Earnings Call Transcript
Carlyle Group Inc. (CG)
Earnings Call Transcript - CG Q1 2020
Operator, Operator
Good morning, everyone, and thank you for being here. Welcome to The Carlyle Group's Earnings Call for the First Quarter of 2020. I would now like to turn the conference over to your host, Mr. Daniel Harris. Please proceed, sir.
Daniel Harris, Host
Thank you, Tiffany. Good morning, and welcome to Carlyle's First Quarter 2020 Earnings Call. With me on the call today are our Co-Chief Executive Officers, Kewsong Lee and Glenn Youngkin; and our Chief Financial Officer, Curt Buser. This call is being webcast, and a replay will be available on our website. We will refer to certain non-GAAP financial measures during today's call. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. We have provided reconciliations of these measures to GAAP in our earnings 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 and other SEC filings 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. For the first quarter, we generated $129 million in fee-related earnings and $175 million in distributable earnings, with DE per common share of $0.48. We have declared a quarterly dividend of $0.25 per common share. To ensure participation by all those on the call, please limit yourself to one question and return to the queue for any additional follow-ups. And with that, let me turn the call over to our Co-Chief Executive Officer, Glenn Youngkin.
Glenn Youngkin, Co-CEO
Thank you, Dan, and good morning, everyone. Thank you for joining us. To describe the current global health and economic crisis as unprecedented feels wholly inadequate. The human toll is tragic, and the economic damage has been extensive. I want to start by thanking all of the health care professionals and frontline workers helping to protect and heal our communities. Our thoughts and prayers are foremost with the people and families across the globe that have been and continue to be impacted by this pandemic. As the situation has continued to unfold, our top priorities at Carlyle have been and remain the health and safety of our people and their families, as well as supporting our portfolio in every way we can and ensuring that we can continue to deliver for investors and all stakeholders by mobilizing our extensive global platform and every resource at our disposal. Carlyle was in a position of strength leading into this crisis, which has provided us great stability. The pandemic has shocked the world over the past 4 months, but we've been able to mobilize quickly and decisively, thanks to the great work and continuity across our entire global platform. Kew and I are incredibly proud of the Carlyle team. We have found an even greater level of both collaboration and commitment, and compassion and service. The first quarter of 2020 started off exceptionally well, with our 2019 momentum continuing. At the firm level, our outlook for the year was developing as envisioned, with solid earnings growth, substantial dry powder from our $110 billion fundraising campaign, our successful transition to a C-corp, and a sturdy balance sheet. In addition, our portfolios were in good shape and performing well with strong investment and exit pipelines. In the first quarter, we were able to execute several IPOs, secondary trades, and announced transactions, including the IPO of One Medical and the sale of Sundyne from our US Buyout portfolio, block trades in China Literature and MicroPort in our Asia buyout portfolios, and numerous sales from our U.S. Real Estate funds. Fundraising momentum continued into the early part of the year, with $7.5 billion of new capital raised in the first quarter. So, while the pandemic has shocked the world, Carlyle was sturdy and steady going into the storm. Upon the onset of the crisis in January, our China team took decisive action, which set the precedent for our other regions and accelerated our decision-making process in Europe and the United States. In March, we quickly moved all of our U.S. and Europe employees to work remotely. We then activated our business continuity plans and to date have seen near-perfect execution. Early on, Carlyle's investment teams were active, stress testing every equity and credit position in our portfolio and making decisions for each asset based on varying levels of business disruption. And One Carlyle, our global resource platform, has been an action like never before, using all of our capabilities to provide support for our portfolio companies. We've also been leveraging many of the company's unique offerings, particularly in health care and technology, to help provide solutions to the most pressing issues, as many of our companies have also been upfront in the fight against the virus. For example, PA Consulting has done great work coordinating efforts to source ventilators for patients in the U.K., and most recently, Ortho Clinical Diagnostics announced breakthrough work to rapidly deploy antibody tests. With that said, it is clear that the next few months and quarters will be challenging. It is our view that the recovery will progress in fits and starts and will take longer than what we all would have hoped. With this in mind, we remain fully committed to our top priorities, but also to our strategy as long-term investors and partners to our portfolio companies and our LPs. We're planning for and preparing for a wide range of outcomes, and we do remain in a strong position with $74 billion of dry powder, $1 billion of cash on our balance sheet, and $525 million in capacity on our revolver, a global team and platform that are stronger than ever, and deep experience across Carlyle as we have previously operated successfully through economic, financial, and market crises. There's no doubt that we have much work to do, and I'll hand it over to Kew to walk you through some of our thoughts for the future. I, again, want to reiterate that our leadership team is active and focused on driving value for our fund investors and shareholders. And we thank you for your commitment to us, and we assure you that the Carlyle team remains equally committed to all of you. With that, let me turn the call over to Kew.
