Carlyle Group Inc (CG) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to The Carlyle Group Fourth Quarter 2021 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Daniel Harris, Head of Investor Relations. Please go ahead.

Thank you, Shannon. Good morning, and welcome to Carlyle's Fourth Quarter 2021 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 a 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 fourth quarter, we generated $174 million in fee-related earnings and $903 million in distributable earnings, with DE per common share of $2.01. We produced net realized performance revenue of $683 million and entered 2022 with an accrued carry balance of $3.9 billion. And for the full year, we generated $598 million in FRE and $2.2 billion in distributable earnings, with DE per share of $5.01. We declared a quarterly dividend of $0.25 per common share.

(Operator Instructions) And with that, let me turn the call over to our Chief Executive Officer, Kewsong Lee.

Thanks, Dan. Hello, everyone, and thanks for joining us today as we discuss our fourth quarter and full year 2021 results as well as provide line of sight into 2022.

We started last year by laying out our strategic plan for future growth, and I'm pleased to tell you that we are delivering on our goals. We had an exceptional 2021 with records across the board in fee-related earnings, distributable earnings and every major investment metric. I am proud of our people and the results they have collectively produced.

Our fourth quarter performance caps this strong year and illustrates the powerful growth trajectory across our more diversified platform. I want to highlight the key drivers underpinning our record year as our FRE has grown to new sustainable levels, our growth initiatives are starting to pay off and our performance has set the stage for robust distributable earnings over the next several years.

Let's start by underscoring our investment performance with valuations increasing 41% year-over-year and realizations of $44 billion across all of our traditional carry funds. Portfolio construction continues to be a strength, especially as we enter a period of greater volatility. We're investing more capital as we expand our aperture and leverage even more effectively our global scale and sector expertise. This has resulted in record investment activity.

We deployed $14 billion in Q4 alone and $34 billion in 2021, each a record. This investment performed the ability to send realized proceeds back to our limited partners has helped their fundraising efforts. In 2021, we raised $51 billion, nearly double what we raised in 2020. We aim to continue this momentum over the next few years as we focus on the substantial upside potential to our Investor Day target, which would help us drive financial results beyond our FRE ambitions. Alternative sources of capital formation such as high net worth, retail, open-ended funds, permanent capital and insurance represent upside and are an increasing source of fundraising dollars as we pick our spots to grow these sources of capital.

Stepping back, the headline is we ended 2021 with strong fundraising momentum that will carry over into 2022. Our extraordinary performance across the board has established a new level of earnings power, which gives us the confidence to raise our dividend substantially. You'll hear more on this from Curt later. More importantly, this performance also gives us the resources to continue investing strategically to build the firm and accelerate growth.

Now turning to strategic growth opportunities. Our investments in Global Credit are paying off, both organically and through strategic acquisitions. For example, our credit opportunities strategy has grown to $8 billion in about 4 years. And with Carlyle Aviation, we expect FRE to triple in 3 years since the acquisition. The growth continues with our energy now focused on building out infrastructure credit, which we are doing organically and jump-starting growth in real estate credit.

Another scalable platform initiative is Fortitude, which continues to progress as planned. And given the current activity level and pipeline, we are confident that 2022 could be a breakout year for this very scalable permanent capital platform. Several years ago, we asked for patience as we rebuild our Global Credit platform. We're using the same playbook in other areas like infrastructure and renewables, where we see significant room for growth and, similar to Fortitude, anticipate an active year.

Finally, our focus on building the firm includes investment and leadership in impact and ESG capabilities, which are increasingly required to drive returns and meet the needs of our LPs. At Carlyle, ESG is not one fund or product but a part of everything we do. One example is the ESG Data Convergence Project announced in partnership with CalPERS in September 2021, which has reached a milestone commitment of over 100 leading GPs and LPs globally to its partnership, representing $8.7 trillion in AUM and over 1,400 underlying portfolio companies. And just this week, Carlyle took another important step as one of the first in our industry to announce its commitment to achieve net zero greenhouse gas emissions by 2050 or sooner across direct investments. By integrating an ESG mindset across the firm in our investment processes and throughout our value creation, our approach benefits all stakeholders.

To wrap up, we entered 2022 better positioned than ever before. Carlyle is stronger and healthier firm today because of our 2021 progress. Our focus remains on continuously improving how we drive value and generating attractive returns, and we are confident in our ability to grow FRE, drive investment performance and strategically build the firm for future growth. We are focused on building the best investment firm possible and running it better than ever before.

As the environment continually shifts around us, our diversified investment platform and global team have demonstrated resilience and adaptability. I remain confident in our ability to thrive and capture opportunities in any environment. I'm proud of our team, and we remain focused on continuing to deliver for shareholders and all stakeholders. I appreciate the hard work as we accelerate our activity for another very active year of executing on our vision of thinking bigger, moving faster and performing better.

