Earnings Call Transcript - CG Q2 2022

Operator, Operator

Good day, and thank you for joining us. Welcome to The Carlyle Group's earnings call for the second quarter. I will now pass the conference to Daniel Harris, Head of Investor Relations. Please proceed.

Daniel Harris, Head of Investor Relations

Thank you, Liz. Good morning, and welcome to Carlyle's Second Quarter 2022 Earnings Call. Joining me this morning are our Chief Executive Officer, Kewsong Lee, and our Chief Financial Officer, Curt Buser. We issued a press release and detailed earnings presentation earlier today, both of which can be found 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 discuss certain non-GAAP financial measures during today's call. These measures should not be viewed in isolation from or as replacements for measures prepared according to generally accepted accounting principles. We have provided reconciliations of these measures to GAAP in our earnings presentation, where reasonably available. Any forward-looking statements made today do not guarantee future performance, and should not be relied upon. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the Risk Factors section of our most recent annual report on Form 10-K that could lead to actual results differing materially from those indicated. Carlyle has no obligation to update any forward-looking statements at any time. Turning to our results, for the second quarter, we generated $236 million in fee-related earnings and $529 million in distributable earnings, with distributable earnings per common share of $1.17. We had net realized performance revenues of $271 million, and our accrued carry balance stands at $4.3 billion. We declared a quarterly dividend of $0.325 per common share. With that, I will now hand the call over to our Chief Executive Officer, Kewsong Lee.

Kewsong Lee, CEO

Thanks, Dan. Hello, everyone, and thank you for joining us today. Carlyle once again delivered strong results for the second quarter. We continue to drive growth and diversify the earnings power of our business. And importantly, our investment performance remained strong amidst the volatility and uncertainty in markets around the world. All of this is a result of clear strategic priorities and the hard work of our teams globally. We're in a much different environment as inflation, rising interest rates and uncertainty affect the real economy and financial markets. At Carlyle, we have been preparing for this complex and challenging environment, which is likely to continue in the near term. We are focused on continuously assessing risk, recalibrating valuations and capturing opportunities as we move forward. The strength of our diversified platform, well-constructed portfolios and over $80 billion of dry powder positions us well as we have deliberately built Carlyle into a more resilient firm that is set up to adapt and manage through all types of market conditions. We are a different firm today and better positioned than ever before as we drive forward from a position of strength. Given the environment, we know that questions about our portfolio are top of mind, so allow me to address this topic before we get into the points we'd like to discuss today. Thus far, portfolios across the firm continued to perform exceptionally well. Our focus on investment excellence and the diversification of our platform are supporting the firm's relative outperformance, with Carlyle's aggregate carry fund portfolio appreciating 3% in the second quarter, while various public benchmarks were down 10% to 20%. I'll provide some perspective, and Curt will drill into more specifics. Our global private equity portfolio appreciated 2%, driven by strength in infrastructure, natural resources and real estate, and flat performance in corporate private equity. Throughout the GPE segment, our overarching view is that we have well-constructed and well-positioned portfolios. Our approach has always been to invest in good assets and established companies led by strong management teams that have a differentiated path for growth and value creation. As a result, we have avoided the sectors that have been hardest hit. Our portfolio is only 7% publicly traded, and we are benefiting from the strong demand that continues for high-quality private assets, even as public market multiples are contracting. And importantly, thus far taken as a whole, the top line of the companies in our corporate private equity portfolio continues growing at double-digit rates while maintaining operating margins. Now turning to our credit portfolio. We are seeing resilience in the underlying performance of our assets and higher yields are driving better performance for LPs as most of our investment strategies benefit from higher rates. At this moment, credit quality remains strong, and we have not seen any notable pickup in duress or non-accruals, although we are closely monitoring our portfolio. We actively manage all of our credit positions and are very focused on managing risk exposures and maintaining balanced risk-adjusted credit quality throughout our portfolios. Before I hand things over to Curt, there are 5 important points to listen out for as he talks about the quarter. First, our focus remains on driving FRE growth. What we have done over the past several years to grow and change the nature of our FRE is quite frankly, underappreciated. Just this quarter, we delivered a record $236 million of FRE, up more than 60% from last year, and we are on track to achieve our previously stated $850 million goal in FRE for the full year 2022. It's important to understand that the vast majority of our fee revenue is agnostic to asset market valuations and is instead based on committed or invested capital, giving us greater visibility on the level of fees and FRE that we will earn. Second, our deliberate effort to diversify the firm is paying off. Our earnings mix is more diversified and more resilient than ever before, and it continues to grow because we have reshaped our business to capitalize on those areas where we see attractive growth in the private markets. As a result, the largest share of our fee-earning AUM is now associated with Global Credit. Furthermore, FRE contributed 50% of DE in the first half of 2022, making our earnings stream more balanced and distributable earnings more predictable throughout different market cycles. Third, the firm's capital formation efforts are powering us forward even during changing dynamics for fundraising. Importantly, please listen for the impact of the Fortitude transaction and how it sets us up for the future as total capital formation for the quarter was nearly $60 billion, with the addition of the highly scalable Fortitude advisory assets under management. This includes the nearly $10 billion we raised in new capital from LPs, but more than half this amount from global credit and global investment solutions even as we continue to raise in the more traditional private equity funds. Next, the firm is operating from a position of financial strength. We have a nominal level of net debt. Our dividend is comfortably covered by our sustainable FRE, and our balance sheet is positioned to help us continue to grow. Add to this over $2 billion in investments and more than $4 billion in net accrued carry, and our balance sheet today comprises over $16 per share in value. Finally, and perhaps most importantly from my perspective, we are executing against our strategic plan and delivering on what we told you we would do. Compared to just 2 years ago, Carlyle is more diversified, growing faster and more profitable. My job as CEO is to make sure we stay focused on the right priorities, develop our people and shape our culture. We are doing just that. Putting all this together, we believe we are positioned well to navigate through a period of increasing market uncertainty and complexity and have confidence in our ability to deliver long-term earnings growth and shareholder value. With that, over to you, Curt.

