Good afternoon. I'm Patrick Davitt, the U.S. Asset Manager Analyst here at Autonomous. It's my pleasure to welcome Carlyle CEO Harvey Schwartz back to the conference.
Patrick, great to be here. Good to see everybody. Thanks for being here.
As a reminder, if you want to try to get your own questions in, I have a Pigeonhole here on this PDF, and you can do that through your device, and I'll try to work it in as I see fit. Harvey, thanks again. It has been just over two years now since you took over as CEO. I think it'd be great to start with an update on your key takeaways from those first two years. What have you learned? Biggest surprises, biggest challenges, and any strategy shifts you now think you might need to make?
It is great to see everybody. I would, maybe at the highest level, look at the last two- years as implementing strategic growth initiatives, which I outlined with the team during the first year. Separately, let's just call it sort of operational improvements to the platform. Let's start with the former. On the strategic growth initiatives, it did not take long coming into Carlyle to assess the incredible capabilities of the team, the diversification of the footprint and the business model, and really the history and the power of the brand to very quickly identify key areas where we could add value to our clients and growth. In no particular order, the secondary business, Carlyle AlpInvest. Tremendous track record, 25-year history, acquired by the firm in 2012 for something like $25 million, $90 billion of assets, growing incredibly quickly.
Capital markets, insurance, the credit platform. We identified all these wealth and reorganized parts of the businesses to really mobilize the teams to execute against those initiatives. You can clearly see the momentum behind those initiatives really starting to pick up in the, I'd say, one year in, and certainly in the third, fourth-q uarter of last year, in the first- quarter of this year. You just pick capital markets. I think in the six-month period, the two-quarter period we just went through, capital markets was $150 million of revenue. That's better than any full year the firm has ever had. That's in a pretty, I'd say, average operating environment. Of course, those capital markets revenues, we're not committing any balance sheet. That's just like literally strategic value-added, super high-quality revenues. You could see in an operating environment that was much more active.
We have gone back. We get this question a lot. What would that look like at a peak operating environment? That is well over $300 million. That is a key driver. You have seen the wealth growth in terms of the footprint and the solutions that we have launched, CAPN, and there are other solutions pending. Of course, the growth in credit and insurance. Broadly speaking, I am super proud of what the team has done in terms of the growth initiatives. Now, on the other plank, let us just say operational efficiencies, we can break that down in terms of cost control, really addressing what was an inefficient deployment of resources and capital management. On that front, if you want to use FRE as a proxy, FRE is up close to 40% in two- years since I joined.
Operating margins were up 900 basis points, more in line certainly with the industry. We were last in the industry in terms of operating margins. Now we're certainly in line. I think there's more room to grow there, but it's not really a cost story at this point. We obviously overhauled the entire compensation strategy, which was really a win-win for our LPs, our shareholders, and obviously our teams want more alignment. That was implemented, and that's been a huge success. Lastly, on the capital management, we announced the share repurchase. We're over 50% of the way through that. I would say everything is coming together as well as we could expect, given it's a bit over two years as a new CEO coming in. I'm super proud of all the work done by the senior leadership. They've really come together tremendously well.
You've seen it in fundraising, raising over $50 billion in the prior four- quarters. We had a great first- quarter. Momentum seems quite good. Overall, I feel really good about what the team has done.
Great. We'll dig in on a lot of that as we get through the conversation. Maybe to start, given we have most of the major alternative managers here on the macro side, I've been asking everyone kind of similar high-level questions to compare and contrast. Obviously, it's been a very volatile couple of months. I sense, despite the recovery in markets, there's still a lot of concern about sticky inflation, higher-for-longer rates, slowing economic growth. Do you agree with those concerns? What's the current thinking inside Carlyle on things like inflation rates in the economy?
I'll make a couple of points. That could be an entire 50- minutes, by the way.
Yeah, I know.
I'll make a couple of high-level points. I think there's a real temptation for all of us who have been doing this for a long time to make comparisons to prior- cycles. In some ways, I think that makes a huge amount of sense. Although I do think this is entirely different and unique because what we're really going through is a global policy shift, which is really amplified by the new administration's tariff policy, but was broadly in place starting several years ago. Again, like I said, this could be a 50-minute conversation itself, so I don't want to go through the course of history.
