Earnings Call Transcript - CG Q3 2022

Operator, Operator

Good day, ladies and gentlemen, and thank you for joining us. Welcome to the Carlyle Group's earnings conference call for the third quarter of 2022. I would now like to hand it over to Mr. Daniel Harris, Head of Investor Relations. Mr. Harris, you may begin.

Daniel Harris, Head of Investor Relations

Thank you, Harris. Good morning and welcome to Carlyle's third quarter 2022 earnings call. With me on the call this morning is our Interim Chief Executive Officer, Bill Conway; our Chief Financial Officer, Curt Buser and several leaders from the office of our CEO. Pete Clare, Chief Investment Officer for Corporate Private Equity; Mark Jenkins, Head of Global Credit; and Ruulke Bagijn Head of Global Investment Solutions. Bill and Curt will begin with some prepared remarks and then the entire call, our team will be available for your Q&A. 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 reconciliation of these measures to GAAP in our earnings release. 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. Earlier this morning, we issued a press release and detailed earnings presentation, which is also available on our Investor Relations website. I'm going to begin with a quick discussion of our results and then hand the call over to Bill. In the third quarter, we generated $213 million in fee-related earnings and $644 million in distributable earnings. Fee-related earnings of $213 million increased 40% compared to the third quarter of 2021. Year-to-date, FRE is $632 million which is 49% higher year-over-year through a combination of strong organic growth as well as the positive impact of various strategic transactions completed earlier this year. FRE declined sequentially from the second quarter largely due to two items we see in the last quarter. Catch-up management fees totaled $10 million compared to $19 million in the second quarter and fee-related performance revenue was also lower sequentially. Distributable earnings of $644 million this quarter and the year-to-date DE of $1.5 billion is 10% ahead of last year's $1.3 billion and is already more than double any prior full-year results other than our record result from last year. On an after-tax basis, we generated $1.42 and DE per share for the third quarter and $3.33 year-to-date. We declared a quarterly dividend of $0.325 per common share. With that, let me turn the call over to our Interim Chief Executive Officer and Co-Founder, Bill Conway.

Bill Conway, Interim Chief Executive Officer

Thank you, Dan. Good morning, everyone and thank you for joining us today. It's been a while since I've spoken with many of you that I'm pleased to be on the call today to discuss Carlyle's results for the quarter. While Carlyle is in a transition period, as we move towards a new CEO, the firm is operating well and I'm proud of our teams around the world as we continue to perform for all of our stakeholders. There are two important points I'd like to focus on today. First, I'll touch on the results and highlight the strength and diversity of Carlyle's global business. Second, as we navigate challenging markets in a difficult economic environment, I'll discuss how our approach and investment experience is helping us manage through economic uncertainty and positioning the firm for the future. I'll also give a brief comment on the status of our search for a permanent CEO. First, let me provide some perspective on Carlyle today. In the third quarter, Carlyle delivered solid results for our fund investors and our shareholders despite the market volatility. Year-to-date, our results are strong with FRE up almost 50%. None of this is by chance, we were able to deliver this outcome due to the breadth and depth of our businesses, strong business leadership, and highly capable investment teams around the world. Let me be very clear, the firm's strategic focus on growing fee-related earnings, diversifying our business mix and earning stream, and improving the way we operate has not changed at all. These core tenets will not change regardless of who is leading the firm. We have three global business segments that are run by three strong leaders, each of which serves as stewards of investor capital and drivers of growth for our shareholders. Ruulke Bagijn in Global Investment Solutions, Peter Clare in Global Private Equity, and Mark Jenkins in Global Credit are all on the call with me today and you'll have the opportunity to ask them your questions later. As we navigate through more challenging markets than any of us have seen in a decade, the firm is in an enviable position. Carlyle and I have been doing this for 35 years and we've seen all types of markets and economic cycles. We are confident that each of our businesses has the resources, investment talent, and capital of over $74 billion of dry powder to capture opportunities for our stakeholders. Our teams are highly experienced and have worked together through various cycles. In fact, the partners of our investment teams have worked together at Carlyle for more than 15 years on average with decades more at firms across the globe. Moving on, let me discuss the broader environment and how that impacts our investment outlook. All of you will see the same things we do. Rising interest rates, high levels of inflation, and geopolitical uncertainty each of which lead to increased market volatility and headwinds for investors and operators. This is unlikely to resolve in the short term, now our teams are not sitting back and waiting for better days. Certainly this market is tougher for some parts of our businesses than others and on some parts of our business, this environment will create opportunities and two examples come to mind. Our credit opportunities business, which you see far more lucrative places to put money to work and our solutions business, which will have even more chances at attractive returns to finance buyers and sellers of existing fund positions. One of our core strengths has been in the area of investment risk management, particularly in the construction of our portfolios. We certainly take risks. You can't make money without doing so, but we need to get paid for the risks we take. Until recently, the investors who have made the most money have taken the most risks. That is in our style. Portfolio construction matters, it's a differentiator that continues to position our business to deliver outsized relative performance for fund investors across market cycles. Our portfolios are built with diversification by geography, industries, deal size, and risk. And portfolio construction is adjusted in our private-equity business, but in Global Credit and Global Solutions as well. For instance, in our CLO businesses, CLO portfolios, we manage hundreds of credits. This investment strategy has led to default rates at half the industry average. Another example would be our US real estate business, which is investing in its ninth closed-end fund with committed capital of $8 billion. This is an experienced team with a long and successful track record. In terms of portfolio construction, they favor demographics over GDP. Their current fund has almost no exposure to office, hotel, and retail, which represents 60% of the typical real estate fund. In volatile markets like today's, our fund results should reflect the benefits of our strategy and so far they have. Before I close, let me comment on our search for a permanent CEO. In short, the search continues. The Board and search committee are making good progress finding the right leader and we do not have any additional information to provide at this time. I'll finish where I started. Carlyle has the capital and expertise to have a long-term focus, which has served our investors well for decades. We have three strong segments that are well-positioned to navigate the current environment and capture value. Our quarterly and year-to-date results underscore the strength of this platform and Carlyle has delivered through various market cycles and transitions. I'm proud of where we are today and feel that we can continue driving long-term shareholder value. With that, I'll hand things over to Curt Buser, our Chief Financial Officer.