Curtis Buser, CFO

Thank you, Kew, and good morning, everyone. As Kew highlighted, we delivered strong results this quarter, driven by the solid relative performance of our funds, increasing diversity of our earning streams and the significant impact from our recently closed strategic transactions. I want to focus my remarks on three areas: first, fee-related earnings and overall distributable earnings have had a strong start to the year, highlighting an increasingly diverse business mix and better balance between FRE and performance income; second, our global investment platform performed well, and we continue to have a record level of net accrued performance revenues; and third, our global credit business took a major step forward in assets under management and earnings power, and we continue to see opportunities for further growth and performance. Let's begin by discussing the strength of our second quarter results and more broadly, the first half of 2022 by highlighting a few important metrics. First, fee-related earnings were a record $236 million in the second quarter, up 60% year-over-year with substantial growth in Global Credit and global private equity. Our fee-related earnings margin reached a record 40% in the second quarter and 38% in the first half, up from 33% in the full year 2021. Distributable earnings of $529 million increased more than 34% from last year, and our earnings stream reflects an improving mix with fee-related earnings contributing 50% of distributable earnings in the first half of this year. Digging into second quarter FRE, total fee revenue of $594 million increased 40% year-over-year, supported by strong organic and inorganic management fee growth as well as higher transaction fees and fee-related performance revenue. Management fees comprised almost 90% of total fee revenue for the first half and increased 24% compared to the first half of 2021. Included in our results this quarter are $19 million in catch-up management fees, largely associated with follow-on closings in our latest U.S. buyout fund as well as several smaller GP funds. We also benefited from strong transaction fees in Global Credit, largely related to aviation and insurance solutions activity. Transaction fees and catch-up fees helped drive our record FRE margins this quarter. So it's important to note that these fees are dependent on the pace of future investment activity and fundraising. We also generated $35 million in fee-related performance revenues in the second quarter and $80 million for the first half of the year. Looking towards the second half of 2022, GP fee-related performance revenue will likely be lower due to the construct of the Core Plus real estate fund, but will likely increase again in 2023. Global Credit fee-related performance revenues should be relatively stable. I mentioned last quarter that you would see a material step-up in our quarterly fee-related earnings and margin owing to our recent global credit transactions, notably CBAM, which closed on March 21 and Fortitude, which closed on April 1, and that's exactly what the second quarter produced. Global Credit FRE surged to a record $72 million, nearly triple last quarter, owing to management fee revenue from these transactions and a high level of transaction fees. Global Credit's FRE margin also nearly doubled quarter-over-quarter to 42%. While this number may vary quarter-to-quarter, we expect it to remain well above prior year margins. Our overall DE mix continued to skew further towards a higher level of FRE even as continued realization activity supports the production of net realized performance revenues. Diversifying our earnings stream has been a deliberate effort. And for the first half of the year, FRE comprised 50% of pretax distributable earnings. Moving on in what is a complex environment. Our portfolio continued to perform well as Kew noted, with 3% overall carry fund appreciation. Our diverse global portfolio has been carefully constructed with high-quality investments. And together with persistent exit activity, supported positive appreciation despite significant declines in public markets. Broad-based portfolio strength in infrastructure and natural resources was supported by higher energy demand and pricing. And