Carlyle Group Inc. Q3 2025 earnings call

Thank you, Michelle. Good morning and happy Halloween, and welcome to Carlyle's third quarter 2025 earnings call. With me on the call this morning is our Chief Executive Officer, Harvey Schwartz, Chief Financial Officer and Head of Corporate Strategy, John Redett, and incoming Chief Financial Officer, Justin Pluff. Earlier this morning, we issued a press release and a detailed earnings presentation, which is available on our Investor Relations website. This call is being webcast, and a replay will be available. We will refer to certain non-GAAP financial measures during today's call. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. We have provided 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 factor section of our annual report on Form 10-K that could cause actual results to differ materially from those indicated. Carlyle assumes no obligation to update any forward-looking statements at any time. In order to ensure participation by all those on the line today, please limit yourself to one question and return to the queue for any additional follow-ups. With that, let me turn the call over to our Chief Executive Officer, Harvey Schwartz.

Thanks, Dan. Good morning, everyone, and thank you for joining us. We delivered another strong quarter of results as we continue to execute our strategic growth plan. For the third quarter, we delivered FRE of $312 million and now have generated $946 million year-to-date, up 16%. Record AUM of $474 billion, up 7% year-to-date. Organic inflows of $17 billion in the quarter and nearly $60 billion over the past 12 months, with significant capital coming from credit, secondaries, and global wealth. With this momentum, we feel confident about exceeding the financial targets we updated last quarter, which included full-year FRE growth of approximately 10%, up from our prior outlook of 6%, and full-year inflows of $50 billion compared to our prior outlook of $40 billion. Before I dive into more specifics of the quarter, I'd like to address the macro environment.

As we look across markets today, this remains a somewhat complex but quite resilient environment. While the markets have been impacted by ongoing headlines related to policy shifts and geopolitics, the underlying health of the global economy continues to be strong. Inflation is moderated, balance sheets are healthy, and overall, consumers are still spending. With official government data delayed by the shutdown, earlier this month, we released Carlyle's proprietary U.S. economic data. These indicators are derived from our portfolio of nearly 300 operating companies and more than 700,000 employees. These insights provide one of the few real-time views into the economy: steady EBITDA growth, continued investment in technology and AI infrastructure, and resilient consumer demand. Turning to credit markets, there's clearly been a lot of focus here over the past several weeks.

To date, our own market and portfolio data are not signaling any broad deterioration in overall credit quality or systemic risk. Consistent with the economic data I just walked through, fundamentals remain pretty solid, and credit events have been idiosyncratic. Of course, the credit cycle is evolving as it should, repricing where necessary, but again, not flashing broad stress. Capital markets activity has meaningfully accelerated. Announced M&A volume was up more than 40% year-over-year in the third quarter. IPO volumes are up 60% year-to-date, with increased activity during the quarter. Now turning to our global private equity business, we've capitalized on our improving transaction environment, returning capital to our limited partners. Over the past year, we have returned $19 billion in capital to investors in global private equity, 150% of the industry average. Note, this does not include $5 billion of signed transactions. Our momentum internationally continues.

In Japan, we announced a successful IPO of Orion Breweries. This marks a positive indicator for the broader IPO market and is another important milestone for our team in the region. In Europe, we recently completed the sale of Calystone and announced the sale of HSO. Lastly, in private equity, we recently announced the EUR 7.7 billion carve-out of BASF's coatings business, leveraging our global industrials platform and deep carve-out expertise. In the past 20 years, Carlyle has done 19 industrial corporate carve-outs with an average IRR of 25%. Another great example of the unique operating skill set we bring to our investors. In Carlyle AlpInvest, the team continues to deliver exceptional growth, with FRE up more than 80% year-to-date. Last month, we closed our largest-ever secondaries fund, $20 billion, further scaling the business.

