The Carlyle Group Inc. (CG) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Carlyle Group Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. 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 Second Quarter 2026 Earnings Call. With me on the call this morning is our Chief Executive Officer, Harvey Schwartz; and our Chief Financial Officer, Justin Plouffe. Earlier this morning, we issued a press release and a detailed earnings presentation, which is available on our Investor Relations website. This call is being webcast, and a replay will be available. 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 a reconciliation of these measures to GAAP in our earnings release 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. In order to ensure participation by everyone on the line today, please limit yourself to 1 question and return to the queue for any additional follow-ups. With that, let me turn the call over to our Chief Executive Officer, Harvey Schwartz.

Thanks, Dan. Good morning, everyone, and thank you for joining us. We delivered an outstanding second quarter with record results across our diversified global platform. Our momentum is a result of disciplined execution focusing on investment performance and delivering on our strategic plan. Highlights in the quarter include our highest level of distributed earnings in nearly 4 years at $472 million, which includes record distributable earnings in both Carlyle AlpInvest and Global Credit. Record FRE of $358 million, up 11% year-over-year, driven by record fee-related performance revenue and record capital markets fees. Net realized performance revenues increased more than fivefold from last quarter and another strong quarter of inflows with nearly $17 billion. Our fundraising momentum is exceptional, with $56 billion of inflows over the last 12 months, a 10% increase from the prior year. All of this drove AUM to a record $485 billion. As we enter our fundraising super cycle, we've already attracted $30 billion of organic inflows in the first half of 2026, another firm record. In Carlyle AlpInvest, our strong start to the year continued with another $5 billion of inflows in the second quarter, including a final close of our single asset secondary strategy, capital for our portfolio finance strategy and continued growth in our Evergreen Wealth Solutions. In Global Private equity, this quarter was exceptionally busy. We raised an anchor commitment of $5 billion towards the first close of our U.S. buyout fund, and we've officially launched marketing for this strategy. We launched a dedicated defense and industrial platform and announced its first transaction, the acquisition of Sictorian Systems, an NSA-certified hardware data encryption provider. I'll give you more detail in a moment, but we also continue to be an industry leader in realizations. And in Global Credit, we attracted $6 billion of inflows with solid activity in structured credit, asset-backed finance and flow reinsurance. Looking forward, we expect to have nearly all of our core strategies in the market raising capital over the next few years. This will support accelerating revenue and earnings across our platform, underpinning our conviction in our 3-year strategic plan. Let me pivot to realizations. As I mentioned, Carlyle remains an industry leader and an outperformer in returning capital to our clients. We returned nearly $7 billion to our clients this quarter and $37 billion over the past year. Second quarter realizations were strong and diversified across asset classes and geographies. These include realizations in U.S. and Japan buyout, financial services, real estate, opportunistic credit and aviation among others. In our largest private equity strategy, U.S. buyout, we've returned 23% of its fair value to investors over the last 12 months. I want to underscore that this is more than twice the current industry average and also more than the long-term average for capital return of 20% for the industry. Lastly, our Global Forward pipeline is similarly strong with several announced transactions already closed in July or expected to close over the next few quarters. Shifting to deployment. We invested $14 billion this quarter, including several significant transactions in Corporate Private Equity. Sebentis, the codings business, carve-out from BASF, MAI Capital, an RIA and wealth management firm and Japanese construction company. Those transactions and the capital raised for U.S. buyout helped generate record U.S. capital market fees of more than $100 million. This is a direct result of repositioning the Capital Markets business 3 years ago to capture a higher level of transaction fees across the platform. Again, these fees are high quality and very low risk earnings. In Wealth & Retirement, we continue to see strong momentum across the platform and are generating strong net inflows led by Carlyle AlpInvest. We generated over $7 billion in gross sales across Evergreen Wealth over the past year, driving AUM in the strategies to a record $20 billion. That's up more than 60% year-over-year. I'll now finish with a few thoughts on the macro backdrop. The market and U.S. economy continue to display a remarkable degree of resilience in the face of the war in the Middle East, significant pressure on energy markets, stubborn inflation and increasing public market volatility related to questions around AI. When we look at our proprietary data, largely KPIs rolled up each month across our nearly 300 portfolio companies, we see a U.S. economy that continues to expand at an annual rate of 2% to 2.5% in real terms with 6% annual growth in corporate revenues. While there are some pockets of stress from the Hormuz related price shock, U.S. consumption continues to grow at an impressive rate overall. Outside of the U.S., the positive effects of the AI CapEx boom are visible across Asia. And reality seems better than market perceptions in Europe. The energy impact is real, but so too are the defense and infrastructure-related industrial orders, which made a meaningful contribution to growth in recent months. All these near-term market dynamics continue to support the longer-term considerations that drive the need for capital investment around the world. National security issues, including defense spending, energy security, data security and an urgent focus on economic growth across the industrials and health care sectors are driving the demand for durable capital across the globe. This longer-term macro landscape max directly to where Carlyle is positioned to lead and deliver. As you firmly say before, the demand for private capital continues to grow and has been growing in areas where Carlyle has built deep sector expertise for decades. With that, let me turn the call over to Justin.