our real estate strategies, portfolio construction and an active disposition pipeline supported strong valuations. We also saw growth in several of our European-based private equity strategies, notably Europe growth, partially offset by weakness in our public securities, the majority of which are held in our U.S. bio strategy. As Kew also noted earlier, the portfolio's appreciation supported yet another record level of net accrued performance revenues at $4.3 billion. This quarter's accrual was partially offset by over $270 million in net realized performance revenues, more than double the level in the first quarter. Our U.S., Asia and Europe buyout fund and U.S. real estate strategy were the biggest drivers of our net realized performance revenue this quarter. In total, we produced nearly $400 million of net realized performance revenue in the first half of the year. In addition, we have several transactions slated to close over the next few quarters that will support performance revenues and distributable earnings. The size and diversity of our net accrued performance balance and the quality of our investment portfolio gives us reasonable confidence we can generate an average of $1 billion of annual net realized performance revenues over the next several years, though market conditions will impact the actual level in any given year. Moving on, I want to close with some thoughts on our global credit platform. Solid investment performance, strong fundraising and our recently completed strategic transactions drove fee-earning assets under management to $116 billion, more than double the level a year ago. Today, the Global Credit segment is our largest source of fee-earning assets under management, and the recent transactions have provided significant scale to this business. The transformation of Global Credit over the past handful of years is remarkable. Our opportunistic credit strategy is moving from strength to strength as it increases its scale and employs its available capital in a market that increasingly needs assurance and flexibility. Our structured credit business, with $48 billion in assets under management, following the addition of the CBAM assets, is the global market leader. They have a long-term track record of credit outperformance, and have positioned their portfolio to balance risk and reward as we head into an increasingly complex environment, which provides us with significant conviction in the earnings sustainability in the strategy. Fortitude manages almost $50 billion in their general account, and our new advisory relationship with them positions Carlyle to scale considerably as Fortitude deploys their nearly $4 billion of excess capital. And we have growing businesses in real estate credit, infrastructure credit, direct lending and aviation, and we expect these strategies to be significantly larger in the next few years. Broadly, credit quality in our funds remains good, and we are pleased with the diligence of our teams as they manage these portfolios in a rapidly changing environment. In sum, in a difficult market, we posted strong results and are well positioned to deliver a solid year of distributable earnings. Our strategic transactions are performing well. Our teams are focused on managing their portfolios to deliver attractive performance for our fund investors, and we have substantial dry powder to capitalize on opportunities as they emerge. With that, let me turn the call over to the operator for your questions.

Alexander Blostein, Analyst

Kew, maybe I was hoping to start with digging a little bit more into performance trends you're seeing, particularly within Corporate Private Equity within Carlyle. Obviously, a very impressive mark this quarter in light of macro conditions and I appreciate the portfolio selection comment. But I guess even good companies are facing higher costs and slower economic conditions and obviously, lower multiples for the public market. So just curious how you're thinking about the offsets to these factors that drove positive performance within private equity for you guys this quarter? And as you think about the exit environment and the ability to actually monetize some of these gains, how are you thinking about that for the next couple of quarters?