We recently closed a $1.25 billion publicly rated GP-led collateralized fund obligation, the largest of its kind to date. This underscores Carlyle's leadership and innovation within a rapidly expanding segment of the marketplace. We also recently completed a $550 million credit secondaries continuation vehicle, reflecting the evolution of our business across newer asset classes. Carlyle AlpInvest is a market leader at the forefront of an industry with strong secular and cyclical tailwinds. In global credit, our platform continues to scale. During the quarter, inflows into our asset-backed finance strategy were almost $2 billion, highlighting the continued demand for private investment-grade assets. Our strategic approach to insurance solutions continues to pay dividends across all aspects of our investment management capabilities, including our partnership with Fortitude Re and with our third-party insurance clients.

Justin will get into more details about Fortitude Re, but insurance remains a key driver of growth for Carlyle, and we continue to see momentum across the platform. Finally, moving on to global wealth, our momentum remains strong. When I first joined Carlyle, we were attracting about $300 million per quarter in evergreen wealth inflows. Today, we're running at 10x that level, at $3 billion in inflows, our best fundraising quarter in global wealth ever. To be successful across all aspects of wealth, retail, and retirement, you need experience, scale, brand recognition, and diversification. Part of our strategy is partnering with extraordinary brands, like our recent announcement with Oracle Red Bull Racing. This marks the first-ever private markets partnership in Formula One and aligns directly with our long-term global wealth strategy to reach new clients and deepen engagement in key markets.

Over the last two and a half years, we mobilized quickly to capitalize on the growth of private markets and retail. We continue to invest heavily into the business, adding resources and platform partnerships to drive growth. To wrap things up, we are well on our way to exceeding our financial targets for this year and have very strong momentum heading into 2026. With that, let me turn things over to Justin.

Thanks, Harvey, and good morning, everyone. Q3 was yet another strong quarter, consistent with the long-term growth trajectory we've established. We generated $368 million of distributable earnings, or $0.96 per share. Year-to-date, distributable earnings totaled $1.3 billion, or just over $3 per share, up 10% from last year. Fee-related earnings were $312 million for the quarter, up 12% year-over-year. This increase in FRE has been fueled by organic top-line growth. For Q3, total fee revenue increased 11%, and year-to-date, a 13% growth rate represents our fastest pace of growth in the last three years. Roughly 55% of firm-wide FRE now comes from global credit and Carlyle AlpInvest. That's up from about 25% just five years ago. FRE margins remain strong at 48% for the quarter and year-to-date, exceeding last year's record of 46%.

Capital markets and transaction fees were $32 million, up almost 20% year-over-year, and have more than doubled over the past 12 months. As we said throughout the year, our FRE growth is entirely organic and reflects the scalability of our model and operating discipline across the firm. We are on track to exceed our full-year target of at least 10% growth in FRE while continuing to invest for the long term. Let me turn to a couple of highlights for our businesses. Carlyle AlpInvest delivered another excellent quarter, raising $6.3 billion of the capital, bringing the year-to-date total to more than $15 billion. Third-quarter inflows were driven by both institutional demand and strong momentum in our global wealth products. AUM at AlpInvest now sits at $102 billion, up more than 20% year-to-date.

FRE at AlpInvest now represents 23% of Carlyle's FRE, about triple the level from just two years prior. Global credit generated nearly $10 billion of inflows this quarter, and over the last 12 months, inflows have totaled $31 billion, helping lift total AUM to $208 billion. Global credit AUM now comprises 45% of firm-wide assets and has grown at a 33% CAGR over the past five years. Global credit's FRE is now nearly one-third of Carlyle's total. Our global credit business is comprised of a diverse set of platforms that deliver attractive risk-adjusted returns for our investors. Our $87 billion insurance solutions platform is anchored by our strategic partnership with Fortitude Re and has been quite active over the past few months.

