require help managing their portfolios in this complex environment, our global investment solutions business is well positioned to meet this demand and continue to grow the platform.
The important point to remember is that Carlyle has operated through significant market dislocations before.
We remain actively engaged with sellers buyers and capital providers around the world, We're very front footed.
We certainly don't invest for any single quarter or year.
We raise capital and we invest for the long term.
The opportunities across asset classes regions and sectors are growing increasingly more attractive as markets remain volatile and uncertain.
While we remain cautious on the near term environment. We also are beginning to see opportunities to put a huge amount of capital to work that will help drive long term performance and asset growth.
This is an exciting time to be an investor in global private markets.
I'll close with some thoughts has gotten started in my new role.
I spent the past few months meeting our people and getting to know our investors around the world.
Carlisle.
As an iconic brand one I've admired my entire career.
We have an experienced and talented team of professionals, who are up for any challenge and that team is a big part of why I'm here.
Our culture is strong.
It reflects the 35 year history of the firm and it's made up of a group of talented smart hardworking World class professionals, who care deeply about our firm.
And we are committed to being a fiduciary for our clients.
We are in an industry that is growing and there is massive long term potential for Carlyle.
Everything starts with investment performance.
And our firm was built to provide the highest level of care to our investors and to capture the significant opportunities that continue to emerge.
Throughout my career.
I have been a believer in disciplined growth.
As we grow we are also working to identify areas, where we can instill more discipline around our operations.
This approach will deliver returns for our shareholders and fund investors alike.
It's an exciting time for the industry and for Carlyle and I'm very excited to be here and be part of it with that I'll hand things over to Kirk to provide a more detailed breakdown of the quarter.
Thank you Harvey and good morning, everyone.
I wanted to start with an outlook on three particular areas that complement harvey's comments and put our financial results in context with the current macro environment.
First with respect to fundraising we continue to expect to raise more capital. This year than we did last year, though the composition of that fund raising has skewed further towards global credit and investment solutions and less from corporate private equity.
Over the balance of this year, we expect to see CLO issuance resume in addition to incremental fundraising for a number of credit products as well as raising capital in our secondaries and co investment strategies and investment solutions.
While we believe that we will attract a significant amount of capital for our next vintage of buyout funds. We no longer expect these funds in the aggregate to be the same size as their predecessors, and now expect to see a decline in buyout fund sizes across most geographies.
Second as you heard Harvey indicate we expect that the slowdown in capital markets activity will result in a muted level of near term realizations pressure on capital markets transaction fees and lower performance related earnings that said, we continue to have $4 billion in there.
Net accrued carry.
I believe the firm's ability to monetize that carry will be strong over the next few years.
And third our 2023 FRE outlook.
Given uncertainty in current market conditions, including the impact from a slower transactional environment and a lower buyout fund raising outlook.
Our 2023, FRE is likely to be modestly below last year.
While we expect to see topline to fee growth. This year. We also expect to see continued investments into our teams and businesses.
We will be disciplined in managing our expenses while at the same time, ensuring the firm is well positioned to grow over time, notably across our global credit platform extending the capabilities of our capital markets team and supporting continued growth at 42.
Now, let me dig a bit deeper into the major drivers of our results.
Fee related earnings of $193 million increased 6% over the first quarter of 2022 <unk>.
Top line management fees of $506 million.
We're up 11% year over year with the strongest growth in our global credit platform through a combination of organic growth and the impact from strategic transactions last year.
Fee, earning assets under management of $271 billion increased 29% from the first quarter last year, driven by $28 billion of fundraising over that same time period alongside strategic transactions completed last year.
Two days ago on May 2nd Fortitude announced an agreement to reinsure $28 billion of life and fixed annuity products.
This 42 transaction is a great example of its strategy to become a preferred solutions provider to large global insurers as it leverages its strong balance sheet and broad capabilities to pursue growth.
402, and expects to close this transaction in mid 2023 pending customary regulatory approvals.
When the transaction closes carlyle's fee, earning assets under management will increase by the amount of the reinsurance transaction as part of our strategic Advisory services agreement with Fortitude.
And over time, we expect about 20% of the general account assets related to this transaction to be directly invested into Carlyle investment strategies.