Over to you, Curt.

Thanks, Kew, and good morning, everyone.

I want to begin by reiterating many things Kew mentioned to emphasize what our strong performance this year means. We generated over $5 per share in distributable earnings in 2021, well more than double the average generated in the last 5 years. In fact, the fourth quarter's $2.01 per share would have exceeded the full year in 4 of the past 5 years. These results are driven by attractive investment performance and are fortifying our balance sheet to help us deliver long-term, sustainable growth in our global platform and fee-related earnings.

Let's dive deeper into all of this. This year, we focused on delivering strong, sustainable and growing fee-related earnings. 2021 was a record year for the firm's overall FRE. Every segment generated record FRE, and our full year FRE margin grew to 33%, up from 30% in 2020. In fact, FRE grew more than 20% off the adjusted level in 2020, and our 5-year FRE CAGR is 24%. This is the outcome of scaling our platform and positioning Carlyle for growth.

As Kew noted, we also had a record year for fundraising, and much of that will have a stronger impact on fee-related earnings in 2022. Record fundraising of $51 billion, along with strong fund performance, helped drive total assets under management, up 22% over the past year.

As we look ahead, we will continue to focus on running the firm effectively and efficiently. On an organic basis, we expect to see FRE growth of more than 20% in 2022, driven by strong top line growth. 2021 fundraising underpins much of our expected growth in 2022. Notably, we activated fees on our new U.S. buyout and growth capital funds as well as our most recent U.S. real estate funds all in Q4, elevating fee revenues in the fourth quarter and setting the stage for higher fee revenues this year.

In addition, we expect to see a breakout year for Global Credit in 2022. The business has $73 billion in assets under management as of year-end, more than 2x larger than it was less than 4 years ago, underpinned by nearly $17 billion in fundraising in 2021 for a broad spectrum of strategies, as many investors continue to shift away from traditional fixed income to private credit opportunities. This segment has several scaled products in structured credit, opportunistic credit, direct lending and aviation as well as several newer products in infrastructure and real estate credit, including the recent iStar transaction that will close in the coming weeks that are all well positioned for growth.

Our Global Investment Solutions business has the scale, global reach and data to help fund investors continually reassess and reconstruct their portfolios in pursuit of capturing returns. In a world where private capital has become mainstream and a significant portion of our investors' portfolios, this approach is more important than ever before and has enabled this business to more than double FRE to $84 million from $37 million just a year ago. Performance has also been impressive with appreciation of 48% in 2021 and net accrued performance revenues of $319 million at year-end, more than double from a year ago.

Our Global Private Equity business is a diversified business with platforms supporting Corporate Private Equity, real estate, infrastructure and natural resources, all on a global basis.

In Corporate Private Equity, we're a builder of businesses pulling more value creation levers than ever, helping companies reinvent their business models and drive growth. You can see the results of this work in our record net realized performance revenues. Just in the fourth quarter, Global Private Equity realized $10 billion in proceeds fueled by exits in PPD, PK, CoreSite and the sale of more than $1 billion of ZoomInfo. As Kew said earlier, this success is a function of our investment in teams, technology, diversity and platforms.

We have $124 billion in remaining fair value of invested assets in just our traditional carry funds, which ended the year up 30% year-over-year and positions us for continued significant realizations in the future. 2021 was a special year with over $1.5 billion in net realized performance revenues, which will be difficult to replicate, but we believe 2022 will be another strong year, and we should realize on average $1 billion over each of the next several years. Of course, in any given year, the health of the global markets is likely to drive variance to the upside or downside around that expectation.

Finally, I would like to spend some time on the strength of our balance sheet. After prepaying $250 million over 2023 bonds, our balance sheet reflects $2.5 billion in cash and $2.1 billion of firm investments. To put the cash balance in perspective, cash increased nearly $1.5 billion from a year ago. In 2021, we generated realized investment income of $210 million from our balance sheet investments or nearly triple what we earned the previous year. Again, this level of income realizations may not be easy to replicate, but we believe that we should routinely generate investment income at levels of $150 million or more per year on average.

Our strong cash position and expectation for elevated earnings position us to deploy our capital as we previously discussed. This includes investing in next-generation funds and new strategies, growing our adjacencies and pursuing accretive inorganic growth. We see various opportunities to drive shareholder value, resulting from the improved strength of our balance sheet.

Our credit ratings at both S&P and Fitch are on a positive watch for a potential upgrade, highlighting the upward trajectory of our firm and our financial footing. The strength of our balance sheet, along with a significant increase in FRE in 2021, allows the Board to comfortably and sustainably raise our fixed dividend to $1.30 for 2022, a 30% increase. The higher dividend will begin with Q1.

