Carlyle Group, Inc. (CG) Q4 2022 Earnings Call Transcript

Carlyle Group, Inc. (NASDAQ:CG) Q4 2022 Earnings Conference Call February 7, 2023 8:30 AM ET

Company Participants

Daniel Harris – Partner & Head, Public IR

William Conway – Co-Founder, Interim CEO & Non-Executive Co-Chairman

Curtis Buser – CFO

Conference Call Participants

Glenn Schorr – Evercore ISI

William Katz – Crédit Suisse

Alexander Blostein – Goldman Sachs Group

Rufus Hone – BMO Capital Markets

Gerald O’Hara – Jefferies

Michael Cyprys – Morgan Stanley

Kenneth Worthington – JPMorgan Chase & Co.

Adam Beatty – UBS

Patrick Davitt – Bernstein Autonomous

Brian Bedell – Deutsche Bank

Craig Siegenthaler – Crédit Suisse

Brian Mckenna – JMP Securities

Operator

Good day, and thank you for standing by. Welcome to the Carlyle Group Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Daniel Harris, Head of Investor Relations. Please go ahead.

Daniel Harris

Thank you, Kevin. Good morning, and welcome to Carlyle’s Fourth Quarter 2022 Earnings Call. With me on the call this morning is our Interim Chief Executive Officer and Co-Founder, Bill Conway; 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 reconciliation of these measures to GAAP in our earnings release to the extent reasonably available.

Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties including those identified in the Risk Factors section of our annual report on Form 10-K that could cause actual results to differ materially from those indicated. Carlyle assumes no obligation to update any forward-looking statements at any time.

Earlier this morning, we issued a press release and a 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. For the fourth quarter, we generated $202 million in fee-related earnings and $433 million in distributable earnings or $1.01 per share. Fee-related earnings for the full year 2022 of $834 million increased 40% compared to 2021 and FRE margin expanded to 37% from 33% last year. Strong organic growth and several strategic transactions combined to deliver another year of substantial growth.

We generated $1.9 billion in distributable earnings in 2022 or $4.34 per share with a good balance of earnings from FRE, net realized performance revenue and realized investment income. We entered 2023 in a strong capital position. We have $1.4 billion in cash, $2.4 billion in firm investments and $4 billion of net accrued carry on our balance sheet, in total, over $20 per share. We have nothing drawn against our $1 billion revolver, and our debt ratings from both S&P and Fitch improved to A minus ratings. The strength of our balance sheet gives us confidence that we can continue to pursue growth strategies, both organic and inorganic, to help continue to deliver additional FRE growth.

We delivered a quarterly dividend of $0.325 per common share. The combination of our balance sheet strength and sustainable growth in FRE allowed our Board of Directors to approve another increase in our fixed dividend to $1.40 per share per year, an increase of 8% year-over-year and up 40% over the past 2 years. This higher dividend will begin with Q1.

And with that, let me turn the call over to our Interim Chief Executive Officer and Co-Founder, Bill Conway.

William Conway

Thank you, Dan. Good morning, everyone, and thank you for joining us today. I am pleased to be on the call to discuss Carlyle’s Fourth Quarter and Full Year Results. As you’ve heard, Carlyle delivered strong results to our stakeholders despite the challenging market environment. The firm is operating well, and I have tremendous confidence in our ability to capture investment opportunities and to continue to grow our platform in 2023.

I want to talk about 3 topics this morning: the outcome of our CEO selection, the strong financial performance of Carlyle in 2022 and some general thoughts on our outlook. First, we are incredibly pleased that Harvey Schwartz will join Carlyle as the new CEO on February 15. As you all know, this was an incredibly important decision for Carlyle. And the search committee of the Board, on which I serve, drove a robust and exhaustive search for a new CEO. Following a thorough and competitive process, Harvey was unanimously chosen by the Board as the right leader to move Carlyle forward in its next phase of growth.

Harvey is a widely respected business builder with significant leadership experience in a high-performing, highly competitive global financial institution. He is a seasoned operator with a proven record of leading and developing a wide range of businesses and a demonstrated ability to invest in and develop the talent and organizational structure to manage and support these businesses.

As we look to the future, there is tremendous opportunity to grow and to continue to perform Carlyle, to transform Carlyle and deliver sustainable results over the long term. Harvey brings the experience and skill set to fully capture this opportunity.

As CEO, he will set and execute a strategy that advances and accelerates the diversification plan the firm has successfully pursued as well as identify new investment opportunities to further scale the business, drive performance and deliver growth. I am confident in Harvey’s leadership and look forward to introducing him to you in the very near future.

Moving on, I’d like to discuss our 2022 results. Curt will dive into our results in more detail, but I wanted to touch on a few notable points. As Dan mentioned, we generated record fee-related earnings of $834 million in 2022, an increase of 40% over 2021, which demonstrates that our strategic focus to grow FRE and diversify our earnings mix is paying off, and we earned $1.9 billion in distributable earnings despite a volatile exit environment.

We delivered investment returns that were attractive across our portfolio. Our aggregate carry fund portfolio appreciated 11% in the year, while the public markets were down about 20%. And as I said last quarter, portfolio construction and risk management matter, and we believe that this is the key differentiator that positions our investment teams to deliver superior relative performance across market cycles.

Turning to our outlook. As we enter 2023, we are confident in the strong foundation of the firm and believe that we are well positioned to capture new growth opportunities, and Harvey will focus on building off this strong foundation. At its core, our business involves raising money and investing money and then making money that we’ve invested worth more.

Let me begin with some thoughts on fundraising. No doubt the backdrop for raising new capital remains challenging with headwinds more pronounced in certain areas than others. However, today’s environment is different from what we faced entering 2022. Early last year, an unexpected and sharp change in market sentiment had investors on their back foot for most of the year. With rapidly deteriorating public equity and debt prices, the denominator effect greatly reduced LP interest and ability to make new commitments.