Kewsong Lee, Co-CEO
Thank you, Glenn, and good morning, everyone. And let me echo our sentiment of gratitude towards our health care professionals and frontline workers serving our communities around the world. I'm going to discuss our views on the impact of the current situation on our business, and after some financial commentary from Curt, we'll wrap up with thoughts on the future. As Glenn noted, Carlyle was well positioned before the crisis. Our momentum has slowed but not stalled. We believe there could be a continuing and significant impact from this pandemic. The severity and duration of various health and economic issues and the shape and nature of the recovery are still unknowns, and therefore, all of this will take longer to play out than not. Our experience managing through disruptions and cycles in the past informs us of our path now. We are taking a cautionary stance in maintaining a balanced and patient perspective. By doing so, we are confident that over time, our shareholders as well as public pensions, endowments, and foundations will benefit as we use our well-positioned global platform to drive value from our existing $143 billion of assets in the ground and put our $74 billion of dry powder to work towards attractive opportunities as they emerge around the world across various sectors in all asset classes. We'd like to share our thoughts on how our business and the industry could be affected by this crisis in an effort to be as transparent and helpful as possible. So let me address three important dimensions: deal activity, valuations, and fundraising. First, the volume of traditional private equity investment is likely to decline significantly in the short term. Investors will step back and assess the real economic impact of the pandemic on businesses, their prospects, and valuations. In our experience, financial buyers mark-to-market faster than sellers, and thus, there is likely to be reduced traditional deal activity for several quarters or more until some of this uncertainty abates. The majority of our $74 billion of dry powder was recently raised; we can afford to be patient and disciplined, and we look forward to many attractive opportunities, but it will take some time. Similarly, traditional exit activity will be put on hold as IPOs are delayed and sales processes are put on pause until M&A activity and more confidence returns. Keep in mind, our fund structures do not have liquidity risk, and at Carlyle, we are never forced sellers and have the ability to hold assets through periods of market volatility and continue to build value in our companies and portfolio. We believe investment activity will recover at different rates and vary by asset classes, regions, and sectors as the path of recovery becomes clearer. One bright spot is that credit deployment has already seen a significant increase as several of our funds are exceptionally well positioned to capitalize on current market dislocations, particularly in credit opportunities, distressed and special situations. In addition, we are starting to see interesting new opportunities in Asia and in our secondaries business. And certain global sectors benefiting from structural changes, like technology and health care, may present opportunities earlier than more cyclical sectors. Certain industry sectors may experience more than just a short-term impact. Notably, the energy sector is undergoing a significant structural dislocation on both the supply and demand side that is likely to take more than a few quarters to play out. However, over the long term, we have more than $4 billion in dry powder to invest into new opportunities across our energy-related funds and what could be attractive valuations. Let me now turn to the second important factor and speak to valuation challenges that could last beyond the quarter. As the full impact of global shutdowns and an uncertain recovery becomes more evident, there could be additional pressure on fund valuations. Our interim marks are important; the more significant driver of realized earnings in the future is the improvement in growth and performance of our portfolio companies over the long term, which is why one of our major priorities as an investment organization is to focus on our invested assets and drive value creation at our portfolio companies. We thought it would be helpful to share with you the diversification and how some of our most important portfolios are constructed in aggregate. With respect to the remaining fair value of our entire corporate private equity portfolio, we have very little direct consumer retail exposure at about 5%. Relatively low exposure to commercial aviation at approximately 7%. We have very little energy exposure at 2% and less than 1% exposure to lodging and hotels. Finally, only 7% of the remaining fair value of our corporate private equity portfolio is in publicly listed securities. Similarly, in our United States Real Estate portfolio, which represents far and away our largest holdings of real estate assets, we had only 2% of our U.S. Real Estate fair value invested in hotels, 2% in traditional office, and only 1% in retail. Our energy exposure is largely concentrated in separate funds, which account for approximately $13 billion of fair value or roughly 9% of total firm-wide fair value. The segregation of these energy-focused funds, which is a conscious design of our investment platform, is important because the performance and carry potential of our corporate private equity and other carry funds is independent of the results from these energy funds. Without a doubt, we will have some issues and troubles in each of our funds that will be problematic and need to be worked through. But our diversification and the way we have constructed our portfolios give us confidence that over the long term, we are well positioned to continue driving performance and significant value creation. And having done so in the past, we believe our limited partners have come to appreciate our ability to deliver relative outperformance compared to public market indices. Finally, let me address fundraising which, in aggregate, is likely to slow down in the short term as investors try to understand the current environment and their own specific needs. LPs are assessing the impact of this crisis on their portfolios and evaluating the denominator impact, allocation targets, and liquidity schedules in light of market volatility. Our experience is that their pace of new commitments will slow down temporarily while they continue to fund their existing commitments. Having said this for the industry as a whole, some LPs will be more aggressive about continuing to lean into alternatives, and there will be opportunities to raise capital for tactical strategies in the near term to take advantage of dislocations, particularly in the credit asset class. In the short term, we are in good shape as we have just completed a multiyear $110 billion fundraising campaign. And over the medium- to longer-term, what we have great confidence in, is that fund investors will ascribe increased value to relationships with their most trusted, well-resourced, and experienced partners. We believe this positions Carlyle well for the potential to gain more wallet share from our limited partners as the fundraising environment stabilizes in the future. Given these comments with regards to deal activity, valuations, and fundraising, it's understandable there is more uncertainty with respect to near-term financial results, and we feel it is therefore prudent to remove prior guidance and for the moment, refrain from providing comprehensive guidance for the future. We have a strong handle on our business and the factors affecting us, but believe it is appropriate to take our time to better understand the nature and path of recovery in the real economy and markets. To be clear, removal of our guidance should not be interpreted as anything other than our continued desire to build long-term credibility with our shareholders. Before I hand the call off to Curt, let me conclude with this. The private capital industry has experienced attractive growth over the past several decades. This trend is likely to continue as private markets will remain an important source of capital and play an important role as the economy recovers. With every investment we make, we drive value creation and serve the pensions, endowments, and foundations that will need our performance now more than ever. Let me turn the call over to Curt to go through our financial results, and then I'll come back with some final thoughts. Over to you, Curt.