Curtis Buser, Chief Financial Officer

Thanks Bill, and good morning, everyone. As you've heard Carlyle delivered strong third quarter and year-to-date results in a particularly challenging quarter, a testament to the strength of our investment platform and quality of our three global business segments. While economic and geopolitical uncertainties are creating headwinds, our business continues to deliver impactful results. Consider the following: fee-related earnings of $632 million year-to-date are up almost 50% from the same period last year, and are already higher than any full-year in the firm's history. Our carry funds across asset classes and geographies have appreciated 10% year-to-date. As Bill noted, our portfolio construction and proven investment approach is why we are delivering outsized returns and we are well-positioned to continue to do so. Our net accrued performance revenue of $4.1 billion is up from $3.9 billion at the end of last year and that is after realizing $780 million of net performance revenue year-to-date. While fundraising is clearly more challenging this year, we have raised $25 billion in new capital year-to-date. That translates into almost $90 billion in new capital formation when you include completed strategic transactions such as Fortitude and CBAM. With that backdrop, let me provide an update on each of our global business segments and then I'll dig into the financial results. Our global private equity business continues to deliver solid results across corporate private equity, real estate, infrastructure, and natural resources. Fee-related earnings year-to-date in global private equity of $409 million has increased 45% with both top-line growth and margin expansion. Our current vintage of funds taking carry has led to strong carry generation, and as we look forward, we know that we have an equivalent amount of net accrued carry on funds that have not yet taken carry, as we do from those currently generating cash carry. So we believe we are well-positioned to continue to generate strong performance revenues in future periods. Global private equity is also poised for future growth, having raised almost $10 billion in new capital year-to-date and having deployed almost $16 billion into new investments. While in the near-term, the pace of corporate private equity deployment and realizations is likely to slow, given challenging capital markets and we're already seeing the impact of slower CP fundraising. Over the long-term, we see significant opportunities for continued growth across our global private equity investment platform. In global credit, our assets under management have nearly doubled just this year to $141 billion and FRE has more than doubled year-to-date as the impact from our strategic transactions has been highly accretive. Our investment teams are active across the liquidity spectrum, taking advantage of market dislocations to invest in opportunities with increasingly desirable risk-reward characteristics. Many of our largest strategies are floating-rate in nature, so fund investors benefit from increased current yields. At the same time, while current credit quality remains good, we are actively positioning our portfolios to withstand worsening economic conditions and potentially higher default rates. We do not anticipate any near-term challenges that put existing management fee streams at risk, though the slower pace of activity may slow capital market transaction fees. Looking at future growth, global credit has raised $12 billion of new capital this year across 11 strategies. Year-to-date, CLO formation has been strong with 7 new CLOs priced for $3 billion. The velocity is falling due to market conditions. Direct lending generated near-record originations in the quarter with gross new loans of more than $1.5 billion and we are seeing significant demand for private credit across our asset type and geography. Fortitude continues to perform well with a robust pipeline of growth opportunities and we continue to expect it can double its size over the next few years. Moving to Global Investment Solutions. This business is well-positioned to support the increasing liquidity and portfolio management needs of global fund investors. Secondary investment activity is poised to accelerate, as fund investors seek to optimize their own portfolios given market volatility. Global Investment Solutions has seen year-to-date FRE tick lower to $55 million, partially owing to the negative impact of foreign-exchange rates. However, AlpInvest is making strong progress, investing their current vintages of co-investments and secondary funds and are likely to be back in the market to raise their next generation of funds sooner than expected. Global Investment Solutions depreciation was flat in the quarter and is up 9% year-to-date, with net accrued carry of $365 million, up more than 14% year-to-date. To summarize, we expect the pace of activity to slow over the next few quarters in certain areas, while others will remain active. This is