Carlyle Group Inc

NASDAQ:CG

Earnings Call Transcript 2021-Q3

[Operator]

Thank you for standing by. And welcome to the Third Quarter 2021 Carlyle Group Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] As a reminder, today’s program may be being recorded.

I would now like to introduce your host for today’s program, Daniel Harris, Head of Investor Relations. Please go ahead sir.

[Daniel Harris, Head of Investor Relations]

Thank you, Jonathan. Good morning, and welcome to Carlyle’s Third Quarter 2021 Earnings Call. With me on the call this morning is our Chief Executive Officer, Kewsong Lee; 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 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 IR website. It updates the progress we’ve made and the momentum we are building on our strategic plan to think bigger, move faster and perform better that we announced at the beginning of the year.

For the third quarter, we generated $151 million in fee-related earnings and $731 million in distributable earnings, with DE per common share of $1.54. We declared a quarterly dividend of $0.25 per common share.

I know it’s a busy morning, so to ensure participation by all those on the call, limit yourselves to one question and one follow-up and then return to the queue for any additional questions.

And with that, let me turn the call over to our Chief Executive Officer, Kewsong Lee.

[Kewsong Lee, Chief Executive Officer]

Thanks, Dan. Hello everyone, and thank you for joining us today. We are excited to have another opportunity to update you on the great progress we are making against the strategic plan and a record firm-wide earnings performance we delivered this quarter. Our third quarter results are exceptional across all three of our businesses with continued and sustainable progress in FRE, highest production of quarterly distributable earnings ever, and strong fundraising momentum

These results build upon a great first half of the year and illustrate the powerful upward long-term growth trajectory our diversified platform can deliver. As an update, let me start with three important points. First, we are ahead of schedule on our strategic plan across all of our businesses. Second, our focus on FRE and investment performance is paying off for all stakeholders.

And finally, one critical factor in this success is that we have built and aligned diverse and experienced leadership who are running our global firm. Thinking bigger, moving faster, and performing better is our mantra. It is helping us deliver on our priorities. Our strategic plan is already leading to strong results right out of the gate and more importantly, we believe it positions us to deliver continued earnings growth and strong investment performance over the long-term.

The second and third quarters were record breakers for us and we see continued growth from here. Just this quarter, we achieved record AUM of $293 billion and year-to-date we invested a record $20 billion and realized a record $29 billion. What we’ll describe to you today reflects our progress and we remain laser focused on continuing to execute our longer term goals. We have line of sight into how our strategic plan will generate growth and believe we can continue our momentum to deliver attractive results for our stakeholders.

As we generate an increasing level of retained earnings from strong DE over the next several quarters, we are actively assessing opportunities to invest in our platform to drive more sustainable FRE growth that expands on our strengths. We continue to build the team and infrastructure to ensure we are best positioned to pursue the right growth opportunities for Carlyle.

I am confident that we can grow both organically and through strategic acquisitions to diversify our businesses, build new drivers for future growth and increase our sustainable level of FRE.

Today, as you listen and analyze our results and commentary, please pay close attention to the accelerating activity across all three of our global businesses. We are investing, creating value, returning capital to realizations and fundraising that levels that drive line of sight to accelerating growth and earnings.

In regard to our investing, we see significant growth opportunities ahead. The reason is this, massive changes impacting industries and asset classes around the world in generating exceptional investment opportunities for private markets, which is the backdrop for our record investment pace. And our industry continues to deliver investment outperformance as demonstrated by Carlyle’s carry fund appreciation of 33% year-to-date.

Furthermore, we are better competitively positioned than ever before. As a global and diversified investment firm operating at scale, our platform approach enables us to capture opportunities by deploying capital to the sectors and regions of the global economy that are the most attractive. Businesses in these sectors are benefiting from the acceleration of disruptive change and we are capturing these opportunities across all of our investment strategies and investing capital more efficiently.

We are especially focused on trends that are converging, namely in key sectors of the economy like healthcare, where technology continues to generate growth in societal advances. We are also leaning into more traditional power allies like industrials and consumer, but we are bringing a modern approach to incumbent businesses and enabling faster growth for newer disruptive companies.

Furthermore, secular trends like sustainability offers the opportunity to invest in the future of renewables while also taking part in the massive transition that is underway. Demographic shifts like growing domestic consumption in China presents significant investment opportunities as do economies in transition like India and Japan.