As we continue to grow FRE from here and as we laid out in our strategic plan, we expect we will be able to raise the dividend further in coming years. We're outperforming our own expectations and believe we are well positioned to do so for the next several years. Our strong momentum is allowing us to grow our fee-related earnings and distributable earnings and invest in Carlyle's longer-term growth. We are creating exceptional value for shareholders, and we will continue to deliver on this growth in 2022.

Now let me turn the call over to the operator, so we can take your questions.

(Operator Instructions) Our first question comes from Alex Blostein with Goldman Sachs.

So first question, just a little bit more strategic. I guess, Kew, '21 was a really strong year essentially on every front but most notably FRE growth. One of the concerns we continue to hear from investors and Carlyle broadly is that you really won't be able to sustain that kind of growth momentum going forward. But from your comments, you seem to be obviously pretty confident in that. So where is the disconnect? How do you expect that dynamic to play out? And maybe give us a little bit more in terms of the drivers that gives you that confidence.

Yes. Alex, look, I'm really confident. And importantly, the entire team is confident in our momentum and the fact that we're going to keep this going.

Look, FRE has already been growing 20% a year for the past 5 years, and I think that's mostly gone unnoticed. And if you get a little bit more granular, if you look at Q4, we generated $174 million of FRE. That run rate, multiply that by 4, it already positions us for a strong year of FRE growth in 2022, and that's before additional upside from our activities that we've got underway.

Look, with respect to business building, I think you touched on it in your note this morning, and it's the right place to look. Our Global Credit business is about to have a breakout year. We've talked to you about the fundraising. It's got over $70 billion of AUM, raised $17 billion last year. But really, the thing to look at, all the patience in building that business, this is the year where I think operating leverage really starts to kick in. And I think off of that growth, more is going to fall to the bottom line with respect to FRE.

And then turning to our incredible investment performance. It's across the board. And despite the record realizations we had, we still have about $4 billion of net accrued carry balances. It's very diversified across regions, across sectors, across funds. For me -- for us, it's not a question of if this comes out, but when it comes out, as Curt alluded to in his comments.

And then let me just address the broader base momentum we have on fundraising. So we pointed out $51 billion of fundraising. I want to note, 2/3 of that was away from Corporate Private Equity. Healthy fundraising in U.S. real estate, in solutions, in credit, it's broad-based across all segments. And I point that out because I think folks aren't appreciating that we're much more diversified, and it's a much broader business and a platform than ever before.

Now, of course, this is all before the fact that our balance sheet is about as strong as it's ever been. And I'm very focused on driving the firm into new strategic adjacencies, in markets that are large, that are scalable and that can be very FRE generative. So when you throw that all together, yes, I'm really confident. And the last piece to all this, you need a great team. This team is executing. So all of that is what gives me confidence that this is going to continue.

Great. That's super helpful. My follow-up is going to touch around just the operating leverage in the model, and I really want to zone in on compensation philosophy. We've seen a number of players in the alternative space sort of shift the compensation structure towards paying out more carry and, obviously, maximizing FRE margins, including a recently listed large private equity firm, as I'm sure you guys know. Although there is a degree of just P&L geography, obviously, in all of that, it does align compensation with fund performance and therefore, LP. So what are your thoughts about that dynamic for Carlyle? And as you are a lot more scaled today than in the past just with respect to management fee base, why not pursue a similar strategy?

Alex, thanks for that. This is Curt. Let me take that. So first, compensation structure, as you pointed out, are really important in driving behavior. And we feel good about our structures and how they're aligned for stakeholders across all investment cycles. Of course, we're always thinking about compensation and alignment and how to better align compensation of our professionals with that of our shareholders and performance because what you pay for is likely going to be what you get.

At the same time, we do believe in pay for performance and have been consistent in saying that our split of performance compensation shows strong alignment with limited partners on carry and fund performance with shareholders on driving fee-related earnings and using the firm capital to build our retained earnings. So that's important for driving future growth.

We're going to continue to grow our business and our earnings. That's what we're focused on. We've been doing that really well, as Kew just outlined. I have great confidence in the future. And to the extent that we decide to make any changes in our compensation models, we'll let you know. But the bottom line is we believe in alignment.

Our next question comes from Craig Siegenthaler with Bank of America.

So my first question is on credit and a similar question to Alex's first one. But $17 billion of fundraising in 2021, this is a pretty big increase year-over-year, and we see you keep expanding horizontally into new segments. We saw that with iStar this week. So how should we think about the forward run rate for fundraising credit given larger funds, wider offering and also some scale advantages on the distribution front? Because I believe you'll be doing new things on the retail side, too.

Craig, it's Curt. Thanks for that question. Global Credit is set up really well. So let me just kind of tick through some of the areas and starting with fundraising. So you look at kind of our path, it's been a nice tick up in fundraising, in Global Credit over sequential years, something like $10 billion or $11 billion last year, $17 billion this year. And in our pending fee-earning AUM, which is about $16 billion, the vast majority of that is Global Credit, and it will turn on mostly as we deploy capital during next year, and so that will be underpinning a lot of growth.