Over the past few months, at least until last week, we’ve seen a gradual reduction in market volatility. Investors still believe that they have a better handle on the magnitude of further interest rate changes. In addition, Carlyle’s longstanding relationships with the largest and most sophisticated investors around the globe is a benefit, and we continue to see strong demand for many of our investment strategies across our 3 global segments.

Our platform has continued to diversify, and it’s important to note that roughly 2/3 of our fundraising last year came from areas such as Global Credit, Global Investment Solutions, natural resources and real estate. While corporate private equity may continue to face headwinds, we see significant capital raising opportunities across our platform. We will have more strategies raising capital in 2023 than we did in 2022, including our next vintage flagship funds and credit opportunities, secondaries, co-investments and buyout funds across the globe.

We anticipate that our overall dollar volume of fundraising in 2023 will be higher than the $30 billion we raised in 2022. Over the past few months, I’ve been around the world speaking with our teams and investors and feel confident in the power of our platform. Our investors value our partnership, our global reach and our ability to construct diverse portfolios that perform across market cycles.

Now that Harvey is here, it has also taken away some uncertainty about our path forward as a firm, and we think that will also have a positive impact on fundraising. Regarding capital development, today’s market conditions create new opportunities to invest capital across all of our global businesses. Recently, there’s been a wider-than-average spread in pricing expectations between buyers and sellers, which has impacted capital development. The spread is across most asset classes that has been more pronounced in private equity than other strategies, and we are — but we are starting to see evidence of this spread narrowing. As debt and equity capital markets continue to reopen, the pace of deal activity is poised to accelerate.

We deployed a record $35 billion in capital in 2022 with a good balance across equity, credit and solution strategies. And we are well positioned for further investment with $72 billion in dry powder to capitalize on an improving environment. We expect to find ample opportunities to make new investments in 2023 and beyond on behalf of our fund investors. In addition, the improving deal environment presents an opportunity for our global credit business to provide unique capital solutions to the marketplace. In 2022, we underwrote $3.9 billion of new loan activity in our direct lending strategy, and our CLO team issued 9 new CLOs while also trading $30 billion across their portfolios to better position the CLOs for the expected economic environment.

And as fund investors’ need for liquidity persists, we are well positioned to capitalize on this need to our secondaries and co-investments business. Overall, 2022 was a solid year across most financial metrics for Carlyle, and we entered 2023 with strength and momentum. With Harvey as our new CEO alongside our strong leadership team, Carlyle is well positioned and we’re confident that he will build on this momentum to bolster the firm’s position and create value for all our investors and shareholders.

With that, let me hand the call over to our Chief Financial Officer, Curt Buser, to discuss our financial results in more detail.

Curtis Buser

Thanks, Bill, and good morning, everyone. I want to start by reiterating many things Bill mentioned that emphasize the strong position Carlyle finds itself in as we begin this year. We believe our investment portfolios are in good shape and are well positioned to weather economic volatility. And we expect to deliver long-term attractive performance for all of our stakeholders.

We produced a robust $4.34 per share in distributable earnings in 2022, displaying the significant cash earnings power of our firm. We’ve now earned over $9 in DE per share in just the past 2 years. We remain focused on growing fee-related earnings, and it grew by 40% in 2022. And over the past 5 years, our FRE CAGR has been a robust 34%. Our overall earnings mix continues to diversify as we have grown our credit, insurance, capital markets and solutions capabilities. Our strong growth in fee-related earnings is not driven by a single fund or strategy. Rather, our performance led us to driving broad-based top line fee growth across our global platform.

Top line fee revenue growth was 25% in 2022 and was driven by the following: first, raising capital for and growing our traditional high-performing investment strategies across each segment — each of our 3 global segments. Second, organically building out new fee-generating businesses like opportunistic credit, insurance, capital markets and infrastructure credit, to name just a few, each of which added significantly to our growing fee revenue pool throughout the year. And third, we have been actively adding new inorganic streams of earnings, such as our transactions to further scale our CLO business with CBAM, and our advisory agreement with Fortitude.

These efforts have scaled our platform and helped drop more of our top line revenues to the bottom line as we expanded our full year FRE margin to 37% in 2022, an increase of nearly 400 basis points compared to 2021. FRE margin has more than doubled over the past 5 years. We have done this while concurrently investing in new product development and enhanced distribution capabilities, notably across the private wealth channel. We expect to continue to grow FRE in 2023. FRE in the first quarter will likely be similar to Q4 of 2022 before increasing in the second half of the year. In addition, we remain highly confident in our ability to grow FRE well into the double-digit range over the mid- to longer term, in line or better than the market trends across the private capital industry.

Consistent growth in fee-related earnings is supported by the attractive investment returns we produce for our fund investors. Our investment teams again delivered appreciation that outperformed public benchmarks even with increasingly higher discount and cap rate assumptions in our valuation models and elevated concerns about global recession. While only 6% of our carry fund portfolio was publicly traded at year-end, public market comparables are an important input to our valuation methodology and generally were a downward driver of valuations across our private assets during the year.

Of course, the most important valuation driver of any investment is underlying asset level performance, which, in general, continued to reflect growth in revenues and earnings, though this growth generally slowed in the second half of 2022. Our strong performance also owes to our focus on deploying capital in the sectors where we have deep industry expertise and experience.

Our real estate funds appreciated 16% during 2022. Our Infrastructure & Natural Resource funds appreciated a very strong 48%, and Corporate Private Equity funds were up 6%. We realized $34 billion in proceeds for the year, which produced another year with $1 billion in net realized performance revenue. About what I previously indicated would be a good target in most years.