If you really think back, the mega trends that drove economic development for 50- years, globalization was really about the integration of global economies, more efficient allocation of capital, both human and financial capital, declining interest rates, deflation, very limited geopolitical conflict. The last several years have clearly been a trend in the opposite direction. You have the war in the Middle East. We obviously have the war in Europe. The sort of delinking of the global economy was already starting. The whole discussion about onshoring and having hyper-optimized supply chains, the pandemic really reminded everyone that there is risk in being hyper-optimized. That was all part of this too. We came into the new administration with incredibly high hopes. I do think initial conditions are very relevant here. We came in with the dollar kind of at highest levels ever, U.S.
Stock market at highest levels ever, and an expectation that the administration would be very pro-growth, friendly to business. I still think fundamentally that is the policy plan. If you step away from the news headlines and the tweets and you sort of look through the noise, the policy plan is still very friendly to business, very pro-growth. The tariff discussion obviously is a policy implementation we just have not experienced before. That would be the key thing I would say because, again, we can compare this to prior periods, but the fact that this is a policy-driven plan makes this somewhat uniquely different for a bunch of reasons, not the least of which policy can shift, and we have seen it shift very, very quickly. We have seen announcements about policy implementation, European tariffs, and then a switch several days later. It can be quite fluid.
I think as it relates to how does that then translate into the economy? When we talk with clients around the world, and I've been in Asia, as you know, Europe, and having very high-level conversations with administration officials, politicians around the world, and all of our clients, CEOs and CIOs, I would say we're in a period of uncertainty, which leads to lots of questions, but completely unlike 2008 or the pandemic or 2000 or 1998. These are just wholly different situations, which is why you see the markets being pretty cooperative after Liberation Day, obviously a big sell-off, but pretty cooperative. Credit markets are functioning. Bond markets are functioning. Spreads are reasonably tight, but there is this uncertainty element to what is the final landing point of equilibrium around the tariff policy.
I think we're in this period for several months where that uncertainty leads to delayed capital markets activity, possibly delayed monetizations, a risk premium attached to committing capital. That's not just in this business, but this is in all businesses around the world because you need more certainty to run your business. A certainty around policy is certainly something that all businesses are looking for. It's very obvious the administration's aware of this. They want to get through this period of uncertainty as quickly as possible, and they're obviously doing all that. I feel like we're going through this period of uncertainty, which will pass, but it does have something of a chilling effect on business decision-making, which I think is totally understandable.
As it relates to interest rates specifically, all of our data would suggest, and I think as all of you know, we have portfolios. We only have 2,300 people on the team at Carlyle, but we have about 700,000 employees in our portfolio companies around the world. For those of you who notice, that's down from a million. That's because we've been monetizing lots of assets in the past year. We get really, really good proprietary data out of these 700,000 employees rolled up in these companies. Our data basically leads a few months based on the public data. We could see the uptick in inventory accumulation in the first quarter. We were not surprised in the slightest by the negative GDP print. We could see all that in the data. I would say EBITDA is growing quite well in the companies. Performance remains good.
We haven't seen drastic adjustments to hiring. Why is that? Because I think there's confidence in that even though the policy implementation has been a little- bit start- and- stop, that we're headed towards a constructive outcome. Companies aren't aggressively withdrawing or cutting costs. They're still positioned quite well for growth. This uncertainty, of course, translates into the real economy over a period of time. I know there's been a lot of debate about what the Fed does. I'm just giving my personal opinion. I don't think it really matters. I think the Fed has been super clear about their communication. They have said, "We're in a period of uncertainty. We want to see what the data tells us. If inflation remains sticky, then we'll keep rates where they are. If inflation gives us some flexibility," they have huge policy flexibility to cut rates.
I think this Fed has demonstrated historically a huge preference or a willingness to cut- rates. I think they would be super responsive. For those who are kind of wishing for the Fed to cut- today or that the Fed cutting today is a positive, I honestly, I do not see it. We did not see it a year or two ago when people were calling for it. I think it means that the economy is slowing. We do not root for the economy to slow. I think a great outcome would be we get through this period of uncertainty. We see lots of capital being committed. A lot of these transactions now start to translate through the economy. We get some resolution on tax policy and the other administration's sort of initiatives. I think it would be a great outcome if the Federal Reserve did not have to cut- rates.
