The Carlyle Group Inc. (NASDAQ:CG) Q4 2023 Earnings Call Transcript

The Carlyle Group Inc. (NASDAQ:CG) Q4 2023 Earnings Call Transcript February 7, 2024

The Carlyle Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Carlyle Group’s Fourth Quarter 2023 Earnings Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would like to hand the call over to Daniel Harris, Head of Public Investor Relations. You may begin.

Daniel Harris : Thank you, operator. Good morning and welcome to Carlye’s fourth quarter and full year 2023 earnings call. With me on the call this morning, is our Chief Executive Officer, Harvey Schwartz and our Chief Financial Officer, John Redett. Earlier this morning, we issued a press release in a detailed earnings presentation, which is also available on our Investor Relations website. This call is being webcast and replay will be available. 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 provide a reconciliation of these measures to GAAP and 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 factor section of our annual report on Form 10-K that could cause actual results to differ materially from those indicated. Carlye assumes no obligation to update any forward-looking statements at any time. In order to ensure participation by all those on the line today, please limit yourself to one question and then return to the queue for any additional follow ups. In our earnings presentation this quarter, you’ll find several additional pages in the front of the release, starting with Page 6 that Harvey and John will refer to during our remarks.

As I mentioned, you could find the presentation on our IR website to follow along. With that, let me turn the call over to our Chief Executive Officer, Harvey Schwartz.

Harvey Schwartz : Thanks, Dan. Good morning, everyone. And thank you for joining us. Our firm finished 2023 with significant momentum. We set several records last year which you see on Page 6. They include: record FRE at $859 million; record Q4 FRE margin of 43%, and we finished the year with record AUM at $426 billion. We also raised $17 billion of capital in the fourth quarter, our third largest fundraising quarter in the history of the firm. We want to thank our investing clients for the trust they put in us as their fiduciary and the entire Carlyle team for their hard work. Again, we finished the year with significant momentum, which sets us up for success in 2024. Now, please turn to Page 7 in the document. In today’s discussion, John and I are going to focus on four key areas.

First, enhancing stakeholder alignment and changes we plan to make to our compensation model. Second, optimizing capital and our approach to returning capital to shareholders. Third, strategic initiatives in 2024. And lastly, we will delineate explicit financial targets for 2024. Now turning to Page 8, enhancing stakeholder alignment. Today, we’re announcing a shift in our compensation strategy explicitly designed to enhance alignment across all of our stakeholders, our investing clients, our employees, and you our shareholders. Carlyle has a performance-driven culture and our senior investing professionals want their compensation more tightly tied to performance. Shareholders also get more of what they value most a significant step up in steady, recurring fee related earnings, and FRE margin.

And our investing clients also benefit from our teams having more skin in the game. It is a win-win-win for each of our stakeholders, our investing clients, our senior employees and our shareholders. Second, I’d like to discuss changes to our capital allocation strategy. Please turn to Slide 9. We’ve increased our share repurchase capacity by an incremental $1 billion for a total of $1.4 billion. Given our strong balance sheet and positive outlook, this incremental capacity provides us flexibility to return excess capital to shareholders. At the share price, our board and senior leadership see tremendous value in the enterprise, the opportunity to return capital to shareholders is clearly quite compelling. John will walk through our thinking about capital management and our approach in more detail.

Now moving to Page 10, I want to touch on several strategic initiatives. Global Credit insurance is positioned for strong growth. Global Credit is now our largest segment with almost $190 billion of AUM. We have driven a nearly 300% increase in credit AUM over the past four years. In Insurance, we added $29 billion of AUM in 2023 from Fortitude, including the Lincoln financial transaction. We have strong momentum coming into 2024 and a deep pipeline of growth opportunities. In Investment Solutions, we also have great operating momentum. We’ve grown AUM 70% over the past four years to $77 billion. Our secondaries and co-investment strategies are producing attractive returns for their investors and are well positioned to capture opportunities in the current environment.