why our diversification strategy remains core to our future growth. And importantly, as we've seen in past cycles, the work and diligence we do now positions us to come out on the other side that much more ready to act. Turning back now to firm-wide results. Let me dig deeper into third quarter earnings. Let's start with fee-related earnings. As Dan mentioned, third quarter fee revenues are down about $24 million from the second quarter, due to lower catch-up management fees and fee-related performance revenues. That said, fee revenues are up a robust 31% from a year ago. And as a reminder, more than 90% of our management fee revenues are in closed-end fund structures and not subject to redemptions. Cash-based compensation expense in the third quarter was down sequentially, largely as a function of lower fee-related performance revenue and the impact of foreign exchange on translation of compensation in Europe. G&A expenses of $101 million in the third quarter increased as we hosted our Global Investment Conference, and travel and entertainment largely returned to pre-pandemic levels. Expenses continued to be impacted by inflationary pressure and the strong labor market that will continue to impact expenses into 2023. FRE margin was 37% in the third quarter and year-to-date, FRE margin of 38% increased more than 400 basis points year-over-year. For the full year, we now expect fee-related earnings to be between $825 million and $850 million. With the headwinds from foreign exchange translation, slowing buyout fundraising, and unit transaction fees each impacting expected full-year results. That said, we still expect 2022 FRE to increase more than 35% compared to 2021. We remain confident that our long-term FRE growth trend remains intact. Net realized performance revenues of $391 million in the third quarter were our third-largest quarter on record. Year-to-date, net realized performance revenues of $780 million highlight the strength of our portfolio and our team's ability to monetize investments despite difficult conditions. I said last quarter that I expect that our second half of 2022 net realized performance revenues to exceed the first half of the year. With just the third quarter's result, we've already surpassed that goal. Our net accrued performance revenue balance of $4.1 billion and remaining fair-value of investments in our carry funds of $136 billion gives us confidence that over time we will realize a high level of performance revenues and distributable earnings. Our accrued carry remains near record levels despite significant declines in public market valuations and increasingly higher discount and cap rates used in our valuation process. Today, our accrual represents over $11 per share in future earnings power. So let me wrap up. We're performing well against the challenging backdrop. We're focused on growing and diversifying fee-related earnings and expanding the capabilities of our firm to drive long-term shareholder value. More broadly, each of our three global business segments are well-positioned to deliver growth and outsized returns for our stakeholders. Now let me turn the call over to the operator, so we can take your questions.

Operator, Operator

Our first question or comment comes from Bill Katz from Credit Suisse. Mr. Katz, your line is open.

William Katz, Analyst

Okay, thank you very much for taking my questions this morning. Very first question Bill, thanks so much, I could hear your voice again. Just as you think about, I appreciate you have nothing else to say. But maybe you could help us understand what factors or dynamics you're looking for in a new CEO? How you're thinking about internal versus external candidates? And what if anything, did you learn in terms of this transition about where their franchises headed? Thank you.

Bill Conway, Interim Chief Executive Officer

Thanks for the question, Bill, and you know I really can't answer it. And because of that, we're going to give you a bonus question. But having said that, we are making good progress on finding the right leader. We want to find somebody that is better than I am, would be one of the comments I'd make. And we don't really have anything additional to add at this time. But as soon as we do, we will report to you and of course, in the interim, the firm is operating well and from a position of strength, but that takes you bonus question.

William Katz, Analyst

All right, thank you for the shot. So just maybe in terms of one of the biggest things we hear on the storyline is that without the leadership, it's going to be very difficult to grow the business. On top of a very difficult backdrop and your AUM SKU. So I appreciate you went through the three businesses, but can you sort of level set where we are in terms of your prior goals to raise assets? And as you look ahead, help us understand where you see the best opportunities maybe it sounds like the Investment Solutions side, but just anything to help us frame out sort of path to higher-fee paying AUM? Thank you.