But let's tick through some of the big components. First, the structured credit business, our CLO. That business is just booming. So we issued 14 CLOs globally in 2021. It's currently managing about $34 billion in liquid credit strategies. That 14 billion (sic) [14] of CLOs we issued is about $7.5 billion. And we think we're taking market share in this space. That's really going to help underpin a lot of further growth in FRE in '22 because you didn't get all the benefit of that FRE growth this past year, and so you're going to see more in that space. So activity in the CLOs, really good.

As Kew mentioned in his opening remarks, our opportunistic credit business is already at $8 billion, deploying really well. Though fees, again, turn on as they deploy capital. So as that investment pace continues, more increase in revenues, so good space in opportunistic credit.

Aviation business, boy, really nice, nearly triple our run rate in fee-related earnings. The size of that business has continued to go up. You've seen some of these big transactions that they've done of recent, Fly a year ago and the big one this year. So look, they're now at about -- they should be, after all of this closed, increasing their total AUM from about $8 billion as of the third quarter to more than $13 billion. That all positions us to be able to triple the run rate of the FRE coming out of that business.

If you then further think, we've got some newer products like CTAC, small but growing really fast, really contributing to our results. Our direct lending business continues to do well and is growing. And then we've got some new initiatives. So as you pointed out, iStar transaction that was announced yesterday for real estate credit and also our infrastructure credit business. These are new platforms. The transaction yesterday really allows us to jump-start what we think over time will be a big business.

So I wouldn't have high expectations for this year in terms of driving earnings. We've just gotten our place in a really good spot where we have the AUM, the talent pool and really the platform that's now in place to really build a lot of it. So think '24 and thereafter for when this business will really kind of really matter, so we're investing in long-term growth.

And from a firm capital perspective, it's about $200 million in terms of firm capital. So I thought it was a good use of firm capital related to achieve those outcomes. And let's not forget the adjacencies. So Fortitude and capital markets, big adjacencies in Global Credit. They're also performing really well and driving growth. So hopefully that answers your question, Craig.

Great. That's helpful. And...

Craig, this is Kew, and really good to have you back with us here. The only thing I would add, and let me just take a step back, we're being very strategic and thoughtful on how we build out our credit business. It's a platform approach across big scalable strategies. You see how we're doing this. You've been very patient with us, and it's really starting to pay off.

The other thing I would say, as I talk to LPs, we're in the early innings here. Credit is relatively -- private credit is relatively underpenetrated relative to private equity. There continues to be secular tailwinds, and more flows are coming in and wanting private credit exposure. So we've got great momentum. Curt touched on this. This is an asset class with products that will fit particularly well to retail. It's an area where you can find permanent sources of capital, which we've done now with our BDCs, and you noted that publicly. So we've got great momentum. It is sustainable. These are sticky FRE businesses that we think just keep growing as we have secular tailwinds behind our platform.

And Curt, I heard your commentary on Fortitude being a breakout year in 2022. So does this mean insurance M&A? Or is this really kind of robust more organic growth in the institutional B2B channel? I was just hoping you could articulate that comment, and it probably relates to some of the stuff you just said in credit.

Yes. So let me talk about Fortitude. First and foremost, that business is doing great. It's bigger and it's better at this point in time than what our expectations are. So let me step back a little bit. We completed the carve-out, which was not easy. It's a big business, really pleased with the management team there that they're executing really well. They've been able to execute a couple of acquisitions, the Prudential assurance life product that was announced in Q3 and then there's another big reinsurance contract that just got done. They have a great pipeline for future deals. All of that is already -- has a fee run rate to Carlyle of about $50 million to our business. And there's about $10 billion of total assets under management that are fee paying, $7 billion of which is invested directly into our funds, $3 billion of which is the -- how we structured the actual Fortitude investment with our partners.

So it's really set up well for further growth. The pipeline is there. And we think this is going to be an active year for that business in terms of future scale. And good things are happening.

Our next question comes from Bill Katz with Citigroup.

Okay. So Kew, I think you mentioned now a couple of times, and Curt, both, it sounds like the deal pipeline might be picking up and you have some good balance sheet. Could you maybe go down a layer and talk to where you think you might see an opportunity? I think last quarter, so you had mentioned you want to monetize and take the free cash flow from the realizations and drive FRE and I think permanent capital. I think I heard that again today. But can you talk a little bit maybe specifically what segments or products you could see that opportunity playing through?

Sure, Bill. Thanks for the question. I mean, look, take a step back, the criteria for us is we're looking for strategic adjacencies in big and scalable strategies that are going to be generative of FRE that can be great growth drivers for us in the years to come, okay? So we're very focused and disciplined on that.