Global Investment Solutions should see FRE shift sharply higher in 2024 as the effect of strong fundraising impacts our results. We’ve also made progress growing our wealth strategy. The Carlyle brand is a unique and powerful asset. Since inception, we raised nearly $50 billion of wealth assets. We are incredibly appreciative of the trust that our wealth management partners have placed in us on behalf of their clients. We look forward to continue to work with them as we grow this business together. We’re excited to have our credit interval fund CTAC and RP secondary fund CAPM in the market today. And we will have a PE product in the market in the next several quarters. Now switching to expense management. While we focus on growth, we’re also keeping a careful eye on expenses.

In 2023, we grew headcount as we continue to invest across our platform. At the same time, we delivered expense savings in other areas. Again, while growth remains our key area of focus, executing our strategy in a disciplined manner will allow us to expand margins at the same time. Before I got to John, turning to Page 11, let me give you a quick preview on our 2024 financial targets. We are targeting FRE of $1.1 billion. We are targeting FRE margins to increase to a range of 40% to 50%. We are targeting inflows to exceed $40 billion in 2024. And again, we have significantly increased our ability to return capital to shareholders by expanding the share buyback capacity. Again, we intend to be active buyers of our stock as we see strong value returning capital to you, our shareholders.

We began 2024 with clear momentum. And with that, let me now turn the call over to John.

John Redett : Thanks, Harvey. Good morning, everyone. I want to cover several topics this morning and echo a few comments already made. First, stakeholder alignment and changes to our compensation strategy. Second, capital allocation. Third, I want to provide some comments on our 2023 results. And lastly, our 2024 financial targets. Updates to our compensation strategy were driven by our desire to create an even better stakeholder alignment and drive fee-related earnings to our shareholders. Essentially, compensation for our senior people will become more success based. As a result, our earnings mix will increasingly shift to a more shareholder friendly fee-related earnings model as our compensation changes phase in over the next few years.

This should show up in two main ways. And if you want to follow along, flip to Page 8. Our FRE related cash compensation ratio will decline to 30% to 35% from 45% to 50%. Our realized performance revenue compensation ratio will increase to 60% to 70% from 45% to 50%. I want to be clear, this is not about changing the overall level of compensation, but rather having a higher portion of compensation being success driven. This change should be neutral to DE overtime. In connection with these changes, we incurred a onetime non-cash GAAP charge of $1.1 billion, largely related to the value of future carry going to employees. This will allow us to generate higher FRE for shareholders more quickly. Even after this charge, our net accrued carry balance ended the year at $2.4 billion and continued to represent over $6 per share in future earnings for our shareholders.

In addition, we awarded performance stock units to a select number of senior professionals that have the accountability to help us achieve our growth objectives. These units are highly aligned with shareholders as they only invest with significant share price appreciation. As Harvey mentioned, we now have the capacity to buy back $1.4 billion in stock. This is in addition to an expected annual dividend to shareholders of over $500 million. Our strong balance sheet provides us the flexibility to both return meaningful capital to shareholders and importantly, invest for growth. These are not mutually exclusive decisions. Investing into our businesses remains our top priority. Moving on, let me highlight just a few over year-end results. We generated $1.4 billion in DE or $3.24 per share, our third best year on record.

We produced $531 million in net realized performance revenues despite a difficult market backdrop. Turning to fee-related earnings. We produced a record $254 million of FRE in the fourth quarter with an FRE margin of 43%, also a record. And for the year, we produced a record $859 million in FRE. As we already noted, we expect a meaningful shift higher in 2024 for both FRE and margin. Finally, as Harvey mentioned, we had a strong finish to the year in terms of fundraising, bringing in $37 billion in 2023, more than 20% higher than the prior year. Included in that total is more than $9 billion in new capital raised by Global Credit in the fourth quarter alone. We have significant momentum going into 2024. We expect FRE to be approximately $1.1 billion, more than 25% higher than 2023.

We expect our FRE margin to increase to 40% to 50% and lastly, we expect inflows to be more than $40 billion. In closing, we produced record results in 2023, and we finished the year with strong momentum. Now let me turn the call over to the operator so we can take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Alexander Blostein with Goldman Sachs. Your line is open.

Alexander Blostein : Hi, good morning, Harvey. Good morning, everybody. Thanks for the question.

Harvey Schwartz : Yeah, hi.