Looking forward, net accrued carry increased 2% year-over-year to $4 billion. A solid portfolio appreciation more than offset strong carry realizations. And we ended the year with $138 billion in fair value in our carry funds, up more than 10% compared to year-end 2021. In general, we continue to expect to generate on average $1 billion in annual net realized carry.

Though depending on the year, realized performance income could be elevated as it was in 2021 when market factors were favorable or lower in years where uncertainty diminishes capital markets activity. Industry-wide activity rates slowed considerably in the past few months as buyers and sellers continue to search for evaluation middle ground, and funding markets while available are less amenable than they were just a year ago.

For Carlyle specifically, new investment and realization activity has also been slower. And so we expect a muted start to 2023 for both deployment and realizations. Thus, transaction revenue and realized performance income will be lower over the next quarter or 2. If our activity rates across the industry improve over the next few months, then our expectations for higher performance and transaction revenues will also increase.

Let me now turn to some quick thoughts on each of the business segments. Global Private Equity had another strong year with fee-related earnings up 34%. Strong appreciation across Real Estate, Infrastructure and Natural Resources helped net accrued carry increase to $3.5 billion after more than $900 million of net carry realizations. $20 billion of invested capital was generally similar to $23 billion of realized proceeds, which positions global private equity to continue to deliver attractive levels of distributable earnings in future periods.

Global Credit remains our fastest-growing segment, and it benefited from both organic growth activity as well as the positive impact from strategic transactions. Top line fee revenues grew 46% in 2022, resulted in fee-related earnings more than doubling to $225 million, and fee-related earnings margins increasing by nearly 1,000 basis points to 37%.

Strong investment performance across various strategies produced $70 million of net realized performance revenue. Our credit interval fund delivered attractive performance with a 10% dividend yield, while continued net inflows grew managed assets to more than $2 billion. We raised $15 billion in new capital across 11 strategies in Global Credit in 2022, and we expect to have an active year fundraising for additional strategies in 2023, which should position Global Credit for further growth. In addition, we remain focused on helping Fortitude evaluate new growth opportunities, which would help us benefit from incremental advisory revenues.

And in Global Investment Solutions, we are well positioned to see growth in this segment as we begin fundraising for our flagship products, including next vintages in our co-investment and secondary strategies. Fee-related earnings of $69 million in 2022 was lower than 2021, but we expect to see growth later in 2023, as these strategies attract new capital. In addition, with $374 million in net accrued carry and very strong fund performance, performance-related revenues are well positioned to increase over time.

In sum, we delivered strong performance for our stakeholders in 2022 and are well positioned for what will likely be a more attractive investment environment in 2023. We see tremendous opportunity to deploy capital into what we think will be a great investment for our portfolio and fund investors.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Glenn Schorr with Evercore ISI.

Glenn Schorr

So maybe for Bill, first. Look, I think a lot of investors have been getting on board the direction of travel for Carlyle for the last couple of years, FRE growth, margin expansion, diversification. So we had a pause for 6 or 7 months. We found Harvey. Maybe talk a little bit more about why Harvey and then, most importantly, what’s he here to do relative to the strategy that all these investors are on board? And I want to know, like, is that strategy important to you and the co-founders because the process we went through is what it is? So just curious if you could talk to that.

William Conway

Sure. And thank you for the question, Glenn. First of all, I am very excited that Harvey is going to join us. He was our first choice, and he is — and I think it should be pretty obvious why. We were looking for somebody who had a really proven track record. We were looking for somebody who had experience building businesses. We were looking for somebody who had a record of managing and recruiting and training and developing talent and working in the collaborative environment. We were looking for somebody who could relate to people like you in Wall Street and tell our story, a wide range of skills. And frankly, there aren’t a lot of people who have all those skills.

In Harvey, I think we found that person. He is really fantastic. Yesterday, he and I were walking around our New York office. We went on all the floors, we were talking to people, and he was happy to see them, and they were happy to see him. And it was really not so much they want to get rid of me, but rather they were excited to see him there. We obviously have a lot of people who used to work for Goldman, and they were happy to see him; and people who just had heard about him and his track record and his skill set.

So I think why Harvey and who he is and what his track record is, that was pretty clear to me that we couldn’t get anybody any better than Harvey. He was — he’s fantastic. Now what’s he here to do? I think in some ways, the path that we have is set. We want to — first of all, we want to increase the stock price. Even though we are — we’ve got a great investment track record that doesn’t show up in our stock price, we have — how is he going to do that? Well, we have to grow our business, we have to grow our business, we have to grow our business.

Particularly the fee-related earnings, but other parts of the business as well that assets and the like, he’s got a great set of experiences. Remember, he was at Goldman during the time of a financial crisis and talking about having to deal with situations that were risky and yet had great opportunity. So I don’t see dramatic changes in the basic strategy, but it will be up to Harvey. He’s going to be the CEO of the company. And I’m going to do everything I can to help him be successful and — including staying out of his way, if that’s the right part of the solution. I can’t tell you how happy I am that he’s here.

Glenn Schorr

Well, long track record with him, so I totally agree with that. Maybe just one numbers question. I’m interested in your comments about the improving bid-ask dynamic. You have $11 or so in net accrued performance revenue, which is a lot relative to your stock price, like you said. So you realized $1 billion in performance revenue, but you picked up another $1 billion basically on the back of Infrastructure and Natural Resources. So could you expand a little bit more on what you talked about the improving bid dynamic — bid-ask dynamic? Is that like a near-term-ish thing? Or is that a hopefully second half thing? Just curious on what you think it takes to get the wheels moving again.