Kewsong Lee, CEO

Sure, Alex. Thanks for the question. Look, it's clearly a complex market, but we're really focused on controlling what we can control, namely our investing in how we manage our portfolios. But I think the right way and the best way to answer your question, as I said in my opening remarks, we're more diversified than ever. And let me spend a few minutes walking through our various businesses and why I think we're so well positioned with respect to our portfolios and portfolio quality, which your question implies. So first of all, in Corporate Private Equity, it's important to understand we've got a world-class dominant business at scale. But what's really important to appreciate is that for the several years now, Alex, we've been running slower growth in our investment cases. And importantly, virtually all of our investment base cases contemplated contraction of exit multiples. So that's what I mean when I say we've been preparing for these types of environments. Now we've always been focused on investing in great companies with a view to create growth and fundamental operating improvements to drive our returns. So when you put all this together, we've got great constructed portfolios across all of our CPE strategies, and they're diversified across sectors, regions, themes and vintages. And it's really why we've been able to avoid the hardest hit sectors, we've avoided the high-flying companies that don't generate any profitability. And so when you take a look at that portfolio that you referred to, our Corporate Private Equity portfolio, at the top line, has been growing at about 14% this year. They've been maintaining their operating margins given all of the operating improvements that I just referred to. And so the value creation is really coming from growth and operating improvements, which has offset the contraction in the valuation multiples that we've seen in the markets. And with respect to the exit part of your question, look, you can't have good exits if you don't have good companies. Great exits start with great investing. We pride ourselves on being a great investment firm with a great investment ethos. And so when you pick good companies, partner with them to create value in a fundamental way, it sets you up for the exits and it's just a matter of how you decide to exit given what the market and the conditions afford you. So look, taking a step back, we're at scale. We're very well diversified in Corporate Private Equity. We've got superior portfolio construction. Thus far, it's performed relatively well because of the operating performance and the fundamental nature of our value creation. And who knows what the future has in store for everyone moving forward, but I like the way we are positioned as we're heading into this current environment.

Craig Siegenthaler, Analyst

Hope everyone is doing well. So we were looking to get an update on fundraising. So how crowded does the current backdrop feel to you, especially in private equity and especially with U.S. pension plans feeling the dominator effect? And then how much of this is offset by new strength from sovereign wealth funds given their stronger cash flows from higher energy prices?

Curtis Buser, CFO

Craig, I'm going to start and just kind of level set a little bit, and then Kew will add some color. So let's just kind of recall where we were. 2021 was a great year for us. We raised $51 billion. 2/3 of that came in credit, real estate, our solutions business, infrastructure, renewables, so really diverse in terms of our capital raise. And this year is kind of the same. We expect to have 20 or more strategies in the market this year, again, emphasizing the diversity of the platform. And we're off to a good start, $19 billion raised in the first half, $10 billion in this quarter. And what we're seeing from LPs is they're continuing to entrust us with an increasing amount of capital, which is really important in the current environment. Kew?

Kewsong Lee, CEO

Thank you, Curt. The fundraising market is undeniably challenging at the moment, and this situation may continue for a while as limited partners adjust to market conditions. The corporate private equity segment is particularly affected by these challenges. However, I want to highlight what Curt mentioned. We have over 20 strategies available in the market, and it's crucial to reference my earlier remarks about the diversity of our platform and its advantages. Currently, more than half of our fundraising is derived from Global Credit, infrastructure, renewables, and solutions, where we are experiencing strong demand. I also want to expand the discussion to include capital formation. As noted earlier, we added $50 billion in perpetual capital from Fortitude this quarter. The key takeaway is that we have various avenues for raising capital to facilitate Carlyle's growth. Our fee-paying assets under management have now reached approximately $260 billion, setting a new record. While we anticipate some challenges in the private equity markets to continue for a time, the diversity and breadth of our platform provide us with numerous fundraising opportunities, particularly when considering capital formation across all our strategies.

Christoph Kotowski, Analyst

I wanted to get a bit more color on what Curt said about fees in private equity coming down in the second half versus the first half or second quarter. Is that a function of just lower catch-up fees or is that the function of realizations coming from funds? Or what's driving that?