Curtis Buser, CFO
Thanks, Kew. In my remarks, I will briefly discuss first quarter 2020 results and then frame some of the important issues we're watching. Let's begin with our results for the quarter. Fee-related earnings were $129 million with a 33% margin, up from $103 million in the first quarter of 2019. We recovered $30 million of litigation costs in connection with the final settlement of the Carlyle Capital Corp. litigation, which is included as a reduction of G&A expense. Excluding this recovery, FRE would have been $99 million with a 25% margin, which reflects some specific revenue shortfalls that developed in March due to the pandemic related to CLOs and transaction fees, both of which I will comment on further in a minute. Net realized performance revenues began the year on plan with several carry-producing exits, which then slowed as the crisis emerged globally in March. Overall, pretax distributable earnings were $175 million in the first quarter compared to $101 million in the first quarter of 2019. With markets still unstable and exit slowing, the pace of realizations over the next few quarters is expected to slow, and quarterly realized performance revenues are likely to be below this quarter for the next several quarters. Our valuations were lower in the quarter. Our corporate private equity funds depreciated 8% in the first quarter compared to the MSCI All Country World Index decline of 23% over the same period. Real estate was generally stable, down 1% in the quarter, while our natural resources funds, which have a large energy component, depreciated 22%. Investment Solutions appreciated 1% in the quarter, reflecting the standard 1 quarter lag in portfolio valuation for this segment. As a result, in total, net accrued performance revenue on our balance sheet declined to $1.2 billion from $1.7 billion at year-end. It's important to note that our accrued clawback remained insignificant and unchanged from year-end. And while it's possible that our net accrued carry could further decrease should values continue to decline, we do not expect a material change in our accrued clawback. As Kew said, given the very high level of uncertainty for the rest of 2020, we are not able to provide comprehensive forward guidance at this time. But let me frame certain aspects of our fee revenues and expenses. Starting with fee revenues. One key point is that approximately 98% of our management fees arise from fee-earning AUM located in closed-end fund structures with no redemption risk. Furthermore, approximately 90% of our fee revenues are from traditional closed-end, long-dated funds for which our fees are highly predictable and stable and have very little exposure to fund valuations. While we have $12.5 billion of pending fee-earning AUM that is not yet activated fees, further management fee growth relies on new vintages or new carry fund families. To the extent fundraising is delayed, growth of this revenue base will be similarly delayed. Regarding the other 10% of fee revenue, we earned about $120 million annually from management fees on our CLOs in the form of base fees and subordinated fees. Subordinated fees represent about 70% of this revenue base. Credit rating downgrades across the industry may cause the subordinated fees to be deferred. These deferred fees can be subsequently turned back on and recaptured based on the actual default rates and cash returns within the CLO structures. During this quarter, we did not recognize $4 million of subordinated fees, which were deferred. If the rating agencies further downgrade bonds and loans in which the CLOs have invested, it's likely that CLOs across the industry will experience revenue deferrals over the course of this year. During the great financial crisis, we saw the majority of CLOs across the industry shut off subordinated fees, but 100% of our CLO subordinated fees were turned back on, and all of our deferred revenue was recovered. Finally, transaction and advisory fees generated $53 million of fee revenue in 2019 and are likely to trend lower with a slower pace of closed investments. Shifting now from revenues to expenses. Cash compensation was $204 million in Q1 2020, generally in line with the first quarter of 2019. In a given year, a little over half of total cash compensation and benefits expense is due to variable year-end compensation. We will actively manage this level based on actual results for the year. We have control over our professional fees, travel and entertainment, and general and administrative expenses, which in some cases, like travel, will be lower, and in other cases, we'll even more tightly manage expenditures. When you put all of this together, it's really hard to say where exactly our 2020 distributable earnings will land. Forecasting FRE is more doable. But given the current economic uncertainties, we are currently estimating a wide range of $400 million to $450 million for our 2020 FRE outlook. Two last items. First, we continue to manage equity-based compensation expense and the $32 million in equity-based compensation expense compared to $39 million in the first quarter of 2019, represented a 19% decline. Second, as Glenn noted, we are in a strong liquidity position and accordingly declared a dividend of $0.25 per share in line with our planned fixed dividend of $1 annually. With that, let me turn the call back over to Kew.