Curtis Buser, Chief Financial Officer

Hi Bill, it's Curt. Let me start off and then I'll have partners join in afterwards. Let's go back to the beginning of 2021, which wasn't that long ago. We set a goal for 2024 to generate $800 million in fee-related earnings, $800 million in net realized performance revenues, and $1.6 billion in pretax DE, and we've met those goals. This year, year-to-date, we've achieved $1.5 billion in DE, which are record numbers compared to the same three quarters last year. From a fundraising and capital accumulation standpoint, we raised about $50 billion last year, and this year we've raised $25 billion to date. More importantly, when considering strategic transactions, we've accumulated roughly $90 billion in capital. Our relationships with our LPs are strong, and we're actively working on those relationships. Pete is on the road right now doing just that. I believe the prospects for the future are very promising, especially with the market dislocations we're experiencing, as my colleagues will take full advantage of these opportunities. I'll pause here to see if any of my colleagues want to add to what I've just shared.

Peter Clare, Chief Investment Officer, Corporate Private Equity

Hi everyone, thank you. Bill, thanks for the question. I wanted to share some insights on fundraising in the global private-equity space. Overall, as Curt mentioned, our funds are performing exceptionally well, with an average appreciation of 10% across all our carry-generating funds, and even higher in our global private equity sector. Portfolio construction is crucial, and a key aspect of our investment strategy is creating portfolios that minimize risk and maintain resilient earnings in the businesses we invest in. Historically, we've excelled during challenging economic times, and this strong track record is likely to aid us in our fundraising efforts. While the market for large buyouts has slowed, we expect that our current fundraising activities will ultimately yield commitments comparable in size to previous vintages. It’s also important to note that our focus is broader than just buyouts, with significant growth in areas such as US real estate and Europe Technology. You will likely hear more about the growth we’re experiencing in credit and Global Solutions.

Mark Jenkins, Head of Global Credit

Yes. Hi Bill, it's Mark Jenkins here on the credit side. I would say similar to Pete. I mean, I've been on the road talking with our investors. There is a sense of opportunity when we talk to investors about what's going on in credit markets in particular, as they seen a repricing of risk. And we're taking advantage of that. Similar to see, I mean we have a broad platform here at Carlyle that spans everything from liquid or private credit and real assets. And I would say across the opportunistic play and frankly, even on the CLO space, we continue to see growth. And as I go down the various channels that institutional insurance retail, we continue to see those as great avenues of growth for the business and opportunities for our investors.

Ruulke Bagijn, Head of Global Investment Solutions

And this is Ruulke. In terms of growth, our platform is very well-positioned to benefit from the market conditions, especially with liquidity needs increasing across markets. And let me also remind you a bit about AlpInvest. We managed $63 billion of assets under management and secondary's our largest and profitable part of our business, managing $21 billion of assets under management. But we also have leading co-investments and any fund investment businesses. Our performance has been strong with long-term net outperformance across all strategies of around 500 to 1,100 basis points for last 10 years, but over the last 20 years. We continue to deploy it also despite the current market conditions, and we expect actually to be back in the market next year with several strategies and being able from the opportunities that we see in the market, which are especially obviously also present in the secondary business where our liquidity needs are increasing across markets at this point in time.

Operator, Operator

Thank you. Our next question or comment comes from the line of Ken Worthington from JPMorgan. Mr. Worthington, your line is now open.

Ken Worthington, Analyst

Great. Thank you, good morning. Public shareholders seem to be concerned about the leadership uncertainty. And I think we can see that in the underperformance of the shares. Commitments this quarter seem slow and logic would suggest that leadership uncertainty could be a factor here. So the question is, do you think leadership uncertainty is having an impact on fundraising? If so, how meaningful is that uncertainty having on either the size or timing of commitments? And then I guess most importantly, do you think the choice of a new CEO can win back concern clients or is the damage somewhat irreversible for funds in market right now? Thanks.

Bill Conway, Interim Chief Executive Officer

Thanks, Ken. Well, the short answer would be no, in terms of the impact of the CEO change on fundraising. I've been on the road a lot myself, talking to investors. Pete was right when he said that it has slowed down due to congestion in the markets. But I think I don't see any long-term damage at all and this. And remember, I'm an investor, I've been an investor for 35 years. I was the Chief Investment Officer at Carlyle before I was CEO the first time. I think the investors in our funds, they like seeing somebody at the top who they know understands exactly what they're trying to accomplish.