William Conway

That is — that the real question is. And of course, what we’re talking about there is that sellers think their businesses were worth what they were worth a year or 2 ago. And buyers say, “Well, I don’t want to pay those prices anymore.” And so there’s been a gap. I’ve mentioned in my remarks that it’s been both in the prices of equities, we see it kind of on the value of the companies that you own, but it also applies to credit. For example, there was a deal recently and we looked at where the credit spread or all in price of the credit a year ago might have been 6% or 6.5%, and now it’s double digits. So there are still certainly some disparities in valuation.

However, it is getting better, Glenn. And I’d say it’s getting better slowly. It’s not rapidly. This is not going to be something that I think it — someone is going to ring the buzz and we’re going to know that it’s where it should be. Private equity has the advantage and private debt too as well of being able to evolve and able to function in lots of different kinds of environments and to adjust to those environments. And I see that in the types of deals that we do now. We’re not doing deals that are giant deals that require billions — $10 billion of equity and $10 billion of credit. Those deals will be almost impossible to do today.

But the market is gradually healing. Buyers and sellers gradually coming together. And I think it’s on both sides. I think buyers are dropping the prices down and I think — price what they’re willing to pay. And the sellers are saying, well, maybe we’re going to have to just be able to settle for a lower price than we thought. And I think that’s across the board. It’s not going to be just in private equity, it’s not going to be just in Americas, it’s everywhere. More in the second half probably than the first.

Operator

Next question comes from Bill Katz with Credit Suisse.

William Katz

Congrats on adding Mr. Schwartz. So a question for you, guys. You mentioned that you think that asset gathering can be better in ’23 than in 2022. I was wondering if you could unpack that a little bit and maybe bifurcate between where you stand on sort of the free flagship corporate private equity portfolios versus the rest of the business with some emphasis on the solutions business?

Curtis Buser

Bill, it’s Curt. Thanks for your question. I’ll start and then Bill might add in. So I’m really proud of what we did in 2022 from a deployment standpoint. We deployed $35 billion across the portfolio. It was actually our most deployment in any year. And between ’22 and ’23, it was noticeably better than what it had been in all prior years. Bill talked about some of the challenges here recently, and we think that, that’s going to pick back up.

The diversification across the platform and deployment I was really proud of because what you saw in ’23 was much more coming out of Global Credit and other aspects of even private equity outside of corporate private equity. And so all of that was really good. So the deployment piece was really good. That leads us into a good place from a fundraising perspective and sets us up well for fundraising.

And so because it’s the first and foremost thing, I think, is kind of how the portfolios are performing and then how you think about fundraising. So from a fundraising standpoint, a couple of high-level things for you to keep in mind. Our portfolios are performing really well. And this, I think, sets us up nicely to go as we seek to raise more capital.

Second, as Bill said, we expect to raise more in 2023 than we did in 2022, and we’ll have more products in the market to support this. The third thing from a number standpoint, I want you to keep in mind is, in 2021, at the beginning of the year, we said we would raise $130-plus billion over 4 years. So 2 years in, we’ve raised $80 billion, $50 billion last year, $30 billion this year. And we added $65 billion through strategic transactions. So that’s $145 billion of new fee-earning AUM in just 2 years. And you see that in our fee-related earnings, up 40%, 30-plus CAGR over the last 5 years. And so that’s done really well. And we’ve seen a lot of that growth really in credit and in our solutions business.

Now in the buyout funds, we still have, obviously, some congestion in that space, but there’s a number of reasons to have optimism there. First, as Bill said, I think there’s less uncertainty about the global markets today than it was a year ago. Second, public markets seem to be improving here in early days of the year, but it’s still early. Third, we’re in ’23. So that’s a new set of allocations for investors. And last, with the appointment of Harvey Schwartz, we have a lot of reason to be excited. And we hope that, that carries forward to our investors and taking away some uncertainty that may linger there in certain situations.

But look, I’ll reiterate that I think that our buyout funds will be similar in size to their previous vintages. And so I’m confident in that and very excited about kind of our overall growth in the firm. And I think that this will be a better year from a fundraising perspective than it was in 2022 and, again, helping us in our focus on driving fee-related earnings.

William Conway

Okay. And just a follow-up, maybe stick with you, Curt. So just sort of triangulating the notion of FRE up in ’23 over ’22, just sort of wondering how you might be able to ring-fence that. And then just given the sort of yet to be determined incremental strategy with Mr. Schwartz, how should we think about margins? Because I hear a lot of grow the business, grow the business, grow the business. Can you drive FRE up and FRE margins up if you still need to grow the business?

Curtis Buser

Bill, look, I said that we’re confident we’re going to grow fee-related earnings in ’23. I think the first quarter will be a little flat, as I said in my remarks. But thereafter, I think things are really set up nicely. There’s — this is a challenging environment, and we are continuing to invest and that’s why I think this might be a little lower rate of total growth than, say, in the past, but feeling really good about our ability to grow fee-related earnings. I think with Harvey coming on, his past experience in helping companies and helping situations improve profitability will be a good addition to the team, will bring new thoughts to this. But I also want to be careful and give him the opportunity to put his imprint on things. And so I want to be a little cautious in terms of how much specificity I give in guidance, but we’re really well set up to begin ’23.

Operator

Our next question comes from Alexander Blostein with Goldman Sachs.

Alexander Blostein

Maybe just to follow up the prior discussion from Bill’s question. It sounds like you guys still feel pretty confident about the overall fundraising targets that you laid out couple of years ago, but the mix might be slightly different. Obviously, you highlighted the private equity business is a little bit slower. Can you expand on that a little bit? And as you think about the ramp that you’re talking about into 2023 from FRE growth, what are some of the key products and strategies that you expect to be kind of the biggest contributors to that ramp?