Curtis Buser, CFO

Thank you for your question, Chris. Specifically, I want to point out the fee-related performance revenues, particularly in our Global Private Equity and Core Plus real estate fund. The fund has performed well and remains attractive, but due to its structure, it generates incentive fees based on the capital deployed. Three years ago, there was less deployment in the second half of the year, which means the crystallized incentive fees will likely be a bit lower in the second half as well. I wanted to make that clear. However, I believe this will resolve itself over time. Additionally, there's $64 million of net accrued incentive fees associated with this strategy, which is roughly the same as last quarter, despite about $12 million net of compensation realized this quarter, indicating stability. We have a good outlook for this product moving forward. Regarding catch-up management fees, they may decrease in the third quarter. Predicting exactly how this will unfold for the rest of the year, especially outside the GP segment, is challenging. We did see some solid transaction fees this quarter, and while it's hard to determine the timing of future revenues, I am optimistic about achieving our $850 million of FRE for the year, which is the key focus.

Robert Lee, Analyst

Regarding Fortitude, I believe you mentioned there is approximately $4 billion in available capital. Could you clarify what that might imply for assets? Should we anticipate something like 10:1 leverage on that? Additionally, how is the current environment influencing the reinsurance opportunities with Fortitude? Are there specific businesses offering more potential than others? Any insights on this would be greatly appreciated.

Kewsong Lee, CEO

Robert, thanks for the question. Why don't we do this? Curt, why don't you tackle the first part of the question, then I'll try to tackle the second one.

Curtis Buser, CFO

Yes. So Rob, I think you got it right. You picked up on really an important metric. They've got nearly $4 billion of excess capital that Fortitude's going to use to continue to grow its business. And if it does that, you're right, that translates into 10x to 15x from a size standpoint. So as we've previously said, I think Fortitude is in a great position to double its business over the next handful of years. So I'd say somewhere over the next 5 years, they're well positioned without really doing a whole lot else to double the business.

Kewsong Lee, CEO

Yes. And Robert, let me just add on to that. So first, Fortitude is performing very well. And we are exceptionally happy with how that platform is developed. It's got double-digit ROE at the moment. Reserves are in great shape. And as Curt mentioned and you rightly pointed out, it's got about $4 billion of excess capital, which is an incredible capital base to support future growth. As you know, as Fortitude grows, because of our aligned strategic advisory arrangement, as Fortitude grows, Carlyle benefits through our investment platform. With respect to the areas and sources of future growth, the current environment of volatility and higher rates, actually leads us to believe there's going to be more deal activity. Because what that volatility does is it puts pressure on insurance companies to manage their capital more effectively. And as a result, they are going to be much more inclined to want to divest and to sell legacy liabilities, portfolios that are capital consumptive or enter into reinsurance transactions with folks like Fortitude. So at the moment, our pipeline is very busy, very robust. You've seen us announce deals with Prudential, with T&D in Japan. And there are lots of other areas for us to continue to grow via reinsurance, but also scaling up via acquisition. These types of things are not predictable month-to-month or quarter-to-quarter, but as I look out over the next several years, this excess capital and the momentum that Fortitude has leads me to believe you're going to see real scalable growth coming out of Fortitude in the years to come.

Curtis Buser, CFO

Yes. I mean, Kew confirmed that in his prepared remarks, and we feel very comfortable with the $850 million. And again, the business is performing well. And so I think that's a good target and a good expectation for us.

Kenneth Worthington, Analyst

Kew, a couple of questions on inorganic growth. Has the environment for inorganic growth changed given market conditions? And then maybe there had been a gap between public and private market valuations, for alternative asset managers presenting a nice arbitrage opportunity for public market buyers and that arbitrage, I think, narrowed. Have private market valuations come down with public market alternative asset manager valuations? And ultimately, what is your outlook here today for the second half of 2022 into '23 for executing the inorganic part of your growth strategy?

Kewsong Lee, CEO

Sure, let me address the first part of your question. Regarding inorganic growth, I want to emphasize that corporate development should be carried out strategically and thoughtfully as we diversify our platform. We have successfully done this in the past, but we will maintain a disciplined approach going forward. There is no specific quota, budget, or timeline driving our decisions; rather, we will be measured and deliberate. This environment may present opportunities, and we are cautiously evaluating what it has to offer while considering where we want to expand our platform. The areas that appear most promising for growth are likely in credit, solutions, and our infrastructure platform. The key criterion for our focus will be on strategic adjacencies that are FRE intensive, ideally leaning toward perpetual capital, and are highly scalable in substantial markets with the potential to significantly influence our growth over time. We are open to pursuing opportunities that meet these criteria, but to reiterate, there is no immediate pressure or timeline that we are looking to fulfill.