Kewsong Lee, Co-CEO
Thank you, Curt. Let me end with a few thoughts on the future. The crisis has slowed, but by no means stalled the momentum we've established coming into this year. Our focus has not wavered, and we are uninterrupted in our work of driving value in our companies. Our 2020 financial results will reflect our solid start to the year and the relative stability of our fee earnings as we now adapt to emerging opportunities and trends and take advantage of our strong position to deliver on 2021 and beyond. To that end, our investment strategy remains on track. We are a global investment firm with a long-term orientation, seeking to generate attractive and consistent performance for our investors, who are relying on us now more than ever. We are focused on generating as much value as possible from our existing and highly diversified portfolio for our fund investors and our shareholders. We are also patiently investing our dry powder and believe many attractive investment opportunities will emerge in the years to come. Our business strategy remains on track. We are growing our best-positioned and most scalable investment funds, managing our expenses prudently, and finding the right opportunities to selectively expand and diversify our business. Our financial objectives are unchanged. We are focused on driving FRE each year, generating significant distributable earnings over the medium to long term, which, in combination with FRE, provides for a long-term attractive earnings growth profile, continuing to control equity dilution over time and protecting and increasing our dividend over time on a lagging basis to our FRE as it grows. No one could have predicted this pandemic, but we had already been preparing our organization and investing with the mindset that we were late cycle in the economy. Over the last three decades, we have become an industry leader, given our ability to build better businesses in partnership with great management teams through all sorts of economic and market cycles. We have confidence that our platform positions us well to navigate through and adapt to a new environment as we continue to find attractive investment opportunities and fund our strategies by raising significant amounts of new capital. We thank you for your support and partnership and hope that all of you stay safe and healthy. With that, let turn the call over to the operator and take your questions.
Operator, Operator
Your first question comes from the line of Bill Katz with Citigroup.
William Katz, Analyst
I hope everyone is safe and healthy on your end as well. Just maybe Curt for yourself, relatively wide range on the FRE. I was wondering if you might be able to help us sort of frame the upside, downside of that range, what some of the underlying assumptions might be either micro or company-specific that would range it between the $400 million to $450 million?
Curtis Buser, CFO
Thanks, Bill, for your question, and good to talk to you this morning. So first, I just want to reiterate, we remain really focused on growing fee-related earnings and also improving our FRE margin over time. We have a great handle on our business. But even with having a great handle on our business, there's still much that we don't know about how the pandemic will play out and how it will impact us. So for example, I don't know what further downgrades to expect from the rating agencies and how that could potentially affect our CLO subordinated fees, as I described in my opening remarks. I'm hopeful that it has no material effect. And you can kind of see it was only $4 million here in the first quarter. But if you look back to the great financial crisis, obviously, it had a bigger impact. That said, there are a lot of great aspects of our business model that clearly help. 98% of our fee-earning AUM has no redemption risk. 90% of our fee revenues is from predictable and stable management fee streams. And our LP defaults have historically been nonexistent. So we remain committed to growing FRE. But right now, it's hard to exactly see how this plays out. And we have a lot of good levers. And right now, I think it's the right thing to kind of appropriately set this in the $400 million to $450 million. Bill, it is a wide range. I wish I could give you much more precision, but it's just too early in the year to give you that kind of precision.
Operator, Operator
Your next question comes from the line of Craig Siegenthaler with Crédit Suisse.
Craig Siegenthaler, Analyst
Hope you're all healthy. I just wanted to start with the credit marks. With a 21% mark for your credit carry funds, I wanted to see what were the marks in the businesses that are not in carry funds, like CLOs, direct originations? And I'm not sure if you include aviation and structured credit or not, but I was interested in that mark, too.