If you recall, back at Investor Day, which is about a year ago, I mentioned that I think the 2 best areas for this for us are going to be in the credit asset class and in the solutions business, which continues to grow very fast in our industry. We're already a dominant Global Private Equity player around the world. I think the bigger opportunities for scalability and FRE generation are going to come in to credit asset class and in solutions for us. Hopefully, that gives you a little bit more color.

Okay. And then just to come back to the net realization guidance for the next couple of years. So it sounds like it's up a little bit from your Investor Day, which is nice to hear. When I look sequentially, and this may be too tactical view, but your net accrued carry balance actually dipped a little bit quarter-to-quarter. But when I look at some of your seasoning ratios, like in-carry ratio, your percent public and those aged 4 years or more, those all sort of slipped a little bit, maybe it's quibbling. But how do you sort of triangulate between -- certainly appreciate '21 was a great year to $1 billion sort of on average now when you have sort of a bit of a less public portfolio all else being equal.

So look, I really think that the overall platform is set up really, really well. The $1.5 billion that we generated in realized carry last year is far beyond anyone's expectations, just a phenomenal year. And if you look at kind of on a go-forward basis, I think we can continue to do really well. And let's talk about some of those specifics.

So we started the year not at $3.9 billion. And in fact, if you look at last quarter to this quarter, the fact that we still have depreciation that we had to keep it essentially rounded the same $3.9 billion is pretty doggone good when you realize $683 million in a quarter. Now let's go back to Carlyle's big realization years from when we went public to 2017, $683 million of net realized performance revenues, that was an annual number. We did that in one quarter. And so as we look going forward, I'm very confident there's $3.9 billion of accrued carry but more importantly is the $124 billion of invested capital in the ground at remaining fair value. That number is about double what it was during the last cycle and is 30% higher than at the beginning of this year.

So all of the components to really be able to drive carry going forward are in place. So the in-carry ratio is still really good at like 75%. The amount that is still accrued despite really strong realizations, I feel really good about. And you look at our GAAP numbers, even there, I mean, look at the GAAP EPS number, it's a nice forward indicator of things to come.

Bill, it's Kew. Great exit activity is a function of great investment activity and hard work that's gone into it 3 or 4 years prior. And our investment engine is really firing. And our deal teams, they're really performing. We're creating real value in our portfolios. And if you look at our investment pace and our ability to deploy more, I mean, $34 billion in 2021, that's really the forward indicator, the setup for what our earnings power is going to be 3, 4, 5 years hence, right?

So the $3.9 billion of carry that we have now, the fact that it stayed flat despite record realizations talks to the -- our business model that we are driving great deployment and great portfolio company appreciation. So the engine is really working, okay? So we're managing more money. We're investing more money. We're creating more value than ever before. And it's just going to be a matter of time before that comes out in our earnings over 3, 4, 5 years.

Our next question comes from Chris Kotowski, Oppenheimer & Co.

Yes. I wonder if you could give us a bit more color on the iStar transaction just because I have a feeling this is kind of like a case study for your strategy of using balance sheet capital to try to drive FRE growth. So in the press release, it said that you acquired it for roughly $3 billion, and you just said on the call that $200 million came from your balance sheet. So I'm curious about the remaining $2.8 billion. Does that come from a specifically raised third-party vehicle? Or does it come from just ordinary funds across the board?

And then how should we think about in terms of the day 1 revenues that it generates at this level? And in the press release, you say you expect it to scale to $10 billion. What would it be at a mature fully platform level at that level? Kind of those -- if you can give some color around those things.

So Chris, I think it's a great question. And we're really pleased about the transaction and really overall what's happened in credit, just as I kind of commented on a minute ago. The deal itself, $3 billion purchase price really kind of setting us up for a good platform in real estate credits, one that we know well. Roger Cozzi, who's taken the lead in all of this, really built that in the past, bringing over some of the people that he knows really well.

So from a personal perspective, really good. From an asset perspective, we know the assets. It's a levered transaction, so there's about 2:1 leverage, and from an equity piece that was funded by some of our LPs, both in existing [products] and strategic investor, and we're about 20%. We'll be -- the important part is we'll be the GP. So you kind of think about this as fund structures. We're the GP of that. This enables us over time to potentially use this to be in the retail channel. But more work to come on all of that.

And it's going to take us, as I said before, 2 to 3 years before this really culminates. But we need to make investments like this now to be able to drive that kind of growth in 2024, 2025 and thereafter. So this is a good move for us as a firm and really jump-starts what I think is going to be a very big business. Mark Jenkins, who runs this, said -- look, he's looking to build a $10 billion business. And I know Mark pretty well, and Mark's not going to stop at $10 billion.

Our next call is from Gerry O'Hara with Jefferies.

Great. Just maybe I wanted to pick up a little bit on the Investment Solutions business. Clearly, you see some kind of growing momentum there as it relates to net accrued revenue. But perhaps you could just kind of give us a little bit of an update on how that segment is evolving and where you might see that kind of headed into next year.