Thanks, Harvey, and good morning, everyone. As Harvey mentioned, we had a strong second quarter with results that reflect the continued operating momentum and diversification across our platform. We generated distributable earnings of $472 million in the second quarter or $1.07 per share. As Harvey noted, this was our best pretax DE quarter in nearly 4 years, powered by record FRE and a substantial step-up in net realized performance revenue from the first quarter. Fee-related earnings were a record $358 million, up 11% year-over-year at a 47% margin. In the second quarter, fund management fees were $560 million, up 3% from the first quarter. Carlyle Alpinvest management fees increased 10% year-to-date as we are benefiting from strong momentum across that segment. Transaction fees were a record $111 million, more than double the level a year ago and up more than 30% year-to-date. As we've said, capital markets revenues are a natural extension of the activity happening across the firm, and you're continuing to see that accelerate as our momentum continues across businesses. Fee-related performance revenues were a record $89 million in the quarter, more than double last year's second quarter and were driven by continued strength in our evergreen strategies, notably in Carlyle Alphavest, an asset-backed finance within Global Credit. Turning now to inflows. We had another very strong quarter, raising $16.8 billion with solid activity across all 3 segments. This quarter included $5 billion of commitments earmarked for our next vintage U.S. buyout fund in global private equity, continued momentum in our Carlyle AlpInvest secondaries and portfolio finance strategies, and the closing of 3 new issue U.S. CLOs along with increasing flow reinsurance activity in Global Credit. Turning now to the segments. Carlyle AlpInvest delivered record distributable earnings of $96 million in the quarter, and fee-related earnings of $87 million were up 27% compared to the second quarter of 2025. Total AUM at Carlyle AlpInvest reached $112 billion, up 16% year-over-year with $4.5 billion of inflows, driven by our secondaries and portfolio finance strategies as well as continued inflows into our evergreen strategies. Our second vintage single-asset secondary strategy closed at 4x larger than its predecessor fund. Shifting to Global Credit. We also delivered record distributable earnings of $158 million, up more than 30% year-over-year. Fee-related earnings of $138 million were also a record, nearly 25% higher than the prior record set in the second quarter of 2025. That growth was driven by record transaction fees of $93 million and record fee-related performance revenue of $54 million, nearly twice the level of a year ago. Total AUM in Global Credit was $211 billion, up 4% year-over-year, and inflows for the last 12 months totaled $25 billion. Deployment was $7 billion in the quarter, led by our U.S. liquid credit, direct lending and opportunistic credit strategies. Credit quality across the portfolio remains strong, and the diversification we've built continues to position this business to perform through market cycles. We also announced in Global Credit alongside Fortitude Re, a second block reinsurance transaction with Unum. The transaction is expected to close later this year, and upon closing, should add more than $5 billion to Global Credit AUM. In Global Private Equity, fee-related earnings were $134 million, and distributable earnings were $219 million. DE rose nearly 50% sequentially on a significant increase in net realized performance revenue. Realized proceeds were $3.9 billion in the quarter and over $20 billion over the last 12 months, reflecting our continued prioritization of returning capital to fund investors. As Harvey noted, our U.S. buyout strategy has returned capital at more than double the industry rate over the past year. In the second quarter, our realized net performance revenues were driven by Japan buyout and our sixth U.S. buyout fund. Across the firm, net accrued performance revenues were $2.4 billion and remain a significant source of future shareholder earnings at nearly $7 of pretax earnings per share. Finally, let me turn to capital management. We ended the quarter with a strong balance sheet and declared a quarterly dividend of $0.35 per common share, consistent with our dividend policy. We saw a very attractive opportunity to repurchase CG shares during the quarter. We were active buyers deploying a record $304 million to repurchase or withhold 6.7 million shares. We reduced our adjusted share count by more than 1% this year with $1.6 billion still remaining on our $2 billion repurchase authorization. Investing in growth remains our first priority, but we'll continue to be disciplined and opportunistic as it relates to returning capital to shareholders. We entered the third quarter with strong momentum across the platform. We see substantial growth opportunities in every segment, and we will continue to take advantage of solid capital markets to drive realizations and new investments. With that, let me turn it back to the operator to take your questions.