Curtis Buser

Alex, it’s Curt. Let me start and then Bill can add. So look, credit did about $15 billion this past year. It’s going to have more product in the market than last, feeling really good about how that continues. Our opportunistic credit fund is out there raising money. Our CLO business will probably start the year a little slower because of all the reasons we’ve talked about. But I think it’s always a heavy weight in the room.

And then in the solutions business, we’ve got our co-investment products and our secondaries products and a couple of new things that we’ll bring to market this year. And so again, more products in that space. Think of the solutions business as really being a nice way to kind of really increase from where they were in 2022. And then in private equity, look, we’re going to have more product in the market in private equity. So a number of buyout funds, U.S., Europe, Asia, will either begin or will be in the market from a fundraising perspective. There’s other products in private equity that will be in the market. And so that, too, I think, is well positioned to do better. I don’t know, Bill, if you have anything to add.

William Conway

Yes. I think solution is going to be a big growing fund and the funds of solutions are going to be a pretty big growing area this year. I also — I don’t want to confine Harvey in any way. I don’t want my comments in any way to limit his ability to imagine a different future or a different way that things could be done better. So I’m a little hesitant to get too specific on this. But I do think that the noncorporate private equity funds, the demand is there, too.

I used that credit example before when I was answering a prior question. Sometimes when it’s a little tougher to raise the equity, raising the credit funds is a little easier because the opportunity is great, the spreads are wider and more money can be made by the investors in those funds. But I don’t want to confine my answer in any way that will limit Harvey and his ability to do a great job.

Alexander Blostein

Got it. All right. We’ll stay tuned for — when Harvey is on.

William Conway

Thank you. You know Harvey? Do you know Harvey?

Alexander Blostein

I have met Harvey, yes.

William Conway

Okay. Good. I just — I didn’t know whether or not another Goldman Sachs person might weigh in and what a great guy he is.

Alexander Blostein

My quick follow-up for you guys was around Fortitude. That’s something you mentioned in your prepared remarks as well. And I think, Curt, you highlighted some new growth initiatives within that, that can kind of help expedite some of the growth as well. Can you expand on that a bit as well?

Curtis Buser

Sure, Alex. So look, Fortitude has got $50 billion, $51 billion of AUM. The way we’ve set up the services arrangement, we fee off of all of that. In addition, they’ve invested about 9 — or I should say, committed about $9 billion into our funds. So all of that has been working as planned. They also have about $3.5 billion to $4.5 billion of excess capital, which positions them nicely to continue to grow, very active pipeline, working really hard on that.

We’ve said before that we fully expect that to be — for them to be able to double in size because of that and fully expect that, that will occur. And when we have more to be able to say on those fronts, we’ll be sure to mention that to you. But we remain very optimistic about kind of how Fortitude can continue to benefit Carlyle.

William Conway

I’d also tell you that Fortitude has — we have 4 or 5 institutional partners who are in that business and are fellow shareholders with us in Fortitude. And they have been fabulous partners helping us grow that business. For us, it still is — we got a lot of capital invested, but we have less than we otherwise would, thanks to those great partners we have. And as Curt said, we do expect to double that business over the next few years at least.

Operator

Our next question comes from Patrick Davitt with Autonomous Research.

Patrick Davitt

I wanted to get a little bit more on the CP — this PE fundraising issues. Could you maybe update us — I know it’s early in the year, but update us on the tone of the conversations with LPs? Are you starting to see people kind of step back into PE more broadly? And thoughts on maybe a more specific time line for when we can see some more chunky closings in those large flagship funds? And then maybe through the lens of all that, is it fair to say 4Q is about as bad as you think it could get in that line?

Curtis Buser

Patrick, let me start on this, but I’m always sensitive about trying to read into the minds of others or really try to figure this out in detail. Look, we have great relations with our LP investors. I think they’re pleased with what we’re doing. A lot of our portfolio performance has been just fantastic and well constructed. And as I already went through a litany of things in terms of what we’ve done well, $145 billion of capital formation in the past 2 years, I think that we can continue to do that in terms of growing and looking, we’ll continue to look at organic things.

So look, I think the tone is good, but it’s still difficult in different places. And tone, you got to be specific related to kind of individual situations in the given fund and the like. And there’s a lot of reasons to be optimistic as we start ’23. So Bill, I don’t know if you have anything to add to that?

William Conway

No more specifics to give at this time, Curt. Sorry.

Operator

Our next question comes from Kenneth Worthington with JPMorgan.

Kenneth Worthington

Maybe first, private markets investing in energy. As you start to come back to market with more of these funds, how does the better environment in energy mesh with pension fund community that seems more reluctant to invest further in traditional energy? And what does this mean for your ability to grow your energy franchise in what seems like a more constructive energy environment?

Curtis Buser

Ken, well said. I mean, I do think that we’re optimistic on the energy platforms. Our partners and colleagues at NGP are excited about their opportunities. They’ve got a fund in the market now. I don’t want to comment specifically on that, but expecting good things out of that. Our renewables platform, our power business, our international energy platform all give us a number of products, but they’re not all in the market. But you’re right. Right now, there’s a lot of good opportunity in energy, but different LPs based on their constituencies have different perspectives.

The limited experience that we have is that generally, we’re seeing a nice uptick from the existing investors in existing product, which is different than kind of going after new or different, but it’s a good opportunity at the present time.

William Conway

And I think its returns are pretty uncorrelated with all the other returns available in the market, too, and that appeals to a certain group of investors as well.

Kenneth Worthington

Okay. So do you — are you — do you think the business can grow? Or does it just sort of stay here as those 2 trends offset each other?

Curtis Buser

Look, the needs are really significant. I think a lot of that has played out. And so it’s too early, Ken, to really call that definitively. But look, I feel a whole heck of a lot better about that whole sector than say, 2 years ago where it felt a lot more difficult. Right now, everything, performance and the chance forward on a lot of those different aspects, I think, are really, really good.