And the potential for increased market volatility or higher interest rates is likely to create attractive investment opportunities across the global credit platform where we have grown to a record AUM of $66 billion, which is more than two times larger than it was less than four years ago.

Now in regard to fundraising, I want to underscore we are communicating and working with our limited partners better than ever before and have raised $40 billion to-date in 2021, an increase of 124% year-to-date over 2020. We will seek to continue this momentum over the next few years and if we are successful, this would provide substantial upside potential to our four year, $130 billion plus fundraising target and drive results beyond our FRE target.

We recently hosted our Annual Global Investor Conference with a 1,000 LPs joining around the world in a hybrid format. It was great to spend time in person with people in New York City and Hong Kong. We are encouraged by the feedback and the headline is this. Investors clearly want the strategies and solutions we have to offer across all three of our global businesses.

Our Global Credit segment’s broad spectrum of credit strategies positions it well to grow as the market continues to shift away from traditional fixed income to private credit. Our Global Investment Solutions segment has the scale, global reach and data to drive portfolio optimization strategies that are more important than ever in a world where private capital has become mainstream in a significant portion of our investors portfolios.

And in Global Private Equity, we are a modern day builder of businesses with more value creation levers than ever before to drive performance, which is critical in a market where competition is fierce and valuations are high. And on top of all of this, we believe we are an industry leader in integrating ESG throughout our firms and our investment processes throughout our value creation processes for the benefit of all stakeholders.

This is all about making everything we touch better including putting us much focus into how we run Carlyle as we do our portfolio companies. Ultimately, we are driving improvements and change across our entire business resulting in better decisions, outcomes and performance for all stakeholders. Curt will now walk you through the financial highlights for the quarter and provide more details on what drove our record results.

So I’ll wrap up with this. The firm is in great shape. We are more global, more diverse, in the midst of a generational evolution at a new Carlyle where our focus is on continuously improving how we drive value and generating attractive returns. We are ahead of schedule on our strategic plan. Our focus on FRE and investment performance is paying off and our platform is benefiting from the growth initiatives to diversify our earnings.

I am proud of our team who are doing a terrific job of executing and delivering on our priorities. I appreciate the hard work, as we accelerate our activity through the balance of this year and into 2022. Thank you. Over to you, Curt.

[Curt Buser, Chief Financial Officer]

Thanks, Kew, and good morning, everyone. As Kew said, this quarter’s standout performance is a result of a clear focus on executing on our strategic plan. To set the stage, our strong momentum in fundraising, record pace of capital deployment and string of successful realizations are driving a significant increase in the scale of our earnings.

These results are underpinned by attractive investment performance, and are fortifying our balance sheet to help us deliver long-term, sustainable growth in our global platform and fee-related earnings.

Now, let’s dig deeper into our record third quarter earnings. I want to underscore the broad based strength across all components of distributable earnings, fee-related earnings, realized performance revenue and investment income. We delivered record pretax distributable earnings of $731 million this quarter. To put that in perspective, that is more than the entirety of the first half of 2021 and is more than 50% larger than any prior quarter.

Our results are bigger, faster and better than they’ve ever been. Year-to-date, distributable earnings of $1.3 billion outpaces our full year performance in any year since our IPO by nearly 40% and this is without even accounting for what is shaping up to be a strong fourth quarter. On an after tax basis, we generated a record $1.54 in DE per share for the quarter.

Moving on to the components of distributable earnings, let’s start with fee-related earnings, which was $151 million in the quarter and $424 million year-to-date, up 23% compared to 2020 excluding the impact of litigation cost recoveries in the first quarter of last year. We expect management fees and fee-related earnings to move higher next quarter as we activate fees on our latest generation U.S. Real Estate funds and our new U.S. h U.S. Buyout and Growth funds.

Overall, we expect strong FRE growth over the next several years and are on track to hit our 2024 $800 million FRE goal earlier than previously anticipated.

The Global Investment Solutions segment, we doubled year-to-date FRE to $64 million, as strong fundraising and deployment drove a 22% increase in year-to-date management fees with high incremental margin as year-to-date FRE margins expanded to 37%, nearly 13 percentage points higher year-over-year.