[Operator Instructions] Our first question comes from the line of Steven Chubak with Wolfe Research.

So I was hoping to drill down into the fundraising outlook. You've had a strong start to the year, $30 billion raised in the first half, tracking up about 8% year-on-year. Can you remind us which funds will be in the market in the back half? And how that informs the outlook for both fundraising as well as management fee growth in the second half?

Yes. We had a great first half in fundraising 1 of the best half we've ever had in terms of organic inflows. And it's really across many different strategies. As you know, we're entering the super cycle in the second half. We really just started that. So in the quarter, $5 billion earmarked for U.S. buyout will also be over the next 24 months in the market with basically every single 1 of our flagship funds in terms of secondaries, portfolio finance, credit opportunities. And obviously, we have a fantastic defense and reindustrialization platform. So we really have these numbers in the first half without really leaning into the flagship strategies that are coming to market. So our momentum there is really great. And I'll call out 1 more thing on fundraising. Our inflows for our wealth platform, we're actually up more than 60% year-over-year. So in wealth, we're building an incredibly good platform and really see good momentum there. .

Any expectation just on back half fundraising and management fee growth just given the funds all be in the market?

Those funds are really going to start accelerating in the second half. You're not going to see -- as we talked about in the Investor Day, you're not going to see closing on those funds. But the momentum is pretty meaningful. And as Justin also mentioned, we also had the Unum transaction, which will close later this year. So there's already sort of $5 billion, but we're not going to give you specific guidance on quarter-to-quarter. There will be timing issues and things like that. But the underlying message should not be confused. The momentum across the platform is enormous, and the pipeline of fundraising is very broad in all our key strategies.

Our next question comes from the line of Alexander Blostein with Goldman Sachs.

I wanted to dig into 2 specific areas for you guys on the wealth channel. One, I was hoping to double-click into the May capital acquisition that you highlighted and how that could potentially accelerate and broaden your ambitions in the wealth channel. And second, in May, you guys launched a private market solution with AllianceBernstein and Brookfield, so curious if your -- how many early feedback to share with us on how material this could be in your plants in the defined contribution space?

So thanks for the questions, Alex. So just taking a step back, over the past several years, we have very systematically studied how to think about the various channels across wealth and retirement and been systematically putting the building blocks together for a strategy that we think really leverages the brand, and we've been very selective about how we thought about partnerships and growth. And so earlier this year, we hired a Head of retirement -- or Head of our retirement practice. And so you're starting to see all this come together. We do think the 401(k) channel, along with the target [indiscernible] date front channel, will be very significant over time. So we were selected by AllianceBernstein to -- as this particular solution, we also announced with [indiscernible] SEI as a trustee for the CIT launches. And so you'll start to see that begin to manifest itself over time. This is not a third, fourth quarter material thing. You're going to start to see this build, I think, in '27. I can't put a pin in to date, but more importantly, taking a step back, I think it's a real indication of how the team is coming together and thinking very strategically. We want to be very effective at the partnerships and the solutions we put together versus -- it takes a lot of work to do because we don't want to put too many in the market. We've been very selective about how we've done this. And so that's how -- that's important how we're approaching it. The MAI acquisition, that was actually done in our U.S. buyout business. So that's a portfolio company, not unlike other portfolio companies, the team is super excited about. It's a great business. As a fiduciary, we have an obligation for our LPs. They are often we work with our portfolio companies when there's opportunities, but we're excited about that business.

Our next question comes from the line of Brennan Hawken with BMO.

So the comp ratio ticked up a little bit quarter-over-quarter. You guys had a really strong result in FRPR and transaction revenues, which is both growth avenues for you. Could you help us understand, is the comp ratio on those revenue lines may be a little bit different? Could that have had something to do with it? And how should we think about those models -- those lines as we begin to model out growth?