Kenneth Worthington

And then equity comp fell a bunch during the quarter. What drove it? And I assume we see that sort of snap back next year?

Curtis Buser

Yes. That’s — look, like a lot of things in this business, looking at any individual quarter is a mistake. You got to look at it over a longer period of time. The fourth quarter had some unusual things in it. Essentially, our fourth quarter is always a little bit light because you’ve completed a vesting of a big tranche in the third quarter. And you haven’t granted anything new that occurs in February. So the fourth quarter is naturally a low quarter, plus we had some performance units for some senior folks that didn’t fully there that had been accrued prior in the year. So the fourth quarter was a little bit light.

I do think you’re going to see a significant uptick in our equity-based comp next year in 2023, both — we’ve made some big grants in February, just a number of our key people and to ensure retention and make sure to reward people that have performed really well and then also bringing on Harvey, and that will also have an increase in our equity-based comp in 2023.

Operator

Our next question comes from Brian McKenna with JMP Securities.

Brian Mckenna

Great. So realizations have been pretty resilient despite the tough backdrop I’m curious what parts of your portfolio are you most active monetizing today? And then it might be tough to answer, but what’s the base case expectation for realizations in 2023, assuming no material shift in the backdrop? Do you think you can get back to that $1 billion level again?

Curtis Buser

So Brian, it’s a great question. And I always like policy my crystal ball to fine-tune this as best I can. A year ago, in the fourth quarter of 2021, we earned about $700 million in net realized carry off of a very strong realization period. And that was like not only impossible to forecast and predict until kind of as it was happening, it also shows the power of what can occur in a single quarter.

So we’re sitting here today with $4 billion of net accrued carry on the balance sheet. Our underlying portfolio of $138 billion of fair value is up 10% from a year ago. So the portfolio is incredibly well positioned to continue to drive significant realizations for our LPs and carried interest for us.

Now exact timing of that, look, it’s going to be second half of the year. Now good news is there’s some smaller, midsized transactions occurring as we speak that gives me a lot of confidence. But the big stuff that will really drive it will be more in the back half of the year. And keep in mind, you actually sign up a transaction, and it takes often a couple of quarters to actually close the transaction. And so the level of announced transaction is far lower today than say, a year ago. And so therefore, it’s going to be the back half of the year.

Kenneth Worthington

Helpful. And then just with respect to CP VII, gross returns of the fund total 14% or 8% on a net basis. So how are you thinking about returns for this fund as it continues to mature over time? And then if you look back historically, what’s the average markup on realized investments relative to the prior unrealized marks?

Curtis Buser

So I would be very careful in terms of — we have funds that are in fundraising. To talking about specifics and forward stuff is complicated on a call like this. But let me give you some high-level thinking. First, our current generation of buyout funds are generally in the same position as their predecessor funds, which all did exceptionally well. And really, I’m optimistic in terms of where this fund and the similar vintage funds will continue to perform and do, just as I said, with respect to carry.

So I think we’re well set up for this. And keep in mind, our portfolio construction, whether it’s in private equity or real estate or credit, is very diversified. And we tend to invest in good assets where we have deep industry experience and knowledge, where we understand the macro environment where they’re operating in. And most of our value creation comes from driving revenue and driving earnings. It’s generally not, hey, we figure out how to buy low sell high. It’s generally not kind of — boy, we can turn this business around because we’re smarter than everybody else. We bring tools to add to revenue, add to profitability, and that’s what it turns in the success.

Operator

Our next question comes from Rufus Hone with BMO.

Rufus Hone

I wanted to come back to some of the comments you made around the FRE growth trajectory. I guess could you give us a better sense of when you anticipate getting into the double-digit growth rate you mentioned in the prepared remarks. And do you think you can get to double digits organically? Or is that dependent on inorganic growth?

Curtis Buser

Rufus, thanks. Look, we can definitely get double-digit organically where — the business is growing fast and it’s very possible that we’ll get there in ’23, but I would say, it’s on the lower side of that, and it really depends upon activity levels. Transaction fees can be a big help. Transaction fees, essentially, if you look on detail while 2022 was up over ’21 and was our best year ever on transaction fee revenues. And from Q2, it kind of peaked and came down in Q3 and came down in Q4, which put a downward pressure on fee-related earnings. I think they’re — it’s going to remain like in the first quarter or so. And then as they pick back up, that will be a big help.

In addition, there’s a number of things that we think will also turn on later in the year. And keep in mind, our credit business generally generates fees off of invested capital. So as we raise capital in that business and raised a lot of money in 2022, as it deploys, we get the benefit of that. And so there’s a built-in lag between fundraising and fee generation, in particular, in that business. So hopefully, that gives you some color.

Daniel Harris

And I would just add, Rufus, as we said during our remarks, we continue to invest in new product development and distribution. And that’s across the platform and we noted that, that’s in the private wealth channel as well. So those are things that should help us drive organic new growth over time in addition to, of course, inorganic opportunities that show up and all the things that Curt just mentioned.

Operator

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

Craig Siegenthaler

And we just want to congratulate you on naming a top-notch CEO.

William Conway

Thank you.

Craig Siegenthaler

So we wanted to start with an update on fundraising for the flagship PE funds starting with CPA. I think there are a number of large LPs that wanted to wait until 2023 when their annual deployment allocations were reset before they committed to 8. I just want to see how this is playing out now that we’re more than a month into 2023?

Curtis Buser

Craig, it’s really too early and I really don’t like to talk about details on a given fund, but remain optimistic in terms of where all of our fundraising can turn out. And as we said, I think we’re going to raise more money this year than we did last year.