Global credit grew fee revenues by $13 million and FRE by $8 million just since last quarter, a 30% sequential increase in FRE driven by strong capital raising and active deployment across the platform including record levels of direct lending origination and record levels of CLO issuance. In Carlyle Aviation, we completed the Fly acquisition, our largest fleet acquisition ever.

Turning to Global Private Equity, we expect FRE to accelerate next quarter and continue to grow throughout 2022 as we benefit from strong fundraising momentum by activating fees later in the fourth quarter on newly raised capital. The positive impact from our capital market strategy is becoming increasingly visible as it further integrates with all our global investment teams.

Net transaction and advisory revenue of almost $60 million year-to-date was nearly double last year and we expect fourth quarter underwriting activity to again drive significant transaction fee generation. Overall, our FRE margin of 33% year-to-date is up about 500 basis points over the past couple of years and is solidly on path towards our 40% target, which we are also likely to reach earlier than previously expected.

Net realized performance revenue of $534 million is far and away our record quarter and was driven by $14 billion in realized proceeds. Importantly, we continue to have $204 billion in remaining fair value across our portfolio, which positions us to generate a high volume of realization activity over the next few years. In the third quarter, we completed private sales across a variety of funds and geographies with realizations of large buyout investments like Novetta and Bountiful and growth strategies like Net Motion and Newport Healthcare, and in continued activity across our U.S. real estate platform.

We also took advantage of strong markets and exceptional investment performance with public secondaries including ZoomInfo, Ortho-Clinical and SBI Card. We have a significant backlog of realizations which close over the next few quarters and we expect to generate at least $450 million in net realized performance revenue over the next two quarters just from already announced sales with potentially significant upside from further realizations from our $19 billion public equity portfolio.

We continue to have confidence in our ability to generate a high level of annual net realized performance revenues over the next several years. Accrued performance revenue remains near a record level at $3.9 billion, down modestly compared to last quarter despite record realizations as our funds continue to perform and appreciate. At this level, the net accrual represents more than $11 per share in future pretax earnings.

We continue to have strong fund performance in a complex environment. Our global private equity portfolio appreciated 5% in the quarter and 31% year-to-date. This quarter we saw the strongest performance in real estate which increased 9% and the natural resources up 7%. Our broad CPE portfolio was up 4%, strong outperformance against the 1.5% decline for the MSCI All Country World Index. Global Investment Solutions had a great quarter once again with 10% appreciation across their portfolio and is now up 39% year-to-date.

This quarter’s strength was led by secondary Main Fund investments and in Global Credit, we continue to thrive providing attractive risk reward across the investment spectrum where our assets under management of $66 million have more than doubled over the past several years.

Realized investment income of $71 million in the third quarter reflects the strong returns and growing size of our on balance sheet investments, which totaled $2 billion at the end of the quarter. Year-to-date, realized investment income of $139 million is nearly triple the same period in 2020. And we are on track to exceed our 2024 target this year.

Our strong earnings have fortified our balance sheet at a great time as we see multiple opportunities to deploy our growing capital base to accelerate our FRE growth by investing in larger funds, seeding new investment strategies, supporting new business activities, and taking advantage of accretive M&A over time.

Given exceptional earnings and our opportunistic debt issuance last quarter, we expect to prepay $250 million in the remaining 2023 bonds in the fourth quarter. This will further improve leverage and boost our financial strength.

To wrap up, we are excited to be delivering on our plan and what that means for our shareholders. We are in fact, outperforming our own expectations, and believe we are well positioned to do so for the next several years. Our strong momentum is allowing us to grow our FRE and our DE and invest in Carlyle’s longer term growth. We are creating exceptional value for shareholders and we continue to deliver on this growth.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Glenn Schorr from Evercore. Your question please.

[Glenn Schorr, Evercore ISI]

Hi, thanks very much. Kew, it’s only been a few quarters, but as you guys addressed the conversation, a lot of your numbers are bumping up on the targets. And here we are in the end of 2021 and they are 2024 target. How do you – how do we think about – it’s great that the markets and your performance has gotten there? How do we think about, does that mean that we plateau for a little while or how do you think about the momentum going in and going through these 2024 targets and like 2021, and 2022?

[Kewsong Lee, Chief Executive Officer]

Hey, Glenn, thanks for the question and nice to hear from you. Look, we had a record quarter. We are well ahead of our strategic plan and I really do think this momentum is sustainable because we are seeing great activity, great energy across the entire firm across all of our businesses. We are making a big deal of we are thinking bigger.