Curtis Buser, CFO
Craig, thanks for your answer. So as again, as we think about our global credit carry funds, the 21% is just the carry funds. And the carry funds are about 25%, and that number is inclusive of the aviation business. But it doesn't include the direct lending. It doesn't include the other aspects of the business, including the CLOs. The CLOs fundamentally really don't drive off of their marks, right? They drive off of the default rates within the underlying CLOs. And so really not as relevant. I need to be a little careful about disclosure around the BDC at this time because it is a separate public company and hasn't separately released its earnings. The key thing in that business is managing those portfolios over time. The key thing is managing default rates and how it all plays out over time; we remain really optimistic about it. Lots of great opportunities to come. And I think that you got to put that 21% clearly, in perspective, it has a high energy concentration. That's from our energy mezz funds, and so I wouldn't let that distort the whole thing, and that's why we only give you the carry funds because it's the only thing that's really comparable here. I don't know if Kew or Glenn, there's anything you'd like to add to that.
Kewsong Lee, Co-CEO
Craig, it's Kew. Let me just give you a little bit more color, and Curt did a good job of laying out the numbers and making a big distinction as to the performance of carry versus the other strategies we have in the portfolio. And remember, credit is a platform-based strategy. With respect to the marks that you saw, most of it, a large portion was driven in our Energy Mezzanine strategy, which several quarters ago, we've already announced, it's not a continuing strategy of Carlyle. The other main driver of the marks within our distressed business, which had a little bit of energy exposure. In the one fund that we can talk about is performance, which is a mature and fully invested fund. I can tell you the gross IRRs of that fund even after these marks is in excess of 20%. And the newer fund about half its capital is still available to invest. And I think it's fair to say distressed is one area where there's lots of great opportunities right now. And so having that dry powder is terrific. So if you look at that with some color, a lot of the marks are driven by what I would call strategies that we're not really going to be fundraising to in the future. And the other major driver was in the business, which actually has more opportunities now than ever before.
Operator, Operator
Your next question comes from the line of Ken Worthington with JPMorgan.
Kenneth Worthington, Analyst
I wanted to ask about the implications of both lower rates and the impact of coronavirus on your recent acquisitions. So you pursued both Apollo Aviation and Fortitude Re. What is the outlook for earnings from both of these businesses? And I don't know if I'm completely off the reservation, so please tell me if I am. But is there any risk of write-down from either of these investments due to the market actions that we're seeing out there?
Kewsong Lee, Co-CEO
It's Kew here. I'll address both of those points. The short answer regarding write-downs is no. However, it's essential to examine each one in detail. First, let's discuss Fortitude. It's well-capitalized, with an excess capital ratio of 210%, significantly above the 150% target ECR ratio. Our adjusted book value has increased substantially since we completed this deal about 1.5 to 2 years ago. The ROEs for the underlying business remain strong, generally in the low to mid-teens. The primary challenge facing the industry, and Fortitude in particular, has been the impact from the recent volatility and rate fluctuations we've experienced. It's important to highlight that Fortitude effectively implemented hedges and risk management strategies to protect the capital in this business. When we initially announced this transaction, we established hedges on interest rates, duration mismatches of our assets and liabilities, and hedges against spread volatility. Collectively, these measures have enabled the company to manage the volatility remarkably well, providing a position of strength and capital preservation during this current environment. The reserves are performing as anticipated, without any significant COVID-19 risks, especially concerning business interruptions. The carve-out from AIG is progressing as planned, and we expect it to be fully completed this year. Additionally, we anticipate the closure of a crucial element of this transaction—the capital raised from our limited partners and strategic partners—allowing us to increase our ownership of the business from AIG to nearly 100%. We expect this transaction to finalize by mid-year. Regarding the investment management aspect of Fortitude, the asset rotation to Carlyle remains on track, and we're pleased with our strategic partnership with Fortitude. Overall, we feel confident about Fortitude's position. Now, on to aviation, which is the second part of your question. I apologize for the lengthy response, but it’s important. This business is performing exceptionally well. In 2019, it generated around $40 million in revenue and over $10 million in FRE for Carlyle. The acquisition has lived up to or surpassed our expectations. Fundraising for aviation is underway, so I’ll be cautious, but it’s off to a fantastic start with closed-end carry funds that have locked-up capital. There has been considerable disruption in the sector due to travel restrictions, airlines reducing capacity, and canceling orders. The new fund we’re raising is vital financing for this market, and we believe it's well-positioned at this time. We have approximately $1 billion available to support important businesses in this essential sector of our economy. Our team is diligently managing this portfolio, working hard with our airline partners to help maintain aircraft leases. Currently, we have a positive outlook for our aviation business and its future potential.
Operator, Operator
Your next question comes from the line of Gerry O'Hara with Jefferies.
Gerald O'Hara, Analyst
Glenn, you mentioned activating a business continuity plan as you kind of start to identify some of the issues that began to evolve early in the quarter. Perhaps you could give a few examples of how that actually works structurally or perhaps some of the steps that we're taking to shore up portfolio companies, identify risk or just kind of assess the...