I think it would mean the economy is really cooking along quite well, and we haven't had inflation- spike. I think that would be a great outcome. I think I'm an outlier.
That makes sense, though.
I loved QE for a while. Then it was too much.
On the uncertainty issue, news hit yesterday that you just met with the Chinese vice premier late last week. Thanks for rushing back to be with us.
Yeah, no, I changed the whole schedule for you, Patrick.
More importantly, to the extent you can.
You're my favorite analyst.
Thank you. To the extent you can, could you share any relevant takeaways on your view of the state of the trade negotiations and/or the opportunity for businesses like yours to continue benefiting from Chinese investment opportunities?
Yeah. I just spent a week in Asia. The initial part of the trip was actually we spent a few days in Japan celebrating our 25th anniversary in Japan. We're one of very few firms that have had such a long-term commitment to Japan. It was actually a fantastic event. I give the founders of the firm extraordinary credit in terms of the way they strategically built out the firm geographically. If you think about back to 2000, not the easiest decision to decide you were going to go into Japan. Super popular to be in Japan now. In 2000, that was a pretty difficult time to think about going to Japan. They actually made some really, really prudent decisions about they wanted the business to be run by locals. They built up this team over many, many years. We're quite proud of the achievement.
The most recent fund had a 25% net IRR. They just nearly doubled the size of the last fund. There is a huge amount of activity in Japan. From there, I went around Southeast Asia. Ultimately, I ended up in Beijing. To the point of your question, I did meet with the vice premier and other officials. We have been investing in China, and we opened our office in Hong Kong about 27 years ago. We have been in the region for a long time. Some of the more notable transactions some of you would have heard about over the years: China Pacific Insurance Group, back I think it was 2005. Last year, got a lot of attention. We sold McDonald's. When we acquired the Grand Food platform, I think that was 2018, there were a couple thousand restaurants, almost double the size of the franchise.
McDonald's ultimately bought it back from us. It was a great, great job creating value. It's classic Carlyle value- creation strategy of going and working with management and expanding the franchise over a number of years. We have a lot of touchpoints in China, a lot of history. I personally have been going to China for a long time. I've sort of watched the evolution of the Chinese economy, sometimes with great wonder over what's transpired in 50 years. I met with the vice premier, a couple takeaways. I got the sense that their discussions with Treasury, as you've seen advertised, were really quite constructive. They had just recently met with our Treasury secretary, the vice premier had in Switzerland. It sounded like that discussion was quite constructive.
Obviously, it yielded a great outcome in terms of taking the tariff barriers down from really trade embargo to tradeable. They seem quite constructive about looking forward to making progress. My biggest takeaway would be, personally, I think it's really, really critical as we go through these policy changes that we try to figure out on both sides how the two countries can best optimize. I think it's a really, really difficult global outcome if the two largest economies in the world can't structurally work well together regardless of where tariffs end up. Tariffs can make a lot of sense for a lot of reasons, specifically industry-specific tariffs. They've been going on for a long time anyway. I left there feeling pretty optimistic about the trend of things.
I am a half-glass-full kind of guy, and I was pretty optimistic when I landed. Nothing about that meeting left me feeling less optimistic. I think obviously this was on the heels of the really successful meeting with our Treasury secretary. It felt pretty good.
Good. Helpful. Thanks. Let's move to realizations. You mentioned that uncertainty can be kind of a freezing moment for things like business activity. And your earnings build is a little bit more dependent on that earnings stream than other managers.
Unclear, but okay.
We've had a pretty significant positive- shift in markets since the last call. Update us on how the realization environment has tracked since then. Any noticeable improvement in pipelines, etc.?
Yeah. So today, for everyone just to level set, the platform has $453 billion of assets. Obviously, the roots of the firm going back to 1987 were in private equity. Private equity was not even called private equity then, as David, Bill, and Dan, the founders, would remind us, it was called the leveraged buyout business. But obviously, it has evolved. And obviously, private- capital has evolved to really even where calling it alternative probably does not make any sense. The platform today is our largest segment is credit insurance at about $200 billion. I already talked about Carlyle AlpInvest, the secondary business, plus Co-Invest and a financing business that is $90 billion on its way to $100 billion quickly. Then you have the GPE segment, which is real estate, infra, real assets, and then you have obviously the private equity footings.