Alexander Blostein : So first, I appreciate — hello. So appreciate all the strategic changes you guys are making today. That’s great. And obviously, the more explicit disclosure is also very helpful. I was hoping we could start with the discussion on the momentum you highlighted in your prepared remarks. As you look out into 2024, particularly with respect to fundraising, I know you highlighted over $40 billion. So I was hoping you could walk us through that. And then sort of related to that, as you think about the momentum in the business, how does that inform the pacing of the share repurchase announcement you guys made today as well? Thanks.

John Redett : Okay. Alex, thanks. So you really could feel it Bill, as a new CEO coming in 2023 and new to the company. As you know, and we talked about this. I really felt like my priority was to spend time with my teams and time of my all keys and my investing clients. And I spent — I mean I think I met with over 300 investing clients during the course of the year. And obviously, you spent a lot of time internally. And that was really about my teams getting to know me, which is more important even than me going to know them. And you could really feel — and I think I even talked about it in the third quarter, we could feel the momentum building in terms of the focus, the execution, the receptivity of the brand. And it all came together with these record results, record FRE, record margin, the cost-saving initiatives and you’re seeing the fundraising.

In terms of coming to ’24, the momentum feels good, and to [indiscernible] backdrop complicate it. And I feel cautiously optimistic about the environment in 2024, which should provide a tailwind and maybe some upside in these targets. Specifically around fundraising, I’ll make two comments. One, I know you all focus on a quarter-to-quarter. We really think about fundraising in terms of how can we provide the best value to our LPs. But putting it in together, we put it together the way you think. We built up knowing what we’ll be focused on in the course of the year. And so we feel good about these numbers.

Harvey Schwartz : And Alex, in terms of the buyback part of your question, look, we’ve been spending a lot of time thinking about capital allocation. And we’re going to take a much more disciplined approach in terms of how we execute on capital allocation. I think the $1.4 billion buyback is an important first step, and we don’t think the stock reflects the true value of the franchise. So you should consider us to be active buyers of our stock. I think it’s also important to remember, we have a very strong balance sheet, which enables us to have the flexibility to — in addition to giving capital back to our shareholders via a $1.4 billion stock buyback and our dividend, we have the flexibility and balance sheet strength to continue to invest in our business for growth.

Alexander Blostein : Great. Thank you very much.

Harvey Schwartz : Thanks, Alex.

Operator: Thank you. Our next question comes from Ken Worthington with JPMorgan. Your line is open.

Ken Worthington : Hi, good morning. Thanks for taking the question. As we look at credit, fundraising was elevated at $9 billion. It looks like 50% more than you raised in the first three quarters of the year combined, and you gave some color in the deck on CLOs and CTAC, but it feels like there’s more to these numbers. So can you flesh out the jump in fundraising this quarter in credit and sort of how that should continue into this year?

Harvey Schwartz : Yeah. Yeah. Thanks for the question. I would say, look, I think it’s really tough to look at fundraising kind of quarter-to-quarter. There’s obviously going to be a lot of volatility. We had a great, great fundraising fourth quarter. We actually had a great year for fundraising and credit as well. And I expect importantly that, that momentum in credit fundraising will continue well into 2024. We’ve got good visibility on that. It was really, really spread across all of our products that we’re raising money for CLOs, as you mentioned, CTAC, which is our retail credit products always in the market. CCOP [ph] we raised money for it as well and Carlyle Strategic Solutions, which is our kind of asset-backed fund.

So it’s pretty consistent across the platform. I think the important takeaway is not focusing quarter-to-quarter. We had a good year but we have really good momentum going into 2024 for credit fundraising and quite frankly, fundraising more broadly.

Ken Worthington : Great. Thank you.

Harvey Schwartz : Thanks, Ken.

John Redett : Thanks, Ken.

Operator: Thank you. Our next question comes from Patrick Davitt with Autonomous Research. Your line is open.

Patrick Davitt : Hi, good morning, everyone.

Harvey Schwartz : Hi, Patrick.

Patrick Davitt : You mentioned the compensation framework will phase in. So what are you assuming for 2024 in your $1.1 billion guide? And in that vein, what are you assuming for transactions and FRPR? And if realizations do remain subdued, do you have a commitment from employees to these compensation ratio? In other words, will you have to — will you have to abandon these targets if the realizations don’t get better? Thank you.