Our funds are growing organically where our initiatives in global credit and our new platforms for growth are really taking hold. We are really moving faster, not only our funds – happening faster but you are seeing the results coming faster. And I think this quarter talks to the results. We are performing better. It’s not only at a corporate level with FRE which has it with FRE, which has accelerated and I think we’ll continue that path.

But all the hard work over the years of putting together these – our investments, constructing our portfolios and working with our companies to create value it’s really paying off. So, yes, the markets are robust and strong right now. But really the realization activity is a testament to all the hard work that’s gone into the ground to do great investing.

And I think all that performance just continues. So, across the firm, we see great energy, great momentum and quite frankly, very confident that this momentum is sustainable.

[Curt Buser, Chief Financial Officer]

Hey, Glenn, it’s Curt. And from my perspective, I only guess if I have ever been in a place where I have greater confidence and what I am seeing going forward and that’s really continued sustainable growth. And let me just give you a few points of what I am seeing. So first, right now, we are sitting on $30 billion of AUM that hasn’t activated.

Half to two-thirds of that’s going to turn on in the fourth quarter and that will take our $150 million of FRE that we just talked that our runrate of $600 million higher into 2022. So that’s a great place to be sitting from my place. Second, from a net realized performance revenue standpoint, $3.9 billion of net accrued carry, plus $116 billion of remaining fair value in the ground across our traditional carry funds really supports growth in net realized performance revenue and the sustainability that we have there.

And third, you can’t underscore the diversity of the platform. The strength that’s occurred in Global Credit and Investment Solutions really gets a diversified business out and going. And last, I am sitting on a much better balance sheet than we ever had which really gives us the firepower to grow sustainable FRE over time. And so, the place and balancing I look forward, this is a great position right now to be able to have confidence in what we can do going forward.

[Glenn Schorr, Evercore ISI]

Okay. I really appreciate that. Maybe I could squeeze in a follow-up on just, your capital raising has been great. You mentioned about ahead of targets. Can you talk about what you are currently doing in the wealth management channels and what you would like that to be in the future? Thanks.

[Kewsong Lee, Chief Executive Officer]

Sure. So, let me take that, Glenn. So, first, our fundraising, we are on a record pace. So, $40 billion year-to-date, $50 billion over the last 12 months and on that $50 billion, $14 billion in Global Credit, which is really just been clicking every quarter very nicely, very diversified record CLO pace, but not just the CLO, it’s across the platform.

Second, in Investment Solutions – Global Investment Solutions, $11 billion over the last 12 months. You are seeing the growth in that platform. As you go back in time, I mean, Global Investment Solutions was like a third of what it is today. The growth that we’ve had there is really been significant and then, obviously, $25 billion in global private equity over the last 12 months really serving that business off of further growth.

So, let me be clear in terms of what we are in terms of the retail channel like, our plan is really built on remain focused on our institutional channel. It’s a long-term capital. It’s extremely attractive. It’s driving our top-line growth. If we execute our plan, our FRE is going to grow rapidly over the next few years and we have plans to have that growth thereafter.

And today, we largely target retail through our high network channel, through feeder funds. That’s been very successful over time. And that channel is generally been very successful because of our strong brand drives 10% to 15% of our capital raising through those channels. But let’s be clear. Our focus on FRE has really produced results. It’s being growing 20% on a CAGR perspective over the last five years and remains so today. And the fundraising momentum that we have will continue to allow us to grow our FRE and the business.

[Glenn Schorr, Evercore ISI]

Thank you very much.

[Operator]

Thank you. Our next question comes from the line of Bill Katz from Citigroup. Your question please.

[Bill Katz, Citigroup]

Okay. Thank you very much for taking the question this morning and the premiered comments. Just coming back to, maybe capital deployment. It sounds like, you might be gearing up to be a bit more acquisitive and you mentioned things like sustainable and further FRE growth. That sounds to me like maybe some potential permanent capital opportunities. I was wondering if you could talk a little bit about sort of where you see the opportunity and then related to Curt’s last commentary that, your 2024 plan is to get into institutional. Might there be an opportunity here to expand the retail, as well. Thank you.

