Carlyle : 403.8 KB

Corrected Transcript

28-Jul-2022

The Carlyle Group, Inc. (CG)

Q2 2022 Earnings Call

	Total Pages: 18
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The Carlyle Group, Inc. (CG)	Corrected Transcript
Q2 2022 Earnings Call	28-Jul-2022

CORPORATE PARTICIPANTS

Daniel Harris	Curtis L. Buser
Head-Public Market Investor Relations, The Carlyle Group, Inc.	Chief Financial Officer, The Carlyle Group, Inc.
Kewsong Lee
Chief Executive Officer & Director, The Carlyle Group, Inc.

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OTHER PARTICIPANTS

Alexander Blostein	Kenneth B. Worthington
Analyst, Goldman Sachs & Co. LLC	Analyst, JPMorgan Securities LLC
Craig Siegenthaler	Michael J. Cyprys
Analyst, Bank of America Merrill Lynch	Analyst, Morgan Stanley & Co. LLC
Chris Kotowski	Glenn Schorr
Analyst, Oppenheimer & Co., Inc.	Analyst, Evercore ISI
Robert Lee	Rufus Hone
Analyst, Keefe, Bruyette & Woods, Inc.	Analyst, BMO Capital Markets Ltd.

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MANAGEMENT DISCUSSION SECTION

Operator: Good day and thank you for standing by. Welcome to the Carlyle Group Second Quarter Earnings Call. At this time, all participants are in listen-only mode. After the speakers' presentation there will be a question- and-answer session. [Operator Instructions] 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.

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Daniel Harris

Head-Public Market Investor Relations, The Carlyle Group, Inc.

Thank you, Liz. Good morning and welcome to Carlyle second quarter 2022 earnings call. With me on the call this morning is our Chief Executive Officer, Kewsong Lee; and our Chief Financial Officer, Curt Buser. Earlier this morning, we issued a press release and detailed earnings presentation, both of which are available on our Investor Relations website at ir.carlyle.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 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

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The Carlyle Group, Inc. (CG)	Corrected Transcript
Q2 2022 Earnings Call	28-Jul-2022

cause actual results to differ materially from those indicated. 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 $0.325 per common share. 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, Kewsong Lee.

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Kewsong Lee

Chief Executive Officer & Director, The Carlyle Group, Inc.

Thanks, Dan. Hello, everyone, and thank you for joining us today. Carlyle 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 Carlyle, 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 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 are top of mind, so allow me to address this topic before we get into the points we 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 appreciating 3% in the second quarter, while various public benchmarks were down 10% to 20%. I'll provide some perspective, and Curt 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 GPE segment, our overarching view is that we have 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 were contracting. And importantly, thus far, taken as a whole, the top line 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 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 she talks about the

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The Carlyle Group, Inc. (CG)	Corrected Transcript
Q2 2022 Earnings Call	28-Jul-2022

quarter. First, our focus was 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, and we are on track to achieve our previously stated $850 million goal in FRE for the full year of 2022. It's important to understand the vast amount of our fee revenue is agnostic to asset market's valuations and is 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. 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 our fee-earning AUM is now associated with Global Credit. Furthermore, FRE contributed 50% of DE in the first half of 2022, 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 Fortitude 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, with more than half this amount from Global Credit and Global Investment Solutions even as we continue to raise 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, and our balance sheet today comprises over $16 per share in 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 is 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, Curt.

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Curtis L. Buser

Chief Financial Officer, The Carlyle Group, Inc.

Thank you, Kew, and good morning, everyone. As Kew 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 want to focus my remarks on three areas. First, fee- related earnings and overall distributable earnings have had a strong start to the year, highlighting 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, 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. First, 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% in full year 2021. Distributable earnings of $529 million increased more than 34% from last year. And our earnings stream

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The Carlyle Group, Inc. (CG)	Corrected Transcript
Q2 2022 Earnings Call	28-Jul-2022

reflects an improving mix, with fee-related earnings contributing 50% of distributable earnings in the first half of this year. Digging into 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 fee is 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 US Buyout fund, as well as several smaller GPE 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 help drive our record FRE margins this quarter. Though, it's 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 CBAM which closed on March 21, and Fortitude which closed on April 1. And that's exactly what the second quarter produced. Global Credit FRE surged to a record $72 million, nearly triple last quarter, owing to management fee revenue from these transactions and a high level of transaction fees. Global Credit's 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 DE mix continued 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 continued to perform well, as Kew 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. In 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 in our US Buyout strategy. As Kew also noted earlier, the portfolio's 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 in net realized performance revenues, more than double the level on the first quarter.

Our US, Asia and Europe Buyout fund and US Real Estate strategy were 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 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 fundraising and our recently completed strategic transactions drove [ph] fee-earning assets under

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