Glenn Youngkin, Co-CEO
Thank you for the question, Jerry. To start, our main priority during the transition was to ensure that everyone could work remotely. By the end of March, we successfully moved our entire workforce to remote work, spanning over 30 offices across 6 continents. This was a significant achievement that went very smoothly. In the first week alone, we held 40,000 video conference calls. The next important step involved thoroughly assessing our portfolio. We categorized our businesses and real estate assets, along with energy companies and loans, into three categories: those that would experience minimal impact, those facing more severe challenges, and those potentially facing substantial impact. This initial assessment helped us concentrate on liquidity and determine where we should focus our efforts. Finally, we activated our global resources at Carlyle to support these companies. For instance, we organized a global meeting with the chief information officers of our major companies to assist them in the transition to remote work. We also worked extensively to address disruptions in supply chains, helping companies that were struggling to procure essential components for manufacturing. Additionally, we supported several of our portfolio companies that developed innovative solutions for frontline COVID-19 response, such as One Medical, which initiated remote COVID-19 diagnostics. Overall, the primary focus was on establishing remote work, then addressing our portfolio, and finally leveraging the resources at Carlyle to support our companies.
Operator, Operator
Your next question comes from the line of Glenn Schorr with Evercore ISI.
Glenn Schorr, Analyst
I appreciate your realistic outlook and transparency. I have a question regarding LP behavior. Could you discuss it in terms of commitments to current funds and their willingness to re-evaluate underfunded positions and asset allocations? Additionally, I’d like to know your thoughts on dedicated funds in general. I recognize there are pros and cons, and that they tend to self-select, but dedicated funds experience fluctuations that highlight this issue. I'm curious if there is any reconsideration of your approach or the LP perspectives on this matter.
Glenn Youngkin, Co-CEO
Thanks for the question, Glenn. I'll start, but I believe Kew will also share his insights. Overall, the investor landscape entering this pandemic is in significantly better condition than during the great financial crisis. This is mainly because the great financial crisis taught investors valuable lessons about liquidity management, particularly regarding the importance of their private capital portfolios. Coming out of that crisis, private capital portfolios performed exceptionally well, helping many investors recover from losses in other areas. Feedback from our investors varies, but generally, as Kew noted, they are taking a moment to assess their portfolios, with some actively engaging in investments. We are seeing ongoing investment processes and commitments, particularly in credit and secondaries, which are sectors poised to capitalize on current market dislocations. Investors are also beginning to show interest in opportunities that will arise during the recovery phase, although we anticipate traditional private equity investing will be slower to rebound. It's essential to note that our close relationship with investors has been crucial. Throughout this period, we promptly shared updates on portfolio statuses and engaged with them regularly. This transparency strengthens their trust in us as a key partner in private capital. Kew, would you like to add anything?
Kewsong Lee, Co-CEO
Yes, Glenn, that was really good. Two or three additional points, Glenn. First, obviously, we've been in very close contact with all of our LPs, as Glenn just mentioned. And we have, in fact, issued some significant capital calls, and all of them have been met with no problems. So just you know, we have been functioning. We have been issuing capital calls, and those calls are being met. Second, look, every crisis is different, and who knows how this will play out versus the GFC. For whatever it's worth, if you go back to the great financial crisis, similar question were asked of us. And we can tell you in hindsight, there were all capital calls were, in essence, met with no material, if any significant defaults occurred with respect to our funding base with respect to LP commitments. And then finally, with respect to your question on dedicated funds. Look, this is an interesting question. And different LPs are set up differently, and some have different ways of allocating and prefer focused strategies for their portfolios. But also for us, it's a conscious way that we've designed our investment platform, recognizing that certain strategies are distinct and have their own inherent characteristics. But the importance that having energy and dedicated funds brings out in periods like this, is that the volatility of those funds does not help nor impair the ability of our other funds to drive value and get to carry. Because remember, the way funds work with their press and their hurdle is its cumulative and aggregated rates of return across all deals in that fund. So to the extent you have overexposure to certain sectors or deals that take the fund, the performance overall down, that fund would be in jeopardy of not getting to carry. So it's a very important point, Glenn, that you just touched on. And so by having inherently more volatile strategies in more focused funds, we think it does two things. One, it helps our LPs from an allocation perspective because many LPs do want those types of strategies broken out. But second, from our investment performance, but more importantly, our ability to deliver distributable earnings in the future. It does have the effect of insulating our more traditional strategies from the downside and upside from these more volatile strategies. So hopefully, Glenn, that gives you a little bit more color.
Operator, Operator
Your next question comes from the line of Michael Cyprys with Morgan Stanley.
Michael Cyprys, Analyst
I was just hoping you could dive in a little bit more on the three funds that fell out of carry in the quarter. Maybe you could just give us a sense if that's due to a single or a handful of portfolio companies? And any color could share around those three funds that fell out. And if you can remind us maybe of a time in the past for some of your funds sell-out of carry, and eventually went back in, how often has that happened? And if you look back in time, which funds, if any, in history at Carlyle did not actually go back into carry? And why was that the case?