[Kewsong Lee, Chief Executive Officer]

Hey, Bill. It’s Kew. Big picture, we are going to be generating a lot of cash on to our balance sheet over the next several years as our realizations materialize. We are going to take that cash and look for ways to invest in FRE generative businesses. So repurpose that balance sheet capital into sustainable growth businesses that drive FRE. So big picture, that’s what we are looking to do. I want to remind you that none of the targets that we’ve laid out in our strategic plan takes into account for any strategic activity. So, all of that would just be in addition to.

And finally, I think I said this in the past the likely areas are more in the Global Credit areas or in solutions, as opposed to private equity in terms of where we think the opportunities would be. We are thinking about it very globally. And we’ll be in touch when something happens and with that, I’ll pass it over to the second part of the question to Curt.

[Curt Buser, Chief Financial Officer]

So, on the capital markets piece, Bill, our capital markets business is doing real well, really underpinned by the greater balance sheet capacity we have to support that business. When you see in the transaction revenue about $60 million year-to-date double last year’s number. Two-thirds of that revenue is really coming out of the capital markets business, which is up from almost nothing a year ago. So that’s really what’s causing on growth there. It’s working very nicely and again because of the balance sheet strength allows us to continue to grow. And so, I am very confident in our ability to get that up over $100 million in the next couple of years.

[Bill Katz, Citigroup]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from the line of Alex Blostein from Goldman Sachs. Your question please.

[Alex Blostein, Goldman Sachs]

Great. Good morning. Thanks everybody. I’ll try to squeeze in two-parter and but overlay to the same topic which is fundraising. So, I guess, Kew, big picture for you. Obviously, the flagship fundraising are going incredibly well, but as you look at the business over the next kind of two to three years, what are the strategies that you expect to be kind of fundraising on a more continuous momentum? Just to kind of give us a sense. So this is a new baseline and then we are going to grow off of that baseline.

And then, just a numbers clarification question for Curt, can you just give us an update on the final close of the U.S. Buyout Fund? And I think I heard you say, kind of how that’s going to translate into FRE for the fourth quarter, but maybe just give us the pieces like what’s revenue, what’s expenses? Kind of how we think about the contribution from the region raise into the fourth quarter? Thanks.

[Curt Buser, Chief Financial Officer]

So, let me start and then, Kew will take. So, we will probably handle this a little bit in reverse order as the way you ask it. So, first, as we kind of laid out, our fundraising momentum is fantastic and we are tracking to record levels. And we’ll probably be able to exceed our $130 billion target or deliver upon that earlier than we thought. We are seeing exceptional fundraising in global credit and in global investment solutions and also in private equity as you point out. And we are seeing larger raises. So, we are seeing the credit opportunities fund coming stronger. We are seeing our real estate funds coming stronger. The secondaries business within Investment Solutions coming in stronger. So all of that has led to the doubling of year-to-date fundraising. With respect to specific funds that remain in fundraising, we can’t really comment on those. And so, with respect to U.S. Buyout, et cetera, I can’t really go into detail other than our overall fundraising momentum is good. We will be activating fees here in the fourth quarter. That will have a pick up, but things that remain fundraising, I can’t give you all of those specifics and details. But again, things are looking really well.

[Kewsong Lee, Chief Executive Officer]

Yes. Hey, and Alex, look, just a few high level commentary first. The secular trends towards private markets just continues and after September conference, but also recent road shows with LPs. The interest level and the desire to allocate into alternatives, into private markets continues around the world across all strategies.

Second, LPs are looking to deepen their relationships with their largest and most strategic GPs. That trend positions Carlyle exceptionally well. Third, we are seeing tremendous benefit in cross-selling from one strategy into another with our LPs and as our platform broadens and diversifies, we are seeing more and more opportunity to do that.

Finally, let me just say with respect to credit and in solutions, in credit, there really is a shift happening where flows are moving away from traditional public fixed income securities where yields are virtually zero into private credit solutions. And I think that is a secular trend with real tailwinds that we are going to benefit from.

And in solutions, as I said in my opening remarks, alternatives are not alternative anymore. They are mainstream. It’s a big portion of our LPs portfolios and they need portfolio optimization strategies as it relates to secondary solutions or co-investment strategies to help the deployment and all of that plays to our advantage with our very strong solution segment.

So, I am seeing very good tailwinds and secular forces which are going to be a good momentum for our fundraising continuing. And I just want to say one last thing. You cannot do this without great investment performance. And we’ve got great investment performance. Our portfolios are in great shape. They are well constructed.