The impact of this transaction was included in our updated fee related earnings outlook for the year.
Fee related performance revenue of $29 million in the first quarter was down from $45 million last year as the contribution from core plus real estate was muted in the first quarter, while global credit fee related performance revenue was up more than 30% looking.
Looking forward to the second quarter, we expect to benefit from a substantially higher level of fee related performance revenue in global private equity.
This is because we expect a significant step up in the crystallizing of gains next quarter and core plus real estate, which will then moderate in the following quarters.
As we have previously noted we expect to generate significant revenues in this line item every year those certain quarters throughout the year will be higher than others.
So keep in mind that fee related performance revenues compensation expense, which is captured in our FRE compensation line will vary directly at about 45% of revenue.
FRE margin was 35% this quarter down modestly from 36% in the first quarter last year.
Total fee revenues were up 7% compared to last year FRE expenses increased 8% leading to the margin compression for.
For the full year, we expect FRE margin to be modestly lower compared to 2022.
Longer term scaling the firm and operating effectively remains a key priority and we expect to see FRE margins resume their upward trend in 2024.
Moving on our portfolio continues to perform well relative to choppy public markets with overall portfolio appreciation of 2% in the first quarter across our carry funds and appreciation of 7% over the past 12 months.
This is well higher relative to a 9% decline in the MSCI all country World Index over that same time period.
Our global credit carry fund portfolio.
<unk>, 3% in the quarter and is also up 7% over the last 12 months, while our corporate private equity portfolio was up 1% in the quarter and 3% over the past year.
Appreciation in our infrastructure and natural resources portfolio was flat in the quarter amidst volatile but range bound energy prices.
But this portfolio is still up 24% over the last 12 months.
And appreciation in our global investment solutions funds was up 5% in the quarter and 7% over the past year.
A few other quick points.
Equity based compensation expense of $57 million increased from $41 million in the first quarter last year as an elevated level of equity grants to employees and our new CEO grants in February began to impact results.
We expect to see this expense tick higher in the second quarter, and then remain at an elevated level.
We repurchased $100 million in shares in the first quarter and as of March 31, Our board of directors reset and increased our repurchase authorization to $500 million.
Our balance sheet remains solid over $1 billion in cash and nothing drawn against our $1 billion revolver.
We have the flexibility to remain opportunistic if prospects arise to deploy our valuable capital.
And as we've said before our day effective tax rate is likely to be volatile on a quarterly basis and this quarter. It was lower than normal that we still expected to average around 20% on an annualized basis.
In sum while there are some short term challenges, we are optimistic long term and see opportunities for growth and value creation.
With that let me turn the call back over to Harvey, we'd like to make a few closing remarks.
Thanks, Kurt and before we move on to Q&A I wanted to reiterate that while there are near term challenges. There is tremendous long term opportunity for the firm.
The overall positive trends in the industry and the strength of our brand and our people well.
These are the reasons why I am here it really is quite a privilege to be part of this team and part of this firm.
Let me turn the call over to the operator, so we can take your questions again, great to be here with you.
As a reminder to ask a question you will need to press star one on your telephone again Thats Star one on your telephone to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Glenn Schorr of Evercore. Your question. Please Glen.
Hi.
<unk>.
Talk to you again.
Hey, Glenn.
Hello, Brian Youre, just breaking up a little bit.
Yes.
Interesting sorry.
Well good to talk to you again I'm curious.
Little bit of a unique situation, but new CEO I heard some of your previous comments I'm curious how you would describe.
Maybe in Layman's terms, what are you here to do I saw the quote.
In the beginning of the slide deck ups, continuing to expand and diversify the platform I heard your comment about substantial and very active white space for Carlos I was wondering if you could expand on that a little bit. Thanks.
Okay, well well Glenn it's good to hear your voice, even a little a little garbled, but.
Nice to chat with you again, I hope you've been well.
Well, maybe I should back up for a second before I.
Get directly to your question, maybe I should just talk a little bit about why I'm here and how I got here and that decision, making process and so.
As I said in my remarks.
One about Carlyle for my entire career, it's an amazing brand I know the power.
Of an amazing brand.