Curtis Buser, Chief Financial Officer

Just add-on to that. Hi, Ken, it's Curt. Look I think there's a couple of things that are really important. First, the aggregate dynamics that are affecting lots of the private equity players, not just us. The denominator effect that congested the market, etc. So look, we're subject to that like others are, but our diversification and other products whether in energy, natural resources, credit solutions, as you've heard. The experience is very different based on that performance and industry and sector matter a whole lot. We're seeing a lot of good opportunities there. So, I think that the comment that you started out with around leadership, people are seeing the very strong leadership that we have across our funds and our teams. Who's at the top matters, but not to the extent that you're implying in the question.

Operator, Operator

Thank you. Our next question or comment comes from the line of Patrick Davitt from Autonomous Research. Mr. Davitt, your line is now open.

Patrick Davitt, Analyst

Hi good morning, everyone. My question is on solutions. You and others are obviously hyping up how big of an opportunity this could be as investors increasingly look for liquidity. But to your point on AlpInvest needing to be back in the market, there's obviously another side of the equation, right. You need to raise in the dry powder to take advantage of that. So why is this a strategy that you think will really have a lot of demand, given where we are in the cycle? As it seems, LP demand is really skewing more towards things like real assets infrastructure and private credit.

Ruulke Bagijn, Head of Global Investment Solutions

I think that's a great question. I mean, let me also be clear, I mean we do have a very significant dry powder at this point in time for the strategy, which is good, because the market is changing as we speak. What we've seen is that public market valuations have decreased much faster than private markets valuations and I think as you are aware, the percentage of illiquid holdings of total AUM of larger investors in the US has increased very significantly. As a result of the denominator effect, LPs are considering their portfolios. They consider portfolio rebalancing, they consider selling part of their portfolios that typically is an area. To the extent, the LPs are considering to sell part of their private equity exposure that is an area we can obviously greatly benefit as a platform with our secondary business. At the same time, it's broader than that. I think the liquidity needs in a markets are increasing, also private SKU managers GDPs do see the market changing their exit opportunities genuinely are becoming narrower, which actually is a positive support for significant trends like continuation vehicles, in which we play a very market-leading role. So whether you look at a GP side of the market or LP side of the market with our secondary and portfolio financing platform, where we have market-leading positions, we think we can benefit.

Peter Clare, Chief Investment Officer, Corporate Private Equity

And Patrick, I'll delve really briefly, we're also not going to top of our own great performance, but performance in our solutions business has been really strong. And so once the times for those products come back to market. Similarly, I'm really good about how we'll be positioned. Very optimistic about the future and it's been a really good story for us. The growth really since 2019 has been very strong in this business. We've taken it from almost nothing to a really interesting story and one that we remain very optimistic about going forward.

Operator, Operator

Thank you. Our next question or comment comes from the line of Brian McKenna from JMP Securities. Mr. McKenna, your line is now open.

Brian McKenna, Analyst

Great. Thank you. So I know the broader capital management strategy will likely be determined by the new CEO. But how are you thinking about the trajectory of the dividend into next year, particularly given the level of FRE growth in 2022? And what will likely be some incremental growth in 2023? And then related just given where the stock is trading, how are you thinking about buybacks here?

Curtis Buser, Chief Financial Officer

Thank you for your questions. First, I want to remind everyone that we increased the dividend from $1 per share to $1.30 per share at the start of this year, which is a 30% increase. We are very focused on continuing to grow our business and want our dividend to be sustainable and consistently rising. The Board typically reviews this at year-end along with our various capital needs and opportunities for growth and buybacks. We are considering how much to increase the dividend within the context of appropriate capital allocation. From a buyback standpoint, we see a good opportunity to manage dilution from equity grants. As we think about balancing buybacks with other capital needs, we're prioritizing growth. The current attractive stock price also influences our thinking on acquisitions and other external capital uses for business growth. We are committed to enhancing shareholder value, and we appreciate your insights on the strategies for achieving that. Thank you for your question.

Operator, Operator

Thank you. Our next question or comment comes from the line of Glenn Schorr from Evercore ISI. Mr. Schorr, your line is now open.

Glenn Schorr, Analyst

Thank you very much. I've heard from you and others that the pace is likely to slow regarding deployment, fundraising, and monetization in this context. It seems that it's going to take some time, and the world is quite disruptive. I'm curious how you might link this slowdown to factors like a lack of available funding or higher costs of funding, which could be causing these discrepancies. Additionally, what indicators should we look for to determine if the environment is improving?