Our teams are working very hard. And I suspect when you marry that great performance with the types of trends I just mentioned, it bodes well over the longer term for our fundraising momentum to continue.

[Alex Blostein, Goldman Sachs]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from the line of Chris Kotowski from Oppenheimer. Your question please.

[Chris Kotowski, Oppenheimer]

Yes. Good morning. Thanks for taking my questions. I guess, I want to go back to comment about how as you realize these gains, the gains in the portfolio, your cash is going to build up on Carlyle’s balance sheet. And historically, Carlyle paid that all out to shareholders. And obviously, you’ve been retaining it all and you pointed to the factor that you want to do acquisitions. I guess, how do you weigh that against the kind of easier and how do you weigh making acquisitions against the easier and more certain path of doing share buybacks and really shrinking your flows? I mean, just my back of the math suggested that, just this quarter is overage versus your dividend would have retired – would have been and afterwards higher about 2% of your stock and that would be 2% FRE growth with a 100% certainty forever. So, how do you weigh acquiring other people’s companies versus acquiring your own?

[Curt Buser, Chief Financial Officer]

Chris, it’s Curt. Let me start and thank you for that insightful question. Look, it’s really great in terms of where we are today. The balance sheet is much, much stronger than where it had been before and so, the growth in a very short period of time is really been remarkable, which allows questions like you are asking to really even be on the table.

So, let me start with a few basics of kind of where we are. First, you saw we just increased our authorization to buy back shares. So, on January 1, there will be a $400 million authorization in place to buy back shares to be clear. We are planning to use that to make sure that our dilution does not exceed 1% per year and we will be aggressive where that makes sense in terms of buying back shares.

Second, we are going to – with this exceptional earnings that we have, I got to pay some taxes. And so, we are going to pay a little bit tax since we are going to pay back some debt. But that’s kind of just clean up and just kind of leaving us really still in a really great financial place. But how we compare, it’s really about driving value for shareholders.

And growth is really being rewarded very significantly in the marketplace. So I want to use capital to drive growth, so that we are driving value. And how we do that? Well, by raising larger funds and so that requires more capital off the balance sheet to cover our share to raise larger funds. We are looking at newer strategies.

Initially the stuff that’s aligned with kind of what we are doing, so our capital markets business, the insurance business, all of that needs more capital as well. And so we need to have that to be able to grow. The newer strategies like infrastructure, that while we have – we think we can really take advantage and grow that much larger, that will require some capital. And then there is M&A opportunities that Kew already spoke about. But in the end, all of this is about driving sustainable FRE growth and I believe that that gets rewarded in the marketplace.

[Kewsong Lee, Chief Executive Officer]

Hey, Chris, it’s a great question. And how we repurpose that cash and invest it to grow strategically to drive FRE and drive growth is absolutely the bigger picture for what we need to do. Obviously, while investing well and running the firm well. Let me just add to what Curt said. It’s all about being incredibly strategic and incredibly thoughtful with these acquisitions and what we are looking to do.

But I’ll just point you to four to two, Carlyle Aviation, our CLO business, Health Invest. These are all examples of really good uses of our balance sheet money to develop businesses which are scaling and growing. So, what are the types of things that we are looking for? Go back to our strategic plan, we’ve been very clear from the beginning.

We are looking for big markets, better scalable that generate recurring and sustainable FRE that we can grow. And that’s my criteria and as our balance sheet gets stronger in a very purposeful, and thoughtful way, we do intend to look for strategic adjacencies that will extend our platform.

[Chris Kotowski, Oppenheimer]

Okay. That’s it for me. Thank you.

[Curt Buser, Chief Financial Officer]

Thanks, Chris.

[Operator]

Thank you. Our next question comes from the line of Michael Cyprys from Morgan Stanley. Your question please.

[Unidentified Analyst]

Hey, good morning. This is [Indiscernible] standing in for Mike Cyprys. Just on comp restructuring, we’ve seen some peers make changes to their comp accruals, shifting more comp to carry and reducing the comp that comes from FRE. Just curious on what kind of scenario environment would it make sense for Carlyle to do this? What maybe some challenges or drawbacks from making those total changes? Thank you.