As soon as I met with the founders, we clicked immediately and as I got to know the people I knew that the talent in the organization.
And.
The investing prowess.
And.
Then when I really when I look at the valuation gap between our firm and in other firms.
It doesn't make any sense to me and so.
The decision to be here actually ended up being quite easy and as I said really quite a privilege for me to be part of this team and part of this firm.
Now.
I've been here I don't know give or take 80 days the team reminding me in and I sort of jokingly or I refer to are sort of my own Carlyle immersion course.
I've just been spending time with our Lps spending time with the teams getting to know everyone and probably more importantly.
Giving them a chance to get in EMEA.
In terms of the white space.
Theres, just a lot of opportunity for us.
We have businesses like global credit, which had been growing very quickly.
We will continue to grow those.
Mr Private wealth space.
Real estate.
One of the highest performing real estate teams.
There's a lot of interest there.
Our solutions business.
When you go around the firm there is a lot of energy to grow. These businesses now it's early days for me, but I can tell you the enthusiasm and the energy Israel.
We lose you Glenn.
No no. Thanks, guys were limited to one question I appreciate it thanks.
No I just thought maybe I lost you.
Now you are limited to one question.
Yes.
Good.
Good to hear you.
You too.
Thank you.
Our next question.
Comes from the line of Bill Katz of Credit Suisse. Your question. Please Phil.
Okay. Thank you I think it's a bad connection as well so first of all congratulations as well.
Okay great.
Very good.
Congratulations and welcome.
So maybe just build on your on your last set of responses to Glen's question can you sort of tie.
Tied together, maybe as you look at some of these bigger picture opportunities, maybe the top one or two things youll be most focused on as you look out over the next year or two and then relative to your discussion of sort of disciplined growth can you tie that into curt's comments about FRE guide down on expenses and where that expense growth may focus. Thank you.
Sure.
Well the disciplined growth that's just always away I've approached businesses that I've been part of it's the way the team here approaches banks and so that again I would say is more philosophically my approach, but it has also been the philosophy of the firm.
No.
I don't think it is.
How do I say I don't really have any favorite children. So I mean, I like growth for growth's sake, and so we have a lot of resources here and so if there is demand for our solutions business will respond to that if there is demand for <unk>.
Growing the private wealth footprint, there's a lot of people in the world that want access to Carlisle and Carlyle invest in capability.
Some things will take longer some things will be more immediate but I don't think it's a question of prioritizing one or two things I think it's a question of as a team we mobilized against all of these things.
But we do it quite thoughtfully.
We're not going to rush I'm, certainly not in a rush and it's really going to be about excellence of execution and.
However, long that takes.
It's more about excellence of execution, but the opportunities are clear.
Hi.
The part the.
Second part of Bill's question really on FRE.
Our revised guidance look we've been focused on growing FRE.
<unk> is a key priority and those white space opportunities that Harvey alluded to are going to propel us forward now, let's just kind of level set remind everybody kind of where we've been we grew up 40% in 2022 and over the past five years, it's up about four fold.
I think we are in great position to continue to do that over the next several years.
But this year is not one of those growth years. This year is going to be these this growth trend is not even every year and this year is a bit of a catch up and get things in the right place, let me level set a little bit for you.
It's a complicated complex market environment as Harvey said in his opening remarks.
M&A volumes are about half of what they were just last year IPO activity is sluggish U S. Leveraged loans are much smaller smaller than they have been in many many years and so all of that activity level.
And that impacts our earnings our ability to generate transaction fees impacts performance revenues the lower level.
<unk> has been impacting our realizations.
And even at Fortitude.
It affects our fees there are variable rate and so as fortitude does well, we make more money, but mark to market types of adjustments impact some of those returns and so right now it's at a lower level and so that's also impacted our thinking with respect to the current year, but again, we're in great shape.
<unk> for the long term see lots of opportunities for long term growth here and think that will be set up and we're going to be very disciplined in terms of how we approach the balance of this year and we're going to work really hard to outperform kind of where we are.
Okay. Thank you both.
Before I came to the firm and there's a lot of cash flow generation and so.
I think that all of these things.
Hey, Brian .
And just to just you.
Your comment about the valuation gap that you see at Carlisle.