Thanks for the question. Investment Solutions has done really well. We've doubled FRE $84 million this year, $37 million a year ago. More importantly, this is in a very attractive space. So solutions products are really a good way for a lot of people to come into private equity. And their performance is phenomenal, 48% this past year. They've mastered really data and how to help LPs construct portfolios. And so they've done a really nice job of that. And their deployment pace has been really good this year.

You point out the accrued here. Obviously, that's a reflection of the 48% appreciation. And look, I think we're well positioned for carry in that business to be -- realized carry to be a much bigger number. Now you start to see some of that really coming in here in the fourth quarter, still small relative to overall Carlyle but much bigger than what you've seen before.

Remind you that this is all European style waterfalls. When we bought AlpInvest, we didn't buy the historical carry. And so it's really only on the funds that have been -- that are raised where the participation rate is right. And so that's going to really start to play off. 2023, '24 or '25 is when those numbers that -- most of that 320-ish of net accrued carry will really pop in those years. I think you'll see a nice increase until that point, but it will be those years where that number really comes through.

In the meantime, Ruulke and the team are really working hard on ways to continue to grow that business. The secondary platform and the co-investment platform are hot platforms. They're looking at other ways to kind of take advantage of what they know and do things, but more to come on that as that all kind of unfolds.

Gerry, it's Kew. The only high-level thing I'd add is there's a theme that I introduced, which is -- or actually came with the first question, which is under appreciation. I think our FRE strength is underappreciated. I think the diversity of our platform is underappreciated in the breadth of it. And quite frankly, I think people are starting to figure out AlpInvest, which is a leader in the solutions space, a great brand, a great platform. It used to contribute -- probably, I don't know, $12 million, $13 million of FRE 3, 4 years back. Now it's closing in on $100 million. It's a strong platform, one of the market leaders.

And that whole space has got real tailwinds in our industry because as the alts business has grown, CIOs and CEOs of these big plans, they need tools for better deployment, portfolio optimization and access to liquidity. And it just shows -- it just talks to the maturation and the scale of what this industry has become. That this part of the industry now is as vibrant as it is with real growth and momentum behind it. So we've got real -- we feel really good about the prospects of AlpInvest. It's a great team, market-leading. And I think, like I said, were underappreciated with respect to how important it is and what its opportunities for growth are within Carlyle.

Great. That's helpful. And then I guess, Kew, sticking with you and as it relates to sort of strategic opportunities. The other deal I think that was announced was, I guess, a partnership with iCapital and Allfunds. Perhaps you could comment a little bit about how your vision into the kind of retail market is expected to evolve, I guess, in the coming years.

Gerry, let me jump in and take that. So look, alternative sources of capital for us really include high net worth capital, retail, open-ended funds, permanent capital and insurance, and they're all additive to our efforts to drive growth. And we have a number of initiatives in each of these areas, some of which we've already talked about. And thanks for pointing out the iCapital announcement yesterday. It's another one of these initiatives that we think over time will be meaningful. We're an investor in iCapital, but it's -- I wouldn't think that this is a major revelation. It's just additive to the overall process here.

The bigger picture is the $51 billion that we raised this past year, double what we raised in the prior year. Momentum is good and is diversified. It's diversified across all of our businesses. And this coming year, we'll probably have about 20 different products in the market, really enabling that strength and momentum to continue. And more importantly, we feel really confident about our ability to drive FRE.

Our next question comes from Patrick Davitt with Autonomous Research.

There's a view in the marketplace that private equity broadly has been one of the most boosted asset classes by this long period of central bank accommodation. So in that vein, it's now perhaps one of the more negatively exposed asset classes to this year's inflationary higher rate, less accommodative environment, particularly given the pivot to growth a lot of firms appear to have taken. So could you give us your reaction to that perception and more specifically frame what you think Carlyle's exposure is to what might be considered growth year, higher multiple positions in the PE portfolio?

Sure. Patrick, great question. Obviously, this is something we're really -- everyone is focused on, us especially. And it's a question about rising rates. It's a question about volatility, inflation, all in one. So let me try to address it.

So first of all, with some of the correction that's happening in the market, and we're all seeing it. The rotations to that are occurring. Clearly, this will have an impact on marks. But I'd like to point out, and Curt or Dan help me out here, I think only 11% of our portfolio are in public names right now, is that correct?

Correct.

Okay. So about 11% of our names are on public names at the moment. But we really feel good about our portfolio construction, very well diversified across industry sectors big companies, smaller companies across all regions. And that type of portfolio construction with our long-term orientation, where we don't have liquidity pressure because of marks. It gives me real good comfort that over the long term, our portfolio will be quite resilient as we enter a period of volatility.

Now if you think about some of the corrections we're seeing, especially with respect to valuations, quite frankly, on the buy side of the equation, we're meeting great companies, and the entry points are now more attractive. So I think longer term, this bodes well. And I'm on record of saying a healthy correction is not necessarily a bad thing with respect to our investment activity. So with a long-term view, again, we're of a view that as multiples trade down, it could be more attractive to us from an investment perspective.

