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Corrected Transcript

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CORPORATE PARTICIPANTS

Daniel F. Harris

Curtis L. Buser

Managing Director & Head-Public 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

Kenneth B. Worthington	Brian Bedell
Analyst, JPMorgan Securities LLC	Analyst, Deutsche Bank Securities, Inc.
Gerald Edward O'Hara	Chris Kotowski
Analyst, Jefferies LLC	Analyst, Oppenheimer & Co., Inc.
Craig Siegenthaler	Rufus Hone
Analyst, BofA Securities, Inc.	Analyst, BMO Capital Markets Ltd.
Michael J. Cyprys	Alexander Blostein
Analyst, Morgan Stanley & Co. LLC	Analyst, Goldman Sachs & Co. LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, thank you for standing by and welcome to The Carlyle Group First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to your speaker for today, Daniel Harris, Head of Investor Relations. You may begin.

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Daniel F. Harris

Managing Director & Head-Public Investor Relations, The Carlyle Group, Inc.

Thank you, Towanda. Good morning, and welcome to Carlyle's first 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 Annual Report on Form 10-K that could 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 first quarter, we generated $183 million in fee-related earnings and $303 million in distributable earnings with DE per common share of $0.74. We produced net realized performance revenue of $118 million and grew our accrued carry balance of $4.3 billion. We declared a quarterly dividend of $0.325 per common share. To ensure participation by all those on the call this morning, please limit yourself to one question and then return to the queue for any additional follow-ups.

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. We're accelerating Carlyle's growth by diversifying our global business and running the firm better than ever before to drive long-term shareholder value. This strategy helped us continue to deliver for our shareholders and investors in the first quarter. Our FRE grew over 40% compared to the first quarter last year. Our leading investment platform demonstrated continued excellence as witnessed by record accrued carry balances, and we are increasingly diversified as over two-thirds of our total AUM is away from Corporate Private Equity.

We are pleased with our progress and we will continue to pursue organic and inorganic opportunities to drive further growth and diversification, while maintaining investment excellence and business discipline as we navigate market and geopolitical uncertainty. The start of 2022 has been complex on many fronts, including the war in Ukraine and rising inflation and interest rates. And the world is now in a more tenuous place. Specifically on our exposure to this conflict in region, across our global portfolio and distribution platform, we have minimal direct exposure to Russia, Belarus or Ukraine and have not seen significant impact to Carlyle's business.

Having said this, there are major paradigm shifts occurring which are driving complexities and volatility in the investment environment. But Carlyle continues to perform and importantly, our focus on thoughtful portfolio construction over the years is paying off this quarter.

Our aggregate investment portfolio appreciated 5%, led by a 7% increase in Global Private Equity while public markets were down approximately 5%. We saw particular strength in our real estate platform with 10% appreciation and our infrastructure and natural resources platform with 19% appreciation. These were the major drivers of our net accrued performance revenue balance growing to $4.3 billion, a record level for our firm.

Our credit strategies are also performing well. Our direct lending strategies are currently yielding approximately 9% and the portfolios in our market leading CLO business continue to have a default rate less than half the industry average. This broad-based performance across all asset classes is a testament to the value of our diversified global platform, time tested investment approach and world-class teams. The private markets continue to outperform public markets over the long-term. And our portfolios are well-positioned for the current market environment.

Turning to our growth and strategic plan to drive shareholder value, we're executing on what we told you and pleased with our progress. In the first quarter, we generated a record of $183 million of FRE, up 42% over the firstquarter last year. This reflects the organic growth in our business over the past year and importantly, does not yet capture the impact from several strategic growth transactions we recently announced.

To that end, we are also pursuing growth by repurposing balance sheet capital for strategic inorganic opportunities. On last quarter's call, we told you 2022 was going to be a breakout year for credit and insurance, two key areas identified for growth as part of our strategic plan. And we are already delivering on that.

We're continuing to scale our Global Credit platform with FRE accretive acquisitions as evidenced by our recent iStar and CBAM transactions. And we also saw major milestones and insurance solutions with a $2 billion capital raise and creation of a new strategic advisory services agreement with Fortitude.

Our strategy in this area is differentiated, providing a real engine for growth and alignment for all stakeholders. This new agreement better aligns Carlyle's financial growth with the strategic interest of Fortitude, and has significant and immediate impacts to our FRE and total AUM, which on a pro forma basis for this agreement, is now approximately $375 billion. Keep in mind with this new advisory relationship, we have a fee stream which is more perpetual in nature and will grow as Fortitude continues to scale.

