Q1 2024 Earnings Summary
- Strong Fundraising Momentum Towards $40 Billion Target: Carlyle remains confident in achieving its $40 billion inflow target for 2024, expecting acceleration in fundraising throughout the year. This is driven by strong demand across its platform, including the Solutions business, real estate funds, Global Credit, and wealth management products. Management emphasizes that the first quarter fundraising of $5.3 billion was on plan, and significant momentum is anticipated in subsequent quarters.
- Active Share Repurchase Program Reflects Management Confidence: Carlyle repurchased $150 million of stock in the first quarter of 2024, which is significant compared to the historical average of $200 million per annum. With $1.25 billion remaining on the share repurchase authorization, management stated they are active purchasers of the stock going forward, signaling confidence in the company's valuation and future prospects.
- Optimistic Outlook for Increased Realizations Boosting Earnings: Carlyle has a strong pipeline of high-quality companies ready for monetization and expects realization activity to pick up as market conditions improve. Management is optimistic that realizations will accelerate, contributing to earnings growth through higher performance fees and returning capital to investors.
- Fee-paying Assets Under Management (AUM) declined in both private equity and credit segments this quarter, indicating potential challenges in growing AUM and possibly affecting future management fees. Management attributed the decline in credit to "normal course runoff" but provided limited details on private equity.
- Elevated equity-based compensation expenses due to performance stock units are impacting profitability and will continue throughout 2024 before trending down in 2025, pressuring earnings in the near term. Management expects the equity-based compensation to "start trending down next year."
- Increasing default rates in European Collateralized Loan Obligation (CLO) portfolios may pose risks to the firm's credit business. While the company notes they outperform industry averages, they admit that European credit stats are "not quite as good" as in the U.S., potentially affecting performance and fees in that segment.
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Fundraising Confidence
Q: Can you unpack the major pieces to achieve the $40B fundraising target?
A: Management expressed confidence in reaching the $40 billion fundraising goal for the year , citing strong momentum across the platform, particularly in Solutions, Wealth channel, Credit, and Real Estate. They expect acceleration in fee-paying AUM growth, driven by demand in secondaries, co-investments, and new partnerships. -
FRE Trajectory and Margins
Q: How do you view FRE trajectory and underlying components this year?
A: Fee-Related Earnings reached a record $266 million, up 40% year-over-year, with margins at 47%. While G&A expenses were lower this quarter due to discipline and seasonality, they expect them to normalize, bringing FRE margins to the mid-40% range in upcoming quarters, aligning with their target of 40-50%. -
Fee-Paying AUM Trends
Q: What caused the decline in fee-paying AUM in private equity and credit?
A: The slight decline was due to normal course runoff outside carry funds. They anticipate growth to accelerate throughout the year, supported by strong fundraising momentum in secondaries, co-investments, Japan, and Real Estate. -
Share Repurchases and Equity-Based Compensation
Q: What's the outlook for share repurchases and equity-based compensation?
A: They repurchased $150 million of stock in Q1, significantly higher than their historical annual average of $200 million. With $1.25 billion remaining authorized, they plan to be active purchasers going forward. Equity-based compensation increased due to performance stock units granted to key team members, aligning interests with shareholders. They expect equity-based comp to trend down next year. -
Realization Activity and PE Exits
Q: Does recent pickup support improvement in realization activity?
A: Management is optimistic about increased realizations, having generated $22 billion in choppy markets. If market conditions improve, they expect momentum to accelerate, though it's market-dependent. IPO markets are beginning to open, which could aid in exits. -
Dividend Outlook
Q: Is there capacity to increase the dividend given earnings outlook?
A: They expect no immediate changes to the dividend, focusing on maintaining flexibility in capital allocation to invest in accretive opportunities and return value to shareholders through buybacks. -
CLO Default Rates Impact
Q: How are rising CLO defaults affecting your CLO business?
A: They are not concerned about credit quality in their CLO business. U.S. default rates are half the industry average, and European credit stats are better than industry averages. Over 25 years, they've collected 100% of management and subordinated fees. -
Insurance Business Pipeline
Q: What should we expect from your insurance business?
A: The pipeline looks strong, with significant opportunities like the Lincoln National transaction. They see persistent momentum due to insurers' need to manage capital dynamically and expect this trend to continue over the long term. -
Real Estate and Infrastructure Demand
Q: Can you unpack the demand in Real Estate and Infrastructure?
A: Their Real Estate franchise is performing exceptionally, currently in its tenth fundraise with strong momentum. They are optimistic about opportunities across renewables, infrastructure, and energy, driven by global trends like energy transition and security. -
Wealth Channel Flows
Q: What are the flows from the wealth channel this quarter?
A: They've raised nearly $50 billion in the wealth channel over time. Products like CTAC, CAPM, and secondaries are gaining momentum, with new partnership launches expected soon. They are optimistic about long-term growth in this channel. -
Reversals of Performance Allocations
Q: What caused reversals of prior performance allocations?
A: CP VII fell out of carry this quarter after being barely in carry previously, impacting performance allocations. Management focuses on long-term performance rather than quarter-to-quarter fluctuations and remains proud of their 35-year track record. -
New Fund Launches in Asia and Europe
Q: Should we expect new fund launches in Asia and Europe?
A: They confirmed they have flagship vehicles in those regions and expect management fees to pick up across the platform throughout the year, with everything remaining on plan.