Peter Clare, Chief Investment Officer, Corporate Private Equity

Sure. This is Peter, I'll address that question. The slowdown in deal flow is definitely due to a mix of factors. First, the investment activity level in 2021 was exceptionally high, marking a peak, so a decline from that is expected. The current level of investment activity this year aligns more closely with our usual annual rate for private equity investments. Looking ahead to 2023, I anticipate that the investment phase will further decelerate due to a couple of key reasons. First, the rise in interest rates is impactful. For private equity buyers, the cost of debt financing has increased, resulting in lower prices. Since we need to achieve higher returns in this environment, sellers will face reduced prices. Consequently, fewer sellers are willing to bring their businesses to market. Given the current situation, sellers are unlikely to achieve top-tier valuations, especially considering the recent downturn in public markets and higher interest expenses, which discourages them from selling. Additionally, the uncertainty in the environment, particularly the expectation of an economic slowdown, makes it harder for buyers and sellers to agree on business valuations today, leading to fewer transactions. However, I don’t want to sound overly pessimistic; many transactions are still occurring. We have made considerable investments over the past quarter, and while financing has become pricier, deals are still being completed. Nonetheless, I do anticipate a slowdown in deployment across the market in 2023.

Mark Jenkins, Head of Global Credit

Yes. Hi Glenn, it's Mark here. On the credit side, I would say that, we've got a different dynamic going in that. We think the opportunity set is increasing specifically in private credit, where the capital market has effectively become less liquid if you want to call that, I won't say it's eased up. And until really the bank get most of those commitments lot of balance sheet, it's going to be a very good opportunity. We see that as a very good opportunity not in the next 6 to 12 months, we think that'll be given the slowdown in the economy a 12 month to 24 month opportunity. When you look in the liquid book, we still have had good formation on the CLO side, despite what's going on in the marketplace. We feel liabilities adjust, which we expect low we'll see probably more continued pace on that side as well. So I think for credit, we feel very good about the opportunity set and the funnel of opportunities that are coming down to us right now and we're quite bullish on what we see.

Gerry O'Hara, Analyst

Mark. I wonder, if we could just follow up on that. A question I was going to ask was going to be on CLO performance was decent, okay hung in there in the quarter. It's down a few percent, both US and European for the last 12 months, which is a lot better than the public markets but still down. Just curious, does that kind of performance profile and then just the higher-rate environment. How the typical CLO investor interprets that? And so I wonder, if I could get a specific CLOs formation thought process over the next year or two? Thanks.

Mark Jenkins, Head of Global Credit

Yes. I think, obviously two components of CLO formation at the asset level right now, which is very attractive and we form the liabilities as well. I think the past 6 months in particular has been more challenging on the liability side, so the leverage that we put on those vehicles. We're going through a period where that formation has been more challenged. That being said, as Curt said, we've completed 7 CLOs this year-to-date, which would be more in line with the regular year for us. I think the challenge will be for managers overall is that access to the liability side, which Carlyle, given where the world's largest CLO manager and one of the better performers and position our portfolios quite well, we're able to attract those liabilities, in particular the equity as well and we commit to the equity ourselves off the balance sheet, so that does perpetuate the formation CLO for our business in particular.

Operator, Operator

Thank you. Our next question or comment comes from the line of Chris Kotowski from Oppenheimer. Mr. Kotowski, your line is now open.

Chris Kotowski, Analyst

Good morning, thank you. Most of mine have been asked, but I noticed that on CPA there is another couple of $100 million of commitments there. I'm wondering, is the fundraising on that done or is there a chance to extend the fundraising into calendar 2023? So that LPs could use their next vintage year commitments to come into that fund?

Peter Clare, Chief Investment Officer, Corporate Private Equity

Thanks for the credit. Yes, we do intend to keep fundraising going into 2023. That was our assumption all along and so we will do that and you're right that will open up a number of investors and a number of our investors have come to us and please, come back and see in 2023 I have more allocation then, so we do intend to keep fundraising going in '23.

Operator, Operator

Thank you. Our next question or comment comes from the line of Gerry O'Hara from Jefferies.

Gerry O'Hara, Analyst

Great, thanks. I was hoping maybe we could get a little bit just an update around the fortitude outlook and kind of how you're balancing what you see or where you see the opportunities for both organic our organic first blocks and transactions and what appears to be an increasingly competitive market, but also more and more attractive one. So any comments or context would be helpful there. Thank you.

