Q4 2023 Earnings Summary
- Carlyle Group plans to execute a significant share buyback of $1.4 billion, which could reduce the share count by approximately 10%, demonstrating management's confidence in the company's value and providing immediate value to shareholders.
- The company expects to raise over $40 billion in 2024, building on strong fundraising momentum across credit, private equity, real estate, and infrastructure platforms, indicating robust investor demand and growth opportunities ahead.
- The Investment Solutions business is expected to double its Fee-Related Earnings in 2024, driven by strong growth and momentum in their secondary business and the launch of new products like CAPM, highlighting significant earning power and expansion potential.
- Uncertainty in Achieving FRE Margin Targets and Compensation Changes May Impact Profitability: The wide fee-related earnings (FRE) margin target range of 40% to 50% for 2024 indicates uncertainty in the company's ability to achieve higher profitability levels. Executives mentioned that the compensation ratio would be dynamic and could act as a "shock absorber," potentially increasing when realizations are lower. This flexibility introduces uncertainty in margins and could impact shareholder returns if performance is not as strong as expected. , ,
- Decline in Net Accrued Performance Revenues and Reduced Shareholder Benefit from Performance Fees: The company experienced a 20% year-over-year decline in net accrued performance revenues in 2023. With the new compensation changes, a larger portion of performance revenues will go to employees rather than shareholders. This shift means shareholders may receive less benefit from performance fees, which could lead to lower earnings per share from these revenues, especially if the trend of declining performance revenues continues.
- Potential Ineffectiveness of Share Repurchase Program and Opportunity Costs: Analysts raised concerns about the effectiveness of the $1.4 billion share repurchase program in significantly reducing the share count. There is skepticism that capital allocated to buybacks might be better invested in growth opportunities within private markets where the company is not yet scaled. Prioritizing buybacks over strategic investments could hinder long-term growth prospects and result in missed opportunities in expanding high-potential business areas. ,
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Fundraising Outlook
Q: What's the composition of the $40 billion fundraising target?
A: Management expects the $40 billion fundraising target to be achieved across the platform, including strong momentum in credit, private equity, real estate, and infrastructure. They acknowledged industry headwinds in corporate private equity, particularly in Europe and Asia, but feel good about the overall target due to good demand in products like their Japan buyout fund and real estate offerings with fantastic returns ,. -
Share Buyback Announcement
Q: Is the $1.4 billion share buyback a one-year authorization?
A: The $1.4 billion share buyback authorization is not confined to one year. Management emphasizes flexibility, intending to be active buyers of their stock. They believe the stock undervalues the franchise and see the buyback as an important step while also having the balance sheet strength to invest in business growth ,. -
Compensation Framework Changes
Q: How will the compensation changes impact margins and expenses?
A: Management is implementing compensation changes deliberately over a couple of years, aiming for a compensation ratio that acts as a shock absorber, dynamic with performance. They anticipate the changes to be DE-neutral, with the majority of employees unaffected. The intent is not to pay people more or less but to have a performance-based structure, supporting an FRE margin target range of 40% to 50% ,. -
Net Accrued Performance Revenues
Q: How are you approaching the decline in net accrued performance revenues?
A: Despite a 20% year-over-year decline in net accrued performance revenues in 2023, management remains committed to performance revenues and carry realizations as core components of the business. They highlight having net accrued carry of approximately $2.4 billion, representing $6 per share. -
CLO Business Outlook
Q: What is the outlook for the CLO business in 2024?
A: The CLO business showed strong performance, raising their first captive equity fund, CLO Partners, which was oversubscribed. Management feels good about the business momentum into 2024, noting that banks are resuming investments in AAAs, and credit spreads are tightening, which supports growth in the CLO market. -
Potential for Strategic M&A
Q: Are you considering strategic M&A as part of capital allocation?
A: While open to opportunities where industrial logic makes sense, management believes that all the footings are in place for growth within their existing platform. They see marginal opportunities in building on their base franchise and are not feeling pressure to pursue M&A given their current momentum. -
Non-Compensation Expense Management
Q: What are your plans for non-comp expense savings in 2024?
A: Management achieved a 43% FRE margin in the fourth quarter, showing faster progress than anticipated. They will continue to focus on prudently managing expenses and see additional opportunities for savings in 2024, but emphasize that growth will be the main driver rather than cost-cutting. -
Investment Solutions Growth
Q: How will Investment Solutions contribute to growth in coming years?
A: Investment Solutions is expected to double its FRE in 2024, reflecting strong momentum in their secondaries and co-investment businesses. Management mentions launching new products like CAPM and sees significant opportunity for growth in this area. -
Credit Insurance Opportunities
Q: What growth opportunities do you see in credit and insurance?
A: Management is optimistic about the credit and insurance platform, having achieved $9 billion in inflows in the fourth quarter. They highlight the capital-light model providing flexibility and a strong partnership with Fortitude, expecting good growth over the next couple of years. -
Capital Return vs. Growth Investments
Q: How do you balance share buybacks with investing in growth?
A: Management believes the share buyback does not sacrifice growth, as they have the flexibility to allocate capital efficiently. They see compelling enterprise value in returning capital to shareholders while ensuring investment in growth opportunities across private markets.