The enormous opportunity to two <unk>.
That valuation gap.
I realize there's a lot of things to invest in.
And a lot of white space and that will that will create.
Longer term pressure on expenses, but as you think longer term about the franchise.
In closing that valuation gap.
How do you think about potentially changing the compensation structure to align more with some of the peers that have a higher FRE margin.
And then how do you think about whether that is one way to do that as opposed to just scaling various businesses.
Hey, Brian It's Karen let me start and however, you can add in.
So look our compensation structures, we use a combination obviously of cash carry equity.
And.
You've got to be very careful when you move the cheese and so we think very carefully about how all of this is set up and how we incentivize our people the alignment that we have in place does a couple of things first and aligns with FRE growth and we've had very good growth over the past four.
Five years on FRE.
And the carry that we've thrown off $1 5 billion net realized carry in 'twenty, one $1 billion last year that provides a lot of capital as well for the balance sheet. So that alignment is important and keeping people kind of focus on the long term trajectory of shareholder value. The equity awards, obviously kind of.
The only thing I would say because you mentioned the valuation gap.
And when I was doing my diligence I didn't look at it and say Oh, we want to be this firm or that firm.
Going to evaluate our strengths internally and we're going to marry those efforts together to make sure we deliver to our Lps, we drive growth and we use our capital along the way in terms of incentives I think Curt captured it perfectly.
Compensation and.
Listen we want to make sure people get pay for performance.
I'd like to correct language about the chase I don't think that was prepared remarks.
But.
We probably wouldn't have put that in our script, but I think you captured it well.
That's great color. Thank you so much.
Thank you.
Okay.
Okay.
Thank you.
Our next question.
Comes from the line of Brian Mckenna of JMP Securities. Your question. Please Brian .
I believe it's me Brian Mckenna, good morning, all and welcome Harvey So.
So it's great to see Brian .
So it was great to see the <unk> deal get announced a couple of deals a couple of days ago, but Kirk can you just remind us about the fee arrangement with fortitude and then how that evolves over time with underlying performance of that business.
And then related how does the pipeline look for these larger deals looking out over the next 12 to 18 months and just 42 would have kind of incremental access capital for some more deals moving forward or will they have to look to raise some additional capital.
Hey, Brian Thanks for the question and thanks for the comments on <unk> look we're really proud of what the team has achieved.
If you look on our release Theres about $55 billion of.
There is about another $9 billion that they've directly invested into our funds not captured in that number and is $28 billion ads on top of all that and there is still out there hunting and looking theres a big pipeline.
And it's very well capitalized business and we had said before that with the raise that we did.
I'm very proud of what they've been able to achieve I think we can do more there and the fee arrangement, we're an investment advisor and so we see really when they directly invest into our products and we see off of how we help them perform and so that's a variable rate fee and as they are.
Perform well generally overall kind of a trailing basis.
The markets are tough right now and so some of that is also got this.
From a lower level.
No no thats great I appreciate it Gary.
Thanks, Brian .
Thank you our next question.
It comes from the line of Chris Kotowski of Oppenheimer <unk> Company. Your question. Please Chris.
Yes, good morning.
Curt in particular I was wondering if you can give us some more color about that.
Private equity fund raising.
<unk>, obviously, we've been hearing about that denominator effect all year long last year and one can only imagine that the post silicon valley environment that that didn't help things.
And.
But I also wonder if you can talk about it just a little bit on a geographic basis, we've heard about that denominator effect, particularly as it relates to U S buyout.
But you've also got.
A very strong two big Asian, and European funds that are kind of finishing up I guess their deployments and they've got a strong track record and I guess is there any particular strategy or insight you can give us.
As to how you.
Hope to raise the successor funds there.
Hey, Chris Hey, good to hear your voice and thank you for the question. So look I am very proud of my partners and especially in the biotech space and the private equity space long very successful track record.
A lot of great stuff over the years and fully.
Committed or invested into Carlyle strategies and looking to do the same first and foremost, though we're motivated through our fee arrangement to make sure that fortitude does well and that we're a good adviser to them regardless of whether it comes directly in the Carlisle product or into other types of assets.
Thank you our next question.
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