[Kewsong Lee, Chief Executive Officer]

Hey, thanks for your question. Look, we have a really good plan in place. We are comfortable with our plan. We are executing against the plan. The plans resulted in growing FRE and growing earnings. Everything seems to be clicking just right. What else like is, our financial reporting is clear, transparent, easy to understand. We continue to obviously look at different ways to improve the FRE and take advantage of different opportunities. But there is nothing in our plans to do a major comp restructure as you are suggesting. And we would only be interested in one that’s really subsided in nature as opposed to just changing geography on the P&L. So, when and if there is ever something for us to do, we will obviously report that to you, but at the present time, everything that you and I and saying is that’s kind of running pursuant to our existing strategies.

[Unidentified Analyst]

Thanks for taking my question.

[Operator]

[Operator Instructions] Our next question comes from the line of Rufus Hone from Bank of Montreal. Your question please.

[Rufus Hone, Bank of Montreal]

Great. Good morning. Thanks for taking my question. I was hoping if you could touch on asset origination and the opportunities in private credit. I know you already have some established origination channels, but we are seeing some of your peers really double down on this and start to acquire platforms and initiate asset sourcing partnerships. Should we expect to see more of this from Carlyle? And would you go down the acquisition with the partnership groups? Thanks.

[Kewsong Lee, Chief Executive Officer]

Hey, thanks for the question. First, the credit business has been doing really well. The growth there has been significant. We doubled AUM over the past couple of years. The annual rate of growth in AUM is around 20%. If you look at the fundraising very consistent. We are coming off of a really – a record-setting paces in terms of CLO issuance, demand has been fantastic. But we continue to look really at kind of other areas to continue to build on our platform.

Now, let me be clear, our – two things that are or a couple of things to be clear. One, taking a platform approach in terms of how we are building the business. Two, very much focused at the present time on investment-grade credits and three, we are looking at cash yield and four, our investors. And generally been successful on all those levels. So, just to remind people, our credit opportunities business has going very well, raising its next fund. It’s in deployment grade. The fund – the performance there has been very strong. CLO business already talked about aviation, great business, just a very large transaction again performing exceptionally well. Expanding in both infrastructure credit, real estate credit. That provides further opportunities and let’s not forget, the direct lending business which has had a record origination here in the quarter. So, again, platform approach to deliver the results.

[Operator]

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

[Gerald O'Hara]

Great. Thanks. Maybe just one on kind of the trajectory of FRE margin from here. You clearly heard the kind of continued focus to build team, the infrastructure, as well as obviously some very strong, I guess, forward-looking fee-related earnings coming online. Can you help us kind of balance the two? And then I would assume some of just the increased spend as we move kind of into those post-pandemic world. But how we should think about the pace between here and as Curt, you mentioned the ahead of schedule as it relates to the 40% target? Thank you.

[Curt Buser, Chief Financial Officer]

Gerry, thanks. Look, as I said before, we care much more about FRE dollars than FRE margin. And so, we are going to first and foremost chase increase in FRE dollars. Margin is a way to get there. But it’s not the end all by itself and comes down the dollars in the door. So, that’s our number one goal. From a margin perspective, we’ve been growing it very nicely. So, 34% here in the quarter, 33% year-to-date. You can see in the Global Investment Solutions business, already up to 37%. So, lot of things are really coming together nicely. Probably my lowest margin business right now is still in credit. That’s because we’ve been building that platform. That should be our leading piece just as we said at the beginning of the year, that’s going to grow and really drive a lot of FRE margin expansion as we go forward. And so, look, I think we are on track to hit the 40% earlier than 2024. And the exact when we get it? I don’t know. But it’s going to be sooner than 2024. And we are going to have a nice growth here coming next year for all the reasons that I have already said. And the business is shaping up real nicely. We are focused obviously on cost, but more importantly on growing top-line revenue.

[Gerald O'Hara]

That’s it for me. Thanks for taking the questions.

[Kewsong Lee, Chief Executive Officer]

Thanks, Gerry.

[Curt Buser, Chief Financial Officer]

Thanks, Jerry.

[Operator]

Thank you. This does conclude the question and answer session of today’s program. I’d like to hand the program back to Daniel Harris for any further comments.

[Daniel Harris, Head of Investor Relations]

Thank you very much for your time today. We know it’s a busy period. We’ll look forward to speaking with you on next quarter’s call and we’ll be at several conferences during the fourth quarter. So, we’ll look forward to, to that as well.

Have a great day.

[Operator]

Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.