Q3 2024 Earnings Summary
- Carlyle has significantly improved its Fee-Related Earnings (FRE) margin to 47%, up 1,000 basis points from last year, and expects further margin expansion through organic growth, indicating strong operational efficiency and profitability.
- The corporate private equity business is experiencing strong performance improvements, with net performance fee accruals increasing by $600-700 million, driven by operational improvements, EBITDA growth, revenue growth, and margin expansion, suggesting a positive trajectory and potential for future growth.
- Carlyle's capital markets revenue is set to reach record levels even in a relatively quiet market, and as market conditions improve, there's potential for significant acceleration, indicating strong growth prospects in this revenue stream.
- Slow growth in management fees despite claimed momentum: An analyst points out that the management fee growth is only 2% year-over-year, which does not reflect the purported underlying growth and momentum in the business. This could indicate challenges in converting AUM growth into revenue.
- Persistent low returns in key buyout funds impacting performance: Despite strong exits like StandardAero and Rigaku, the net IRR for major buyout funds remains low, with CP VII at 8% and CEP V falling to 4%. Continued underperformance in these funds may hinder future fundraising efforts and investor confidence.
- Potential fundraising shortfall and reliance on uncertain market conditions: There is uncertainty around achieving the firm's $40 billion fundraising target, as management uses the phrase "about $40 billion" and notes that timing of fundraising can be affected by external factors. This reliance on favorable market conditions may impact the firm's growth projections.
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Buyout Performance Metrics
Q: How will buyout performance impact fundraising?
A: Carlyle saw strong improvement in corporate private equity performance, with net performance fee accrual up nearly $600 million. Appreciation was driven by operational improvements like EBITDA growth, revenue growth, and margin expansion. Management is optimistic about the trajectory of the business and believes improved performance can enhance fundraising over time. -
Capital Allocation Strategy
Q: How will you deploy excess capital going forward?
A: Carlyle focuses on allocating capital where it can get the best return, prioritizing organic growth and continuing share buybacks. While open to strategic M&A that makes sense, the firm currently sees the best returns from investing in its business and repurchasing shares. Carlyle has repurchased nearly $500 million year-to-date and has $900 million remaining on the buyback authorization. -
Management Fee Growth Outlook
Q: Is there a path to double-digit management fee growth?
A: Fee revenue grew 7% in the quarter, driven by strong growth in solutions (up nearly 45%) and credit (up nearly 11%). While private equity saw some headwinds, management expects momentum from strategic initiatives to translate into higher management fees over time. -
Annual Fundraising Potential
Q: Can you deliver $40 billion in annual fundraising?
A: Carlyle feels optimistic about fundraising momentum, having raised $26 billion year-to-date, the second-best period in its history. The firm expects to be "in and around $40 billion," acknowledging that timing can vary due to client needs. -
Capital Markets Opportunity
Q: How do you view revenue opportunity in capital markets?
A: Carlyle's capital markets business is having a record year, with revenues growing 80% despite a quiet market. The firm is well-resourced and expects activity to accelerate with improving deal flow, emphasizing that the business is balance sheet light. -
Asset-Based Finance Growth
Q: What's the outlook for asset-based finance growth?
A: Asset-based finance is seen as an enormous opportunity, with Carlyle's AUM in this area at roughly $7 billion. The firm expects significant growth through portfolio purchases and flow arrangements, citing the recent Discover transaction and partnerships like Monogram, Triad, and Unison. -
Stock-Based Compensation Outlook
Q: How should we forecast stock-based comp next year?
A: Stock-based compensation is elevated due to accounting treatment of performance stock units but is expected to trend down to more normalized levels in 2025. Management is focused on repurchasing shares, with the share count down 1% this year. -
Credit Fundraising Outlook for 2025
Q: What's your expectation for credit fundraising in 2025?
A: Carlyle anticipates significant momentum in credit and insurance, with tailwinds in private investment-grade markets. The firm expects high activity levels in CLOs and benefits from its partnership with Fortitude. -
Impact of Tariffs on Deployment
Q: Any frictions in deployment due to tariffs?
A: Management believes it's difficult to anticipate government policy on tariffs but is prepared to manage risks. Carlyle's global yet local presence, especially in Asia, provides an advantage in navigating regional uncertainties. -
Potential Impact of Aggressive Policies
Q: How would aggressive policies affect the portfolio?
A: Carlyle regularly risk-manages around various scenarios, including tariffs. Management focuses on long-term strategy rather than reacting to potential policy changes, relying on the firm's diversified franchise. -
Fundraising Pace and Targets
Q: Is the "about $40 billion" fundraising target soft?
A: The firm feels good about fundraising momentum and expects to be close to the $40 billion target, acknowledging variability in timing. The emphasis is on client needs rather than hitting a specific number. -
FRE Margin and AUM Growth
Q: What's the outlook for FRE margin and AUM growth?
A: Carlyle's FRE margin improved to 47%, up 1,000 basis points from last year. Management prefers to grow the margin through organic growth rather than efficiencies and expects it to improve over time. -
Impact of Trump Administration
Q: How will Trump policies impact Carlyle's activities?
A: Management sees positive factors like tax cuts and lighter regulation boosting CEO confidence, leading to more decision-making and M&A activity. This should benefit Carlyle's business, with tailwinds already visible in the numbers.