It closed its $4 billion reinsurance agreement with Unum, its fourth reinsurance transaction this year, issued an inaugural $500 million funding agreement-backed note, and recently launched a reinsurance sidecar focused on driving growth in Asia. Together, we believe these initiatives will lead to more than $20 billion of new AUM in the intermediate term. Our leading nearly $50 billion global CLO platform had inflows of more than $3 billion in the quarter. Credit quality remains strong, and the business has recently been recognized for having among the best performance across all U.S. CLO managers this year, with defaults running well below the industry average. Our $13 billion direct lending platform has been growing at a 20% CAGR the past five years. We believe the market opportunity for direct lending will continue to grow, and we are continuing to invest in this platform, adding resources across leadership and origination.

Credit quality remains healthy across the portfolio, with realized losses running at an average of just 10 basis points per year over the past decade. Our $10 billion asset-backed finance business raised $2 billion just this quarter, and our leading $20 billion opportunistic credit strategy continued to deploy its third vintage fund and is quickly approaching its next fundraise. Shifting now to global private equity. Over the past year, we have attracted nearly $9 billion of capital into our GPE strategies, and today, we have $40 billion of available capital to deploy across the platform. We're excited about our growing transaction pipeline as we head into the fourth quarter, including the recently announced E7.7 billion transaction with BASF in partnership with the Qatar Investment Authority. We also have nearly $5 billion of announced exit transactions that we anticipate to close in the coming quarters.

While Q3 was a lighter realizations quarter, we expect a significant step up in Q4. In addition to this, as you may have seen, one of our U.S. bio portfolio companies, Medline, filed a registration statement with the SEC in connection with a proposed IPO. We remain excited about the future of Medline and congratulate the management team on all they have accomplished so far. In global wealth, our evergreen vehicles continue to scale quickly. We currently have more than $32 billion of evergreen capital, and we raised $3 billion across our evergreen wealth products this quarter. The $6 billion raised over the past year reflects a 90% growth rate from the same period last year. Notably, our new Carlyle AlpInvest Cap Solution in partnership with UBS saw strong demand in its first full quarter and has already surpassed more than $1 billion in assets.

Finally, I'd like to say a few words about the state of our balance sheet and capital management activities. During the quarter, we took advantage of strong debt markets and issued $800 million of 10-year notes at 5%. This extends the duration of our liabilities and leveraged our strong credit rating. This capital provides additional flexibility to invest in growth initiatives in the coming years. We also repurchased over $200 million of stock in the quarter, reflecting our conviction that Carlyle shares continue to be an attractive investment. We are disciplined and opportunistic when allocating capital, balancing share repurchases with investments to drive future growth. Our balance sheet is strong and well-positioned to support our organic initiatives and the firm's long-term financial flexibility. To summarize, our third-quarter results highlight continued growth, earnings diversification, and operating momentum across the platform.

We're executing well, scaling efficiently, and delivering attractive results for both shareholders and investors. I look forward to meeting and working with all of you more over the coming months. Now, before we get to Q&A, I'd like to hand things over to John for some concluding thoughts.

Thanks, Justin. Good morning, everyone. Let me make a few points on the progress we've made on our strategic plan over the last two years. We grew AUM 25% to nearly $475 billion. In the last 12 months, we grew FRE more than 50% to $1.2 billion. Not only did we grow FRE, we improved FRE margins by over 1,200 basis points. We overhauled our capital allocation and compensation strategy. We returned more than $2 billion in capital to shareholders through dividends and repurchases. We also implemented a strategic update to our compensation strategy to increase alignment with all stakeholders. This allowed us to pay more carry to our employees and more fee-related earnings to you, our shareholders. We overhauled our global wealth strategy. As Harvey said, we increased our inflows 10x. Lastly, our focus on capital markets has clearly generated momentum.

We have more than tripled our revenues over the last two years to almost $240 million. The positive momentum we carry into 2026 is the direct outcome of the extraordinary work of our people. I'm excited to begin my next role leading global private equity, a business with world-class investors and significant momentum. With that, let me turn the call over to the operator for your questions.