Craig Siegenthaler

Got it. And just as my follow-up. A big question for us is the long-term growth trajectory. And I know there’s not a ton you can say on this, but when you wrap up your fundraising super cycle with Asia 6 and Europe 6 this year and start to exit the cycle, can you talk about the potential for FRE growth to decelerate and help us kind of with this risk really framing into ’24? And I think it really comes down to the dynamic of can you raise enough capital in insurance solutions and credit to offset the net realizations that your private business will generate?

Curtis Buser

So Craig, I am very optimistic. Let’s just start with solutions. Solutions pre ’21 or so was — for 5 years, was averaging about $30 million or so in fee-related earnings, had a very successful fundraise and growth in that business and stair-stepped up essentially doubled initially to $80 million. We’re now in the $70 million or $69 million in ’22 for fee-related earnings. It does everything that I’m expecting it to do. I see it doubling again. It won’t double in ’23, but I think, in ’24, that business can double.

We’re very bullish on what our credit business can do. And we think with both product that we can really drive, hopefully, another doubling of that business won’t be again in ’23. It’s going to take us some time. But we really kind of think that we can kind of make some real progress there. And that’s off the back of continuing to build out our capital markets business, which, by the way, I had zero exposure on my balance sheet in terms of hung deals or bad things. So really, really proud of our team and capital markets in terms of how they’ve operated and operated in a very smart way.

We talked about Fortitude and what it can do. And look, just the strength across the rest of the structured credit as well as a number of new products. And don’t forget our opportunistic credit business, which is very bullish and is going strong. So there’s a lot of great things in credit and in private equity. Look — still remain interested in kind of what we can do outside of traditional buyout, which — look, I actually think our buyout business is amongst one of the best. And with a little bit of good news in some places, we’ll be right back to kind of doing what it’s always done and think that we’re well set up for real progress there.

And then you just think real estate has just a phenomenal track record. It can add to the picture and see much further growth in real estate. It’s too early to really call out kind of what can happen in energy. And — but I think in infrastructure, you got a nice upside lift kind of there. It will take some time, but it’s a nice upside lift. And so I think across the platform, lots of great things and looking forward to what we can collectively do as a team going forward.

Daniel Harris

Craig, I think as you referenced the term super cycle, as we’ve continued to pursue this diversification strategy we’ve been on for quite some time, that term has less and less meaning for us. Yes, we raised closed-end funds. But if you look at the number of significantly large funds across our platform in every different business, we’re going to raise significant amounts of capital in every year. And then you add on all the things that Curt mentioned outside of what we had several years ago, whether that’s Fortitude or opportunistic credit or open-ended products. And we see opportunities to raise a lot of capital, which gives us conviction and confidence that we’re going to be able to grow FRE in a very substantial way over time.

And just to reiterate what we said during our prepared remarks, we’ve grown FRE at 34% CAGR over the past 5 years, and that’s not an accident. It’s because of this process. And as we look forward, we’re very hopeful, and we have a lot of confidence that we’re going to be able to deliver great results too.

Operator

Our next question comes from Michael Cyprys from Morgan Stanley.

Michael Cyprys

Maybe just circling back to some of the fundraising commentary just as you guys are out on the road meeting with LPs. I was hoping you might be able to comment on pricing trends. To what extent have fees and pricing come up in your discussions with LPs? How are overall economics evolving on the newer slate of funds relative to the predecessor funds? When you look across management fees, discounts for size, recycling provisions, step-downs, reimbursement for expenses, all of those sort of pieces, what sort of changes, if any, are you seeing in the marketplace?

Curtis Buser

Michael, it’s Curt. I don’t think that we’re seeing anything significant one way or the other as we are on the road talking to people. It’s — the stuff that was always kind of the case still remains the case, which is access to co-investment and the like. And so that’s really where more of the discussions really go as we’re talking to LPs and fundraising.

Michael Cyprys

And maybe just a follow-up to that, maybe more on the portfolio company side, just around performance, revenue, EBITDA growth trends. Maybe you can just give a little bit of commentary there. What are you seeing, margin trends, inflationary pressures, tight labor conditions? How is the portfolio adapting to the sort of backdrop? And if you’re able to quantify any of that, that would be helpful, too.

Curtis Buser

Look, the portfolio grew really nicely first half of the year, in particular. The rate of growth decreased second half of the year but was still growing. So over ’22 EBITDA was growing, I want to say, on average about 10%, particularly over the Corporate Private Equity, broadly speaking, portfolio. And so optimistic around kind of what that can continue to do.

Across many of the businesses, we saw continued pricing power that enabled that to occur, to be seen in terms of how strong that pricing power continues and kind of inflationary pressure and how that works against us. And then — but the good news is, I will say that the way we’ve constructed the portfolios, we’re generally in good shape. So again, cash flowing businesses, real estate is not in the bad areas. So almost nothing in office or hotel or retail. So again, very good construction across both our private equity, inclusive of real estate.

Operator

Our next question comes from Gerry O’Hara with Jefferies.

Gerald O’Hara

We’ve covered a fair amount of ground here this morning. But maybe just kind of touching base on the expense side and clearly saw a pretty meaningful step-up in G&A year-over-year. Obviously, a lot of growth initiatives going on investing in the business. But perhaps, Curt, if you could give us a little sense of how to think about that as we look to the next 12 to 24 months?

Curtis Buser

Thanks, Gerry, for the question, and good to hear from you. Look, in a year where I can grow FRE 40% over the prior year, I’ll take it however I can get it. And if that means investing in the business, that’s a great outcome to generate 40% FRE margin. With respect to cash and with respect to G&A, if you look at it on a quarterly basis, Q4 versus Q4, pretty much flat. Yes, on an annual basis up. But I actually think that we’re very focused on — I know that we’re very focused on managing costs and managing where we deploy our excess expenditures, and it’s really around investing in new product development, in distribution and investing for the future.