Curtis Buser, Chief Financial Officer

Hi Gerry, it's Curt. I'll start with some numbers and then Mark will provide some color around it. Fortitude is doing really well, just as a reminder everybody is about $45 billion of fee-earning AUM. There's also about $9 billion that they've invested directly into our funds. Maybe more importantly, they have over $4 billion of capital within fortitude itself. And that's important, because that's the capital that they can use to essentially double their business, which we think we can accomplish over the next couple of years. We're opportunistic in terms of how they're doing in both from and also just from an adjusted book value. From a return-on-equity perspective that business is continuing to perform well. But Mark, I don't know if you have more color to add?

Mark Jenkins, Head of Global Credit

Yes, I would like to add that the macroeconomic environment and foreign exchange impacts on these transactions indicate that insurers are seeking more effective ways to manage their capital and operations. This trend remains unchanged, and in a rising interest rate environment, it often becomes more appealing for sellers to engage in transactions involving these legacy blocks. Our pipeline remains robust, and the timelines for these transactions are typically longer than standard corporate M&A processes due to the complexity involved. We are currently engaged in numerous processes and are optimistic about the developments in this area. We are quite confident in the progress being made.

Operator, Operator

Thank you. Our next question or comment comes from the line of Adam Beatty from UBS. Mr. Beatty, your line is now open.

Adam Beatty, Analyst

Thank you and good morning. Just wanted to follow-up on capital management. I appreciate Curt's comments earlier about wanting to maintain steady dividend and what kind of ratcheted up year after year. My understanding is that that's primarily that process has been primarily based around FRE in the past. I just wanted to ask about the potential for incorporating realized carry in the level of the dividend. You've managed to maintain that fairly well this year, indicated that maybe averaging $1 billion or so in the out years. So it seems like something that might be able to be incorporated in capital distribution to investors, but wanted to get your thoughts on that. Thank you.

Curtis Buser, Chief Financial Officer

Adam, you are correct. I appreciate your acknowledgment of the strength we've seen in our accrued carry and carry generation. We have $4.1 billion in net accrued carry on our balance sheet, translating to approximately $11 per share in future earnings potential. We anticipate this will result in about $1 billion per year, depending on the capital market conditions. However, as Pete mentioned, we may experience some slowdown next year, which could mean slightly lower figures. Regarding our dividend, our objective is to establish a fixed dividend that is fully sustainable and can grow over time. We believe that relying on recurring revenues, especially FRE, is key to this. We also need to balance our capital needs, which include investing in growth, considering buybacks, managing dilution, and returning capital to shareholders. As I mentioned earlier, we have various strategies to enhance shareholder value, and that remains our priority.

Operator, Operator

Thank you. Our next question or comment comes from the line of Mike Brown from KBW. Mr. Brown, your line is now open.

Mike Brown, Analyst

Great. Thank you for taking my questions. So I appreciate the updated FRE expectations for 2022. Any early read on expectations for next year or any color on how we should think about that FRE growth and FRE margin, as we think about 2023? Thank you.

Curtis Buser, Chief Financial Officer

Thank you for the question, Mike. As we've consistently done in the past, we will provide more detailed information on 2023 at the beginning of the year after completing our year-end processes. I want to emphasize that this year we have achieved a 50% growth in FREs over the past decade, which reflects a 15% compound annual growth rate. We are committed to growing FRE, and our diversified business model supports that goal. We are focused on running the business efficiently and effectively. We will continue to invest in our distribution platform and technology to enhance operational efficiency. Our primary focus will be on overall FRE growth, as it is more critical than just margin, although margins are also essential as a means to increase FRE dollars. I am confident that we will maintain our trend of FRE growth moving forward.

Operator, Operator

Thank you. Our next question or comment comes from the line of Alexander Blostein from Goldman Sachs. Mr. Blostein, your line is now open.

Ryan Bailey, Analyst

Good morning this is Ryan Bailey on behalf of Alex and maybe piggybacking off the prior question a little bit. So if we come back to private-equity fundraising, obviously and you've reiterated business, it's a challenging environment for the industry. You have a number of flagships in the market over the next 12 months and you had fairly strong realizations year-to-date out of private equity. With the delayed fundraising, do you still expect management fees to be able to grow in '23 versus '22 within private equity?

Curtis Buser, Chief Financial Officer

So Ryan, it's Curt here. Let me take that. So we're focused on a lot of things to grow the business. I'm going to give you more granular detail on '23 next year. We had very nice top-line growth this year in private equity, any given quarter and really any given year is always tough to call exactly but we're focused on long-term trends. What I really like here in private equity is we have a number of things to focus on. Natural resources, energy, our real estate business, our technology initiatives, our European technology platform, very strong. So there is a number of things for growth in that business and we're focused on growing FRE on all of our big businesses in the aggregate and believe we can do that in '23 as well, I'll give you more detail next year.