Curtis Buser, CFO
Mike, it's Curt. I'll begin, and then someone else can chime in. Just to clarify, during the quarter, we experienced four key funds falling out of carry. These include our fourth Europe Buyout fund, the first version of our international energy buyout fund, our long-dated fund, and our credit opportunities fund. It's important to note that our focus isn't solely on current valuations, but rather on long-term performance. Each of these funds follows distinct strategies and is quite unique. We are actively working on repositioning them back into carry. Reflecting on the great financial crisis, a similar situation occurred when our fourth U.S. Buyout fund dropped out of accrued carry. Ultimately, I was pleased I invested in that fund as it performed well. Additionally, our fifth U.S. Real Estate fund also fell out of accrued carry during that period and subsequently recovered nicely, even achieving accrued carry now. These funds have their specific narratives; for instance, the energy aspect of the international energy fund is well understood, while the long-dated funds will take time to mature, and they are still deploying capital. Our credit opportunities fund is very well positioned and has capital available for deployment, as well as a solid portfolio structure over time. Although our Europe Buyout portfolio faces some challenges, its diverse structure is beneficial. I hope that addresses your question. Glenn or Kew, would you like to add anything?
Glenn Youngkin, Co-CEO
No, Curt, you did a really good job there.
Kewsong Lee, Co-CEO
That was pretty good, Curt.
Operator, Operator
Your next question comes from the line of Patrick Davitt with Autonomous Research.
Patrick Davitt, Analyst
You mentioned categorizing the portfolio into those that are performing well, those with more significant issues, and those that could face a major impact. Could you explain how that process translates into a percentage of your fair value or more generally discuss the relative sizes of those categories?
Curtis Buser, CFO
So here's how we approached it, and it varies by each portfolio and segment. From a valuation standpoint, our process is systematic, consistent, and involves numerous third-party reviews, which we take very seriously. This quarter was particularly challenging. We focused on forward-looking projections regarding earnings or cash flows, and if there was any uncertainty, we increased our discount rates. We also concentrated on near-term liquidity, factoring in any potential liquidity challenges into our considerations. In terms of categorizing our portfolio, most of that was within our corporate private equity portfolio. Approximately 27% of this portfolio fell into the low impact category, meaning those investments saw minor fluctuations, either up or down. About 40% were categorized as medium impact, showing slight negative appreciation or depreciation this quarter. Meanwhile, around 30% of the portfolio was deemed high impact, which accounted for most of the quarter's depreciation, with some investments dropping by about 25%. This categorization helped guide our focus on providing support throughout the portfolio. Additionally, our portfolio construction played a significant role, as Kew already mentioned.
Operator, Operator
Your next question comes from the line of Mike Carrier with Bank of America.
Dean Stephan, Analyst
This is Dean Stephan on for Mike Carrier. Just a question around the realization outlook. I understand that at this point, the outlook is quite blurry. But can you help us understand maybe a V-shaped recovery versus U-shaped recovery areas that can potentially bounce back quicker? And then what type of recovery are you guys kind of forecasting at this point in time?
Kewsong Lee, Co-CEO
I’ll take that one. I think it's fair to say nobody really knows how long this will take. It’s probably not going to be a V-shaped recovery, but we are still early in the process. There’s a lot of discussion about what the recovery will look like. You're asking the right question, and I don't intend to avoid it. We need to work through this situation. We're optimistic about our visibility globally across various regions and sectors. We have prepared many companies to enter the IPO market or to be sold, and we feel good about the momentum we’ve built, which is still there. These companies are progressing, and it will depend on when and how the markets open for us to realize some of that potential. However, as Curt mentioned, it wouldn’t be appropriate for us to predict realization activity at this moment since we need to see how things unfold first before we can provide further insights.
Operator, Operator
We do have a follow-up question from the line of Patrick Davitt with Autonomous Research.
Patrick Davitt, Analyst
So on the wide kind of FRE guide, if I take another tack at it, I think you said the core in 1Q is $92 million. And the midpoint of the new range is $425 million. So can you kind of bridge to maybe where you see the growth coming from 1Q? Because I think all I have of size in my numbers is the Alpinvest raise this year?
Curtis Buser, CFO
Curt, the starting point for this quarter is $99 million, which includes a $30 million recovery. Additionally, we raised $7.5 billion this quarter, resulting in a pending fee-earning AUM of $12.5 billion. There is a significant amount of capital that has not yet generated fees, but we aim to activate it throughout the year. It's worth noting that transaction fees were low this quarter and are expected to remain low for the rest of the year due to ties to exits and other activities. While I anticipated more from this aspect and expected a recovery, the $4 million impact from CLOs also affected us this quarter. When you consider these factors together, this outlines the changes we've seen. I'm still optimistic about our growth opportunities in both the solutions and credit businesses, which can drive further growth, even though it's difficult to predict.