Curtis Buser, CFO

Thank you for the question, Ken. In terms of valuation, we are considering alternative investments and potential acquisition opportunities to continue our inorganic growth. The quality of the asset is crucial; high-quality assets demand higher valuations, while those lacking key attributes tend to be valued lower and face more pressure. We prefer assets with strong free cash flow and healthy margins, as well as those that have a solid growth trajectory. It's important for us to assess whether a company can execute independently or has execution deficiencies, and to evaluate their scale, infrastructure, and technology. When an asset is missing these characteristics, its valuation expectations decline. We may explore opportunities that only meet some of our criteria, but we always consider whether we can enhance those assets to create value. Ultimately, this is an ongoing discovery process between us as a buyer and the seller.

Michael Cyprys, Analyst

I just wanted to come back to some of your early commentary on the call here, maybe just for some on the fundraising commentary just around a more challenging backdrop for raising in private equity. Just curious how you see that potentially impacting Carlyle's own outlook for raising and Corporate Private Equity just in terms of magnitude and timing? Does it have an impact there at all? And then to your comments on the strong portfolio appreciation in the quarter, but just given the tougher macro backdrop here, just curious how you see that impacting the realization outlook into the second half of the year as compared to the $390 million that you generated in net realizations in the first half?

Kewsong Lee, CEO

Mike, it's Kew. Why don't we try this? Curt, do you want to take the first part, and I'll take the second?

Curtis Buser, CFO

Sure. So Michael, on fundraising, again, there's good momentum as we start this year. For all the things I've already said $19 billion raised, 20 different strategies and having very good success on a multitude of fronts. You're absolutely right that the world has changed, in particular around some of the traditional private equity strategies. And that's fundamentally going to result in some of those raises taking longer in general and maybe not raising the same amounts as they would have otherwise in a different environment. All of that said, I still like our play. I still like what we're doing, and I still like our momentum.

Kewsong Lee, CEO

Yes. Regarding your second question on exits, the current M&A environment and the state of the equity capital markets might suggest a significant drop in realizations. However, it's important to consider the size, breadth, and diversification of our portfolio. We have had $4.3 billion in accrued carry for several quarters, and numerous transactions signed several quarters ago continue to close throughout this year. This gives us significant visibility, which is why Curt indicated a comfortable estimate of around $1 billion in net realized performance fees annually, subject to market conditions and timing. The size and diversity of our portfolio support this confidence. Additionally, as I mentioned in response to Alex's question, we have built strong portfolios, and our investment strategy focuses on identifying outstanding companies with strong value creation plans driven by fundamental growth and operating improvements. Historically, 80% of the internal rates of return in Carlyle's Corporate Private Equity portfolio are derived from these growth and operating improvements rather than leverage and multiple expansions. This reflects the nature of our value creation. Given our investment philosophy, we feel confident about the quality of the companies in our portfolio, which contributes to positive exit outcomes. Despite the challenging market conditions and the contraction in valuation multiples this year, our private asset sales have been at favorable prices, highlighting the quality of our assets. Overall, the realizations so far indicate strong breadth and quality in our portfolio construction. If we maintain this performance, we are optimistic about achieving Curt's projection of roughly $1 billion per year in net realized performance fees from our substantial $4.3 billion in accrued carry.

Curtis Buser, CFO

And just to add on to that, Mike. I mean, you heard the confidence in what Kew was saying about the portfolio. And we've been seeing a lot of activity, a lot of discussions, so good exits here in the quarter. We've got a good pipeline of exits. And sitting here today, my bet is the second half is actually stronger than the first half. Not to the same level it was last year, of course, but I think the second half from a carrier production perspective, and I don't have a perfect crystal ball, but I think the second half will be better than the first half.

Glenn Schorr, Analyst

So just came out, obviously, but we've been talking about this for a year. So a quick question on management consumer seems like they struck a clean energy deal, and part of the pay for is carried interest. I'm sure I'm not alone when I got a ton of questions already this morning. I know we've talked about it in the past, I think it would be good for people to hear from you. Two-parter, a, what does it mean for your portfolios? And then most importantly, for your stocks right now, what does it mean, if anything, for the shareholder? Like who's issuing is it assuming higher carrier interest taxes goes through?