Operator, Operator

Thank you, our next question or comment comes from the line of Michael Cyprys from Morgan Stanley. Mr. Cyprys, your line is now open.

Unidentified Analyst, Analyst

Good morning, this is signing in for Mike. Thank you for taking my question. I'm curious about your perspective on the mark-to-market valuation of carry and what the market might be overlooking in relation to carry. Specifically, how should I consider Carlyle's ability to realize the over $4 billion of accrued carry currently on the balance sheet? Thank you.

Bill Conway, Interim Chief Executive Officer

I appreciate your question. The perception around the valuation of carry has been overlooked for quite some time. This has been an ongoing effort to educate people. I want to emphasize that we have over $4 billion in net accrued carry on our balance sheet, supported by $136 billion of remaining fair value in our funds. It's been a challenging market in many respects, but despite this, our funds have appreciated by 10% year-to-date, which is quite positive. Considering how Pete, Mark, Ruulke, and the other teams have built their fund, portfolio construction is crucial, and I believe they have executed this effectively. This places us in a really strong position. While I can't predict the future with certainty, I'm optimistic about our ability to generate carry. This quarter, we realized nearly $400 million. While we may see some fluctuations, the overall performance remains strong even in this tough environment. I completely agree that the $11 valuation seems undervalued in terms of future earnings, and our performance continues to reflect this. Thank you for your question.

Unidentified Analyst, Analyst

Of course. I mean, if I could just sneak in a quick follow-up, assuming this under evaluation carries on for an extended period of time. What levers, I guess I've a better align incentives of the carry perhaps with base you may place a high-value on it or in terms of kind of returning that back to shareholders in some way, some shape or form?

Bill Conway, Interim Chief Executive Officer

Look, alignment matters in terms of compensation strategies but also in terms of being able to drive continued growth in our business. While we continue to embrace our balance sheet light model, being able to use capital that is generally been generated from carry production to be able to reinvest that into fee-related earnings businesses to grow just like we did with Fortitude and CBAND earlier this year, we'll continue to look for those opportunities. Obviously today, the bar for how we look at those things is higher than before. We'll continue to aggressively use our balance sheet to grow, but also balance that with growing dividends, buying back stock, and other tools to grow the firm. Carry is a key component of generating that capital to enable us to do all of those things.

Operator, Operator

Thank you. Our next question or comment is a follow-up from Mr. Patrick Davitt from Autonomous Research. Your line is now open.

Patrick Davitt, Analyst

Hi, thanks for the follow-up. Could you give us some perspective on the underlying corporate PE portfolio operating trends kind of from quarter-to-quarter this year revenue, EBITDA, gross margin vis-a-vis inflation?

Curtis Buser, Chief Financial Officer

Yes. Hi Patrick, it's Curt. I presume you're asking about the underlying portfolio companies and is that's the question, then I have people will chime in here on that.

Peter Clare, Chief Investment Officer, Corporate Private Equity

Sure, across the corporate private equity portfolio, the companies have continued to perform very strongly. Revenue growth overall has been in the low-double-digits across that portfolio. Many companies are passing on price increases, but also demand has remained really strong in most areas of the economy so far. On margins, there are clearly some cost pressure, so on margins are growing in the mid-single-digit. So roughly half the level of revenue growth is the level of earnings growth that we're seeing. Businesses continue to perform well, and we continue to get earnings growth and that's what's supporting the valuations in the portfolio is the earnings growth that we're seeing across the portfolio. That's Corporate Private Equity and I'd say overall across natural resources and infrastructure, the results have been even better. What's happened with energy prices and that's one of the portfolios performed even stronger.

Patrick Davitt, Analyst

And that's LTM, I think, the revenue and EBITDA?

Curtis Buser, Chief Financial Officer

Can you repeat that, sorry -

Patrick Davitt, Analyst

That's LTM, I assume the revenue and EBITDA growth or is that the 3Q?

Peter Clare, Chief Investment Officer, Corporate Private Equity

That is year-to-date, that's year-to-date results.

Operator, Operator

Thank you. I'm showing no additional questions in the queue at this time, I'd like to turn the conference back over to management for any closing remarks.

Bill Conway, Interim Chief Executive Officer

Thank you all for your time this morning with us. Should you have any follow-up questions, feel free to reach out to Investor Relations at any point. Otherwise, we'll look forward to speaking with you again on next quarter's call.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect, everyone have a wonderful day.