There are clearly things that we’re making investments in that will benefit us ’24, ’25, ’26 to enable long-term growth, and things like retail and private wealth really matter for that, less so in terms of what it does to ’23 FRE.

Operator

Our next question comes from Brian Bedell, Deutsche Bank.

Brian Bedell

Most of my questions have been asked and answered as well. But I just want to come back to the — actually to Investor Day targets that you laid out in ’21. You’re tracking ahead of those targets already with the exception of FRE, which I guess you’re on the way towards given its 40% target for 2024. But just wanted to get your conviction around reaching that level? Or is that going to be more of a Harvey decision in terms of potential new investments that you might be making and rather — you’d rather just focus, like you said, on FRE growth?

Curtis Buser

Brian, good question. And look, I’m incredibly proud of what Carlyle and the entire team has achieved ’21, ’22 because we set out a target of $1.6 billion for ’24, $800 million of FRE, $800 million of carry for $1.6 billion of pretax fee. We’ve swapped that from an outcome perspective already in ’21 and in ’22. So FRE at $834 million this past year, 40% up, I care much more about FRE dollars and growth in FRE dollars than I care about margins.

Look, margin is a tool to generate FRE dollars. And so whatever we can do to create more dollars, one tool is creating — is by margin. But however, I can get it, I’m going to get it. And you’re right, we set a target of 40% of FRE margin by 2024. ’23, I think, will probably be more on the flattish size to ’22, which will then cause pressure for ’24 to get to that number. I still think we can do it. Look, we grew from 33% to 37%, ’21 to ’22. So there’s no reason we can’t do that in ’23 to ’24, but time will tell. And look, again, it’s about growing FRE dollars. And so if I can get the FRE dollars going in the right way, that’s what I’m going to do.

Brian Bedell

That’s loud and clear. And then maybe just one last one. Just I guess you talked a lot about fundraising and the headwinds obviously on the private equity side. Maybe if you could just characterize what you’re hearing from LPs and other investors in terms of — now having Harvey on Board and how much of a ballast that is to confidence in the franchise? Or was that not so much of a headwind anyway, it was really just the headwinds in the overall industry and less related to your — to the leadership?

William Conway

This is Bill. In my discussions with the investors, and I was in Europe and I was in Asia and Japan. I would say, that I didn’t see anybody who didn’t invest with us because I was the Interim CEO, and we didn’t have a permanent CEO, and Harvey hadn’t been named at that time. There were perhaps some people who delayed and want to think about the decision and wanted to know who it’s going to be before they committed. But I don’t think there was any — I couldn’t point to any investors said they didn’t do it because we didn’t have the CEO. I think they may have — they didn’t do it now because we didn’t have the CEO, and we’ll see what happens when the CEO is named.

I do think a far bigger factor than the CEO is the market. And the CEO is — most of the fund investors, they care much, much more about the performance of their fund and the individual deals than they care about who the CEO is. So although I’m very excited about Harvey, and I think he’s going to be fabulous, the market, I think, is a more important factor in terms of growth in the PE fundraising.

Operator

Next question comes from Adam Beatty with UBS.

Adam Beatty

Just one question. It’s got 3 parts about the fundraising environment, not necessarily fund specific, but just kind of what you’re seeing. Number one, you mentioned LP liquidity needs. So I’m curious what’s driving those, whether it’s slower monetization or tighter financing or something else? Number two, big theme last year was denominator effect. How far along are LPs in terms of realigning around that and kind of getting past that? And number three is the reopening of LP budgets with the New Year, is it similar to what you’ve seen in past years or better or worse?

Curtis Buser

Adam, it’s Curt. I’ll start and then Bill can add in. Look, it’s always difficult to generalize these types of questions across all the different investor classes and everyone. So everyone just take that caveat very seriously as I attempt to address some of this. LP liquidity needs in general were really due to the fact that a number of funds invested and deployed capital very quickly across the industry and have come back for greater needs faster than expectations.

And then with the slowing down of the equity capital markets in particular, just as we’re talking about buyout in general, that has put some liquidity needs on some investors, not necessarily all. I mean, there are parts of the world, Middle East, in particular, where I don’t think that those needs are as apparent as in other places.

On the denominator effect, look, there were some green shoots early in the year in terms of potential changes with that, some resetting. I think that, that will get better over the course of the year. But again, it comes back to each individual investor type and how they’re viewing it. And so I think that, that will play out. And also, again, all investors are going to be seeking yield. And I think alternative assets is a great place to seek yield. This industry has proven well and it’s just generally done better. And so it’s more about getting them all access to this.

And then the new year, yes, that has an impact on, again, certain LPs in their allocations and how they work with their own investment committees. And yes, it is an impact for some. But again, in terms of quantifying on a broader basis, really tough to kind of do. So I don’t know if Bill is going to add anything?

William Conway

Well, I would say, I can’t break it down by category in terms of what the impact is going to be. I think it’s going to be better than it was last year. I do think that the LP liquidity creates an opportunity for Carlyle. We have a big solutions business of about $70 billion. And both in secondaries, primaries, co-investment, I think there’s going to be a lot of opportunity there, perhaps in some ways, offsetting some of the primary opportunity as LPs either reposition their portfolio or need liquidity for some reason, as Curt pointed out, not so much in some parts of the world, but in others.

Operator

And I’m not showing any further questions at this time. I’d like to turn the call back over to Daniel Harris for ready for closing remarks.

Daniel Harris

Thank you all for your time and interest this morning. We look forward to talking with you again next quarter. Should you have any follow-up questions after the call, feel free to reach out to Investor Relations at any time. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.