Turning to the credit business. I think folks have to appreciate a vast preponderance of our assets there are floating rate, okay? So all else equal, assuming economic backdrop is benign, rising rates means that platform generates more profit, okay? And then with respect to volatility, volatility with respect to the credit platform actually creates flow, especially in our [special sitting] credit opportunistic strategies.

But more broadly speaking, I'd say, Patrick, if there's one thing I've learned, volatility creates change, and change creates deal flow. And our platform is very broad. It's around the world. It's very diversified across strategies, across industry sectors. And we've been able to pivot really nicely over the past several years to finding opportunities. So as we enter this period of volatility, and make no doubt about it, we're not being complacent. We are studying what's happening very carefully. Of course, we're focused on inflation. Of course, we're focused on rising rates. Of course, we're carefully tracking markets. But volatility creates changes that are creating opportunities for our broad-based platform especially with our long-term lens. So hopefully, that gives you a little bit of color on the environment and how we're positioned to navigate through it.

Our next question comes from Schorr with Evercore.

Quickie first. You talked about all this great growth and 20-plus on FRE, which I think is very welcomed. Could we talk about the margin? You talked about in the past about plans to increase that over time. I think you're scaling really well. I don't have to repeat all the things you said. Any specific thoughts on where you think the margin can be in the next year or 2 as the scale starts coming through?

Glenn, it's Curt. So thanks for the question. We -- in our Investor Day, we said we would get to 40%. I've not backed off of that target. That's for 2024. We grew from 30% at the beginning of this year to 33% for the full year of this year. Q4 was 34%. We're well positioned. Yes, there's some increases in some costs in the fourth quarter, but our job is to grow the top line faster than the expenses, and feel really comfortable with our ability to do that. I think you're going to see continued expansion in margin over the coming years. We'll hit the target in 2024.

I'll take the sooner on that, but okay. No problem.

Glenn, it's Kew. I read your note this morning. You have 15 positives and only 4 negatives in your quick takeaway, if I count it correctly.

A question for you. I'm curious if this is more theoretical, I guess. But if I look at your private equity business, it's big. It's global. It's been -- it's fully integrated. It's one team, one dream. They share everything. I'm curious in credit, the growth is great. The capital raising is great. The performance is great. Everything that you pointed out. I'm curious on how you're integrating it and whether or not it needs to be integrated, meaning does each sub-asset class stand on its own, raise capital on its own, go to LPs on its own? Or underneath the covers, years out, will it look just like private equity?

Yes. Glenn, it's a great question. And when I say and Curt says we are taking a platform approach, it's -- we are being very intentional with that language. We have teams of investment professionals that are managing multiple strategies. And we have a credit distribution capability set that is raising money across our platform strategies. And increasingly, we are also talking to LPs that are coming into multiple strategies at the same time in SMAs and other type of structured programs.

And so it is with real intention that we've designed for the long term a strategy that is platform-driven. It takes time to get that going, build it the right way and to have it really pay off, which is why you've heard me from the very beginning several years back to asked a little -- for patience. I think it's starting to pay off. Not only is the growth starting to happen, okay? And you're seeing that organically and also inorganically. We're going to be very thoughtful and take our shots inorganically, but you're seeing a consistent strategy around the platform.

And what that means is at some point in time, there's a tipping point where the AUM base and the revenue base starts to drop more earnings because of the operating leverage that we've created, okay? That has not yet occurred to date, but we are approaching that tipping point, which is why we are -- keep alluding to the fact that we think we're going to have a breakout year in credit as it relates to the FRE drop from all the growth that we've been seeing and that we expect to continue.

So hopefully, that gives you really good color on not only the strategic design of the platform but what we think the business model will enable this to do from a financial perspective, no longer long term, but in the short to medium term.

Our next question comes from Lee with KBW.

I guess, it's hard to believe if there's any more questions left at this point. But real quickly, on the capital markets business, I know it's a relatively small piece, but maybe this is another one of those underappreciated initiatives. Could you maybe just update us on that, kind of your current expectations for that over the next couple of years? And you gave an update, obviously, on the Investor Day a while back, but just like to get another update.

Sure. So look, really pleased with how this initiative is really commenced and gone on, and it's a good example of people teaming together, working across the entire platform. Brian Lindley, who quarterbacks this initiative has really done a nice job of working with all of our credit and buyout professionals and also with our solutions teams. And it just capitalizes really on the deep activity that we see around the globe and really looking to add value in anything and everything that they're involved in. So adding value is a cornerstone of that.