Curtis Buser, CFO

Thank you for the question, Glenn. This news just came out last night, and we still have a long way to go on it. The details are not fully available yet. Our teams are looking into it and conducting research as expected, but it is too soon for us to provide any comments. Generally speaking, regarding our tax situation, we have people all over the world subject to various tax rates, and changes in local taxation do not impact our corporate strategy. We already operate as a full C-corp with a complete corporate tax provision.

Glenn Schorr, Analyst

Maybe I want to address it. I know it has been discussed, but I believe shareholders want clarity. Regardless of the regulations, will the public shareholder bear a higher carried interest cost, or is that the employee who is compensated and receiving carried interest? That's my main concern.

Curtis Buser, CFO

Yes, our carry is already fully taxed on the corporate side. Capital gains rates do not apply; we are essentially paying a fully loaded ordinary income tax rate on our carry.

Kewsong Lee, CEO

Glenn, it's Kew. I'll handle that question. I think it's important to take a step back and put the current situation in perspective and compare that to maybe what we're all remembering with what happened right after the great financial crisis set in. And right now, I think my best guess is there's probably $80 billion of hung loans or backlog today in the system. But that compares to, if you go back a bit, $325 billion, which is the comparable number back at the time of the great financial crisis. But I think what's really important to appreciate is that the entire leveraged finance market is 3 to 4 times bigger. So not only is the absolute amount much smaller, but the total market is much bigger. And on top of that, my view is that our banks and our partners at all of our banks, if they're well capitalized, they're well run. So yes, there is a backlog today that they're trying to move off their books. I have no doubt that's going to happen in time. It is a much smaller issue and headache now than it was at the GFC. And it's just a matter of time before this clears out, and hopefully, activity resumes.

Rufus Hone, Analyst

I was hoping you could provide an update on the solutions business. And how do you see activity there developing in the coming quarters? And whether the dislocation you're seeing in the markets translates into potential upside for that business? And can you also update us on potential fundraising opportunities in solutions and the pipeline for new products?

Curtis Buser, CFO

Rufus, let me begin and perhaps Kew will provide additional insights. We remain optimistic about the solutions business, as there are many positive developments taking place. As I mentioned last quarter, it's important to note that this business tends to grow in stages, corresponding with cycles of funds returning to the market. Additionally, the business has made significant strides in improving its performance and margins, although it faced some challenges this quarter due to foreign exchange fluctuations. It is somewhat more susceptible to currency effects since a substantial portion of this business is denominated in euros. Consequently, as the dollar strengthens, it has impacted our results somewhat. Nonetheless, the overall growth trajectory remains positive. There are opportunities in untapped areas that we're capitalizing on, along with the potential to introduce new products, which we’re focused on, though it will take time to fully realize these developments. This instills confidence in long-term growth prospects for the business. Lastly, the secondary market is thriving at the moment, and we are making the most of it. We have a solid reputation in this space, and AlpInvest has excelled, demonstrating excellent expertise in data and market dynamics. Their performance this quarter has also benefited somewhat from foreign exchange effects but remains robust, and their understanding of current trends is excellent. We are positioned well for the future, especially in the long run.

Kewsong Lee, CEO

Yes. I don't have much to add, Curt, other than if you string together a few of these questions, the volatility, the denominator effect that somebody mentioned on a previous question, all of this leads our LPs to want to optimize, reconstruct and tailor their very large alternatives portfolios and that need, that necessity for the LPs to do that really runs right into the sweet spot of what AlpInvest is designed to help our LPs do. So whether it's secondaries, whether it's single asset strategies, whether it's co-investment strategies, AlpInvest is very well positioned as a market leader to take advantage of this more broad secular trend that all this volatility, all of the multiple contractions and the swings you're seeing, our LPs need to optimize and tinker with their portfolio at large levels. And that, I think, is going to continue for several years to the benefit of our AlpInvest platform.

Alexander Blostein, Analyst

I wanted to go back to the FRE dynamics you described for this year, and it's really nice to hear, obviously, the reaffirmation of the $850 million of FRE for 2022. But as you think about Carlyle's growth algorithm for FRE beyond this year, obviously, you're going to get the benefit from annualization from some of the deals and kind of the big flagship fundraising. So that will help. But curious how you would think about growth and FRE besides these tailwinds for 2023? I understand it's kind of early. I don't expect you guys to have full guidance out. But just as a framework of how to think about beyond some of these annualization dynamics?