Yes, Brennan, we expect the comp ratio this year to be roughly consistent with last year, around that 47%. And the reason is because we're investing back in the business, right? We've said in many occasions, we want to invest for growth and we're investing right now, not just into our people, but also in AI and technology, which we think is critical to our next phase of growth and our wealth platform. So in terms of the outlook for margin, I think we'll be in that 47% range for this year. then as all the fundraising we've talked about starts to flow through the financials in '27 and '28 That's when I'd expect to see the margin tick up. But the important thing here is that we're focused #1 on growth in 2026, and that's why we're investing back in the business.

Makes a ton of Sense. thanks for the color, Justin.

Our next question comes from the line of Mike Brown with UBS. .

I wanted to ask on the capital market side of the business. I wanted to ask on the capital markets side of the business. It's certainly become a more meaningful contributor to the bottom line. You just double quick on some of the key drivers for this quarter and then just touch on whether you see this level of activity continuing to broaden out. And maybe just touch on the kind of run rate as we start to think about the back half of '26 and '27.

Yes. So thanks, Mike, for the question. So as we've discussed a couple of years ago, 3 years ago, we systematically deployed across the firm, this strategy -- and I would say like all new business strategies, there's that beginning period where you walk before you run, and now, I would just say it's part of the muscle memory of the firm and very much part of a culture to do this. And so you will see this correlate with our growth and activity. So if you see high activity, you're going to see this. Quarter-to-quarter, the numbers may move around a fair bit. Personally, I think that's completely irrelevant that you should think about the value generation here. The business will systematically continue to grow as the firm grows and as we launch new funds, particularly as Justin says, we come into the super cycle where all the flagship funds are raising money. That all compounds. And so in a very, very positive way, it creates this enormous flywheel effect, which we expect to manifest over the next couple of years. In terms of transaction flows, this was a strong quarter. I don't expect you to see that in the third or the fourth quarter of this year. But again, I think it's completely irrelevant. The more important takeaway is the momentum in this business and the fact that it's systematically part of the firm now. And then, as we raise these bigger funds and you see activity, it's got this fantastic flywheel effect.

Our next question comes from the line of Brian Bedell with Deutsche Bank.

If we just -- if we could dive a little bit deeper on the defense and industrial platform that you're building out. Clearly, this is a really strong brand for Carlyle for quite a long time. How do you think -- and maybe you could give us some context on the growth trajectory there in terms of how it fits in with the fundraising super cycles. What types of other products can you launch over the next, say, 12 to 18 months in this area? And do you foresee creating a wealth product tier as well?

So well, let's take a big step back. The firm, as you know, was formed in 1987 and sort of like a lot of things in life, accident or birth, everybody signs the firm in D.C., which was just a very natural starting point for our platform and aerospace, defense and government services. And it's been a core feature of the firm in terms of our skill set and expertise, and the first transaction we did as a firm actually was in this space. And so over nearly 40 years, we've been building this practice. Obviously, immense around the world, geopolitical splintering, rest of Ukraine, war in the Middle East, and you've seen the numbers. If you tally up all the numbers for the next decade, I think defense spending globally as a global priority now, whether it's in Europe, Canada, obviously, in the U.S., even Japan, areas of the world that historically haven't invested as much, but I think the numbers in aggregate as much to $8 trillion. So we're the only large-scale firm that has this history of this practice. And what we've seen now is, obviously, this is a core component in terms of a sector expertise in or less buyout business, our large U.S. buyout business. But we're also seeing huge demand from LPs who have interest in this space, and we're seeing lots of deal flow. And the deal flow has gone up so thematically that the investing team thought it was in the best interest of the LPs have a sleeve that could focus that's a lack of better language, on more middle market expertise. Now, obviously, this could be something that we can build upon. But again, we're just really focused on how we address this global macro trend, and that's what this is. It's run under the same hub, same experts. Chairman of the business has been doing this for well over 30 years at Carlyle. So we feel very good about this. In terms of the wealth, we're going to continue to think about wealth. I'm not sure this particular -- I'm not going to give a hard answer on this because we want to be very thoughtful about the wealth channel. I'm not sure a sleeve in this space necessarily lend itself to like an evergreen, but certainly, there's a lot of interest from the wealth channel in this space. It's so topical and the value proposition is quite high. But I think it really depends on how we deliver the solution to those clients, both institutionally and wealth, but there's a huge amount of interest.

Our next question comes from the line of Patrick Davitt of Autonomous Research.

So as you highlighted, a nice pickup in realized performance fees, and you mentioned more deals in the pipeline here in July. So could you put a little bit more specifics around that comment even more broadly, just how that pipeline compares to last quarter? And to what extent that balance actually gives you visibility on a path to reported performance fees actually getting even better in the second half?