Operator, Operator
We do have a follow-up question from the line of Michael Cyprys with Morgan Stanley.
Michael Cyprys, Analyst
I was just hoping to get a little bit more clarity and color around the credit business build-out and how the current environment has slowed or impacted that build out? And if you can give us maybe a sense of maybe what's on your to-do list next for the build-out and how that is evolving?
Kewsong Lee, Co-CEO
Sure, Mike, it's Kew. I'll take that. When it comes to the credit business, the most appealing area for fundraising and deployment is currently in opportunistic, distressed, special situation, and rescue capital strategies. These are more tactical approaches. We have already received reverse inquiries and have begun efforts to raise more funds for both opportunistic and distressed strategies. While I don't want to comment too much since they are in the market, I believe we are well-positioned in terms of both our strategy and the interest from limited partners. Regarding the CLO business, there is currently no real issuance happening, and the market seems to be at a standstill. However, many of these structures are transitioning into higher-yielding loans, which should lead to significantly better yields. It's also worth noting that Carlyle has no outstanding or hung warehouses at this time, putting us in a strong position within our CLO business. For direct lending, I see opportunities, but I wish we had more available capital. We are currently considering how to secure additional funds for that strategy because, amidst market turmoil and stress, private credit can play a crucial role in providing necessary financing for companies, particularly in the small to mid-market, as traditional bank sources have diminished. This will be essential as our economy recovers. We are actively brainstorming how to acquire more capital for that team. I hope this provides more insight. There are more opportunities than challenges within our credit platform, and we've already begun the process of raising capital for some of those strategies, especially on the opportunistic side.
Operator, Operator
Your next question comes from the line of Alex Blostein with Goldman Sachs.
Daniel Jacoby, Analyst
This is Daniel Jacoby filling in for Alex. I have a broader question regarding the outlook for FRE. During the last earnings call, you mentioned the next fundraising super cycle starting at the end of 2021 and into early 2022. I understand there is a lot of uncertainty, but could you provide any insight on when we might expect this next fundraising super cycle to occur? Is it reasonable to assume it has been delayed, or are we still anticipating it to commence as expected?
Glenn Youngkin, Co-CEO
Great. Daniel, this is Glenn, and thanks for the good question. So as we've said a number of times today, we're sharing with you everything that we know, but we're also quite aware of the many, many, many things we don't know. And I think that question is going to depend materially on the length of this recovery. Our funds, as we've talked about today, I think, have performed well; they performed relatively well, and they're well positioned from a construction standpoint and portfolio support standpoint. And so we think our investment performance will be attractive over the long term, which will set us up well for the next multiyear fundraising campaign. But at this point, it's really hard to tell whether that's going to land in the same spot or it may be delayed a bit, and that's going to fully be dependent on what happens here in the second half of this year from a recovery standpoint. So again, we really we don't want to skirt the question. We're thinking about it all the time, but the reality is, until we get a little bit more water under the bridge from this recovery pace, we're really not going to be able to give you much more guidance than we think we'll do well in the next multiyear fundraising campaign. We think our funds will be attractive to our investors, but when that exactly starts, it's kind of hard to tell right now.
Daniel Jacoby, Analyst
Got it. And can I sneak in one more? Is that possible?
Curtis Buser, CFO
Go ahead, Dan.
Daniel Jacoby, Analyst
I'm looking at the FRE outlook and comparing the $400 million to $450 million guidance to the previous guidance of around $475 million for 2020. I'm trying to understand the transition from the old guidance to the new one. I appreciate the insights you've shared about the CLO dynamics. Can you help me break down how the CLO situation compares to the short-term decline in new commitments and the reduction in transaction fees?
Curtis Buser, CFO
I appreciate your question. It seems like you're trying to pinpoint the precise information on various factors, which is why we provided a broad range. If I could provide more specific details in this situation, I would have given a narrower range and potentially not adjusted the guidance at all. However, there are too many uncertainties regarding how these factors will develop. I want to emphasize the strength of our management fees, the upcoming fee-earning AUM, and our overall position. Our focus remains on long-term growth of FRE and improving our margins.
Operator, Operator
I am showing no further questions at this time. I will now turn the conference back over to Mr. Daniel Harris.
Daniel Harris, Host
Thank you all very much for your time, attention, and focus today. We do look forward to speaking with you after the call. Any follow-ups, please contact Investor Relations. Stay safe and healthy, and we'll talk to you again soon.
Glenn Youngkin, Co-CEO
Thanks, everybody.
Kewsong Lee, Co-CEO
Thank you.
Operator, Operator
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may now disconnect.