Curtis Buser, CFO

Alex, I'll begin and Kew may add to this. We've seen significant growth in our business, particularly in the last few years. Over the past five years, we have more than tripled our fee-related earnings, indicating around a 30% compound annual growth rate. By the end of the year, we expect to be up approximately 40% compared to last year. Looking at the broader market, the private markets are likely to expand from about $10 trillion to roughly double that in four to five years, suggesting a 15% compound annual growth rate. If this occurs, we will be well-positioned to take advantage. Our brand, diversity, and strong performance should enable us to benefit from these trends. I believe we can achieve even more, particularly as we utilize our balance sheet and develop new products. However, it remains to be seen how all these factors will unfold over time. Overall, I am pleased with our progress and remain focused on business growth.

Kewsong Lee, CEO

Yes, Alex, I’d like to share some insights that relate to our intentional diversification of our platform, enabling significant growth opportunities and multiple avenues for ongoing earnings. Stepping back, I want to emphasize that our Corporate Private Equity business is world-class and operates on a global scale across various industries, and I’m confident this segment will continue to thrive. Additionally, we have enhanced our platform with a robust credit business that has become the fastest-growing segment. Credit offers greater scalability than private equity, and we see ample opportunities in areas like infrastructure and real estate credit to drive further growth. Our opportunistic strategy has seen great success since its inception, and the aviation platform has more than doubled in value since our acquisition. We believe the credit sector has strong long-term trends, especially as our limited partners move funds from traditional public fixed income to private credit, coinciding with our increasing market share from the banking system. Furthermore, we have established an infrastructure and renewables business that stands to benefit from the ongoing energy transition and significant global investments required for infrastructure improvements. Substantial capital will be needed for infrastructure to support energy transition and enhance regional resilience. We also have our solutions business, AlpInvest, recognized as an industry leader. As the alternative investment sector expands, AlpInvest will increasingly provide valuable portfolio management solutions to our limited partners. Additionally, Fortitude has $50 billion in assets with excess capital, positioned well for growth. Moreover, our capital markets business is anticipated to generate more incremental fees as our deal activity continues to rise. Over the past few years, we have built a more diversified platform that enhances our earnings resilience while offering numerous growth opportunities. This is before considering our corporate development and inorganic growth initiatives, which we’ve successfully and selectively pursued in recent years. If we align these insights with the broader industry trends and our strategic execution, I believe we are well-positioned to continue propelling the firm forward.

Craig Siegenthaler, Analyst

I'm assuming this is not an issue just given your commentary on the resilient credit quality in your Global Credit business. But I'm curious in terms of how your CLO managed fee deferrals work? And can you help us frame the risk that you might have a decline in management fees if we enter a severe U.S. economic recession?

Curtis Buser, CFO

Craig, thanks for the question. Look, we're now the largest player in the CLO space, and that gives us a lot of opportunity and strength. The portfolio is exceptionally well positioned. And the team has been incredibly active in terms of how to position the portfolio for these challenging times. So they traded about $9 billion and that was all buys and sells across the platform here in the second quarter. And with the goal of reducing exposure to industries that had higher commodity costs or little pricing power. So it was all about making sure that we really kind of positioned it well for some potential rough waters. As a result, the risk metrics look really good. Our exposures on CCCs are below industry averages in the index. The quality of the portfolios and all of the basic indexes have scored well and are rating really well from a quality perspective. Our defaults continue to be below market averages. Look, we expect some kind of increase in that. But the underlying cushion in the over-collateralization test is strong. So we feel really well positioned. And as long as that remains so, which we currently expect it to be, there's not really the risk in terms of any of the sub fees shutting off. The portfolio is well positioned and hence the confidence you've heard in our tone.

Daniel Harris, Head of Investor Relations

Yes. Thank you, everyone, for listening on what I know is a very busy day. If you have any other follow-up questions, feel free to reach out to Investor Relations. Otherwise, we look forward to talking with you again in the fall. Thank you.

Operator, Operator

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