The other piece is obviously deal flow really makes this business thrive. And what you're already seeing is, in total, we have about just shy of $100 million this year in transaction and advisory fees, with the vast majority of that coming from this capital markets activity. It's just been great in terms of what they've been able to do this year. I think as we go forward, a lot of the learnings in terms of how to make all the internal workings work right, how to have everyone incentivized right to work and coordinate together.

And remember, we're not an investment bank. So I'm not going after other people's stuff. We're just trying to help and do the things that we're doing really well. So this has had a really nice trajectory. I think it can -- it will continue to grow. It will be somewhat dependent upon capital markets activity and deal flow. But given that all that remains relatively strong, I think we'll continue to do some good things here. Hopefully, that's the color you needed.

Our next question comes from Adam Beatty with UBS.

Just wanted to circle back to retail more from a product angle. In the release yesterday, you mentioned interval fund and BDCs, it sounds like you've got a pretty full suite. So which of those is kind of gaining the most traction right now? Anything that you expected in terms of getting traction, not getting traction? And finally, if there are any product gaps that you might have to fill in, or is it more about just expanding distribution at this point?

Good question. Look, as I said before, there's a number of alternative channels we're chasing and working on, and we have initiatives in each of these. Now some of the -- and I would just say, look, a lot of this is not what we're dependent upon to drive the results, that we're talking about the confidence that Kew expressed earlier is really from running the ship the way we've been running it. And to the extent that we can execute really well on this, it's all going to be additive.

So in terms of specific products, look, we have a very good product within our credit business. Well, we call it CTAC, and it's been going really nicely, throwing off nice fees because the performance there has been phenomenal and has been bringing in new investors. And so I'm optimistic about where that can go.

We have a number of BDCs. They're performing well. The team is working really hard. The ancillary products around that, so that is also helpful. And there's new things in the works across the broader platform of the firm that we're working on, but it's -- they're not really ready for prime time in terms of talking about it in detail.

Got it. That's good detail. I appreciate it. And then just circling back, one of the phrases that kind of resonated in your prepared remarks is picking your spots. And so just wondering if you could talk about spots maybe that you didn't pick, like certain opportunities either that other firms are doing or maybe just opportunities that weren't a good fit for Carlyle and how you're thinking about that.

Look, where we're going to be picking our spots is we've now been focused on kind of building a big balance sheet, not for the sake of having a big balance sheet because that gets valued at not very much, but for the sake of being able to grow fee-related earnings. And so the iStar transaction that you saw is the start of what we're doing there. More to come. But we're focused on kind of in particular, inorganic growth, but also then using that capital to grow in a lot of our own internally developed initiatives and expand in terms of giving bigger scale out of funds and the like. So really see a way that we're going to be using our capital to grow the firm.

Our next question is from Bill Katz with Citigroup.

Okay. This is just some fine-tuning for my model. When you look at your management fees, they had a significant bounce sequentially, and I appreciate you turn on a number of funds. Was there any catch-up fees in there? And as we look at the expense side, anything unusual on the cash comp or the G&A line as we think about into the next couple of quarters?

Sure. So Bill, look, on -- probably on your revenue question on fee management fees, it depends on how you're doing it. Remember, we turned on a number of funds here in the fourth quarter. Not really catch-up management fees because we turn them on, there's nothing to catch up back to. This -- actually the fourth quarter is very light in catch-up management fees. It's very light the whole year. Next year will be a little bit of a different story on catch-up management fees. I think you'll see a lot more in catch-up management fees next year in part because of when you turn it on early and then you have a long fundraise, that's where you'll have it. The -- but in the fourth quarter, a higher effective fee rate, if you do it off of an average of fee-paying AUM beginning of the period, end of the period, the denominator will get distorted there. So just be careful if that's the math that you're doing.

In terms of compensation, look, at the end of the year is the bonus period. We had just a great year, really hit all of key records on really all the metrics. Like what our people were doing and like their focus on driving FRE, and so we paid them, and I feel good about that. And as you heard Kew and I talked about, we're very confident about our ability to drive growth and drive FRE and continue to be focused on margin and running the firm effectively and efficiently. And I think that also makes sense in the current market where talent and attracting and retaining top talent is important.

On G&A, yes, well, G&A pops all over, as you guys know, as you follow us. For the full year, we were about $270 million, which is about the same as last year when you adjust for the litigation cost recoveries. Fourth quarter did have some investments that were being made and some new initiatives and legal costs associated with that, some extra fundraising costs. Actually, I hope that kind of continues because that's really then kind of what fuels long-term growth. And then we have some compliance costs that tend to be back end and because tax returns and all that kind of nonsense occurs more at the end of the year, and so you end up with a bit of more cost at that point in time. So hopefully, that gives you some color on how that plays through.

And I'm currently showing no further questions at this time. I'd like to turn the call back over to Daniel Harris for closing remarks.

Thank you, everyone, for your time today. Should you have any follow-up questions, feel free to call Investor Relations at any time. Otherwise, we look forward to talking to you again next quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.