Turning to fundraising, which continues to fuel our growth. In the first quarter, we raised more than $9 billion. Changing dynamics mostly related to a crowded private equity fundraising marketplace is affecting the timing of some of our private equity funds in the market. But the breadth of our platform and the strength of our brand and LP partnerships remains a differentiator for Carlyle.

We continue to benefit from our diversification beyond traditional Private Equity, as demonstrated by our second Credit Opportunities Fund, which recently had a final close at $4.6 billion, almost twice as large as its predecessor fund, as well as increasing traction within our infrastructure and renewable strategy. We have also added and launched additional products and Global Credit and Global Investment Solutions to meet the rising demands of investors for these asset strategies. Putting it all together, I want to underscore the real magnitude of the acceleration in FRE that we've delivered by executing against our strategy.

In 2017, we delivered approximately $190 million in FRE. Last year, we reported almost $600 million. That is more than tripling our FRE in just four years. And now we said we expect to deliver $850 million in FRE for 2022, which is 40% projected growth year-over-year. If we achieve that, we will have grown FRE by more than four times in just five years. That is significant value creation for our shareholders.

I'll end today with this. We are transforming Carlyle into a more diversified global investment firm, helping us capture growth and expanding strategic areas like Global Credit, infrastructure and renewables, insurance and Global Investment Solutions. And we are doing this while building a powerful Private Equity business.

We feel confident in our strategic plan and our ability to drive future FRE growth. Our leadership team is focused on managing through the complexities presented by the current market and geopolitical landscape. And I'd be remiss if I didn't continue to stress that this complexity and volatility also creates opportunity.

We have built an increasingly diversified business mix that positions us well to continue capturing opportunities across the expanding private markets and to perform across cycles for all of our stakeholders.

With that, I'll turn it 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. I want to focus on three areas in my remarks that complement Kew's comments, but also follow-up on our presentation from just a few weeks ago. First, our strong start to the year and fee-related earnings underscores the work we have done to broaden our earnings stream and provide increased balance to our distributable earnings.

Second, our thoughtful and differentiated portfolio construction underpins our ability to deliver strong distributable earnings. And third, we're poised for additional FRE growth, further diversifying our earning streams.

Let's begin by discussing our strong start to the year in fee related earnings. We generated a record level of fee related earnings, 42% higher than a year ago and our FRE margins increased to 36%, up 500 basis points from a year ago. And all of this is before any meaningful contribution from our recently completed acquisitions that will be additive beginning next quarter.

Management fees of $454 million increased 19% year-over-year, with the most significant growth in Global Private Equity and Global Credit driven by solid fundraising activity and active deployment. Compared to the fourth quarter, Global Private Equity management fees declined due to strong realization activity in the second half of 2021, alongside a step down in Carlyle Partners VII management fees.

In Global Credit, you will see a material step-up in quarterly FRE from our most recent acquisitions, beginning next quarter, With CBAM which closed on March 21st, and Fortitude which closed on April 1st, both adding high incremental margin FRE. In Global Private Equity, FRE should continue to build throughout the year as we raise additional capital in our new buyout and growth vehicles and we expect to see higher levels of top-line fees throughout the year.

This quarter, we began reporting a new line item in our non-GAAP results, which was historically reported as a component of fund management fees, fee-related performance revenue. This presentation is similar to disclosures from others in our industry. Included in this line item are regularly recurring performance revenues we earn from our perpetual products, such as our credit interval fund, CTAC, our BDCs and Core Plus real estate. The latter of which accelerated meaningfully this quarter as we passed through the third anniversary of the CPI Fund. We expect to generate significant revenues in this line item every year, though certain quarters throughout the year will be higher than others.

Moving on, our portfolio performed incredibly well in the first quarter, as Kew summarized, with 5% overall appreciation. Our portfolio construction, diversity of investments and strong underlying performance of our portfolio companies more than offset the negative impact of increasing market uncertainty and the downward pressure from our public positions, which currently make up only about 10% of our portfolio.

The only area where we have meaningful direct exposure to Belarus, Ukraine and Russia across our investment platform is in our credit aviation portfolio, which resulted in downward valuations in these funds for the quarter. As Kew noted, the portfolio's appreciation drove our accrued carry balance to a record $4.3 billion. To put that in perspective, our accrual is up about 35% year-over-year and has more than tripled over the past two years.

This level of net accrued performance revenue provides us further confidence that Carlyle expects to generate our previously indicated average of $1 billion of annual net realized performance revenues over the next several years dependent upon market conditions. First quarter's net realized performance revenues of $118 million was