It was very obvious to everyone in the industry, still gets a lot of headlines, that a lot of liquidity had not been coming back. Historically, give or take, the industry would return about 20% a year- of- capital. Of course, there was this huge capital return and capital deployment in the period of 2021, 2022 when multiples were very, very high. The industry sort of got stuck after that. It is a bit of a vintage issue. This is not unique to Carlyle. This is broadly from middle market all the way through large buyout where the 2021, 2022 period after that when multiples compressed, interest rates went up. A lot of the companies were not financed really in anticipation of that kind of environment. There has been a bit of a log jam to work through. It is an industry-wide log jam.
We strategically did a couple of things. One, from a liability management perspective, the companies are incredibly conservatively financed. I mean, we were very early, very early. I mean, before I showed up, the capital markets team had done an extraordinary job of really extending out duration of the liability structures in the portfolio. That gave us lots of operating flexibility to navigate the higher rate period, which we're still in, the higher rate period, but the transition was easier for us, I think. If you actually look at what we achieved in the past year, the platform returned about $20 billion of capital. We returned about $10 billion of capital, including secondaries we did just over the last couple of weeks in private equity alone.
If you just look at private equity capital returned to our clients, we're running about three times the industry average in the past 12 months. That includes taking Rigaku, which is the largest ever privately owned sponsor company public in Japan, Hexaware, largest privately owned company ever in India, taken public. StandardAero was the third largest IPO of the year last year. We just did a secondary in StandardAero just two weeks ago. We just monetized another secondary. We made a strategic decision that it was very important to monetize assets. We just have great companies in the portfolio. I know there's been a lot of discussion about performance in private- equity, specifically at Carlyle, where we have had one or two funds which have not been sort of traditional Carlyle performance.
If you actually look at our U.S. buyout business, the current vintage fund CP8, that's a second- quartile fund. If you actually just look at it against large buyout, I think it's a top first- quartile fund. We feel really good about the momentum. These are all areas where if you think into the sort of next 5 or 10 years, which is strategically the way we talk to all of our clients globally, the areas where we have extraordinary expertise and 30+ years of experience are areas like healthcare, aerospace defense, financial institutions, and technology, which runs adjacently across all those silos, plus industrial. I think we feel really well positioned in the platform for the next 5, 10 years. The great thing is we've been returning a lot of capital. The fund performance has been really, really good.
On that, I sense there are still a lot of investors that just look at your flagship IRRs and compare it to the other large North American private- equity funds and think it's underperforming, which you're obviously pushing back on. What are they missing when they do that?
It's just math. I'm not pushing back on it. It's just math. I think sometimes narratives are a little stale. I think if you look at vintage- by- vintage, the vintage you're talking about, CP7, where we've had a lot of monetization, we returned billions of capital last year. That vintage is not going to be our best returning net IRR. Now, this gets into a lot of nuance, which I don't want to bore people with. That's the way you look at the headline net IRR. The way our clients look at it is in terms of Co-Invest and opportunities they've had to invest alongside us, which in many cases can materially uplift that net IRR. What I was talking about with CP8, the current fund, the current vintage really is tracking exceptionally well and it's early in its life. We feel really good about the momentum.
Now, we did make some changes in the platform in terms of how we're operating the platform. A business that we weren't really performing to our expectations was the consumer business. We shut down that vertical after I got there. The team has made other decisions, actually, in terms of value creation, which I think have really added a lot of momentum. As I said, we're returning a huge amount of capital to our LPs. The performance of the current fund is quite good. Look, CP7, not our best piece of art, but this is, you're going to have an off vintage. The momentum in the U.S. buyout business is really, really good.
On that, there was a lot of optimism, obviously, about the next vintage fundraise coming this year. Has your confidence level shifted at all given the post-liberation day volatility? Do you think that extends the timelines?
I think the current period of uncertainty, which it's very difficult to put- a- pin on when it will pass. I think three months, end of the year, my expectation, just based on sort of gut feel, by the way, there's no science in this because I do think this is such a dynamic process, it could accelerate dramatically. You could see a whole series of announcements come out very quickly. We could be in a period of much greater policy certainty. It feels like all parties involved, when I talk to people all around the world, not just China, but other parts of the world, it feels like there's real momentum to try and resolve because everybody knows this is a bit of a chilling effect for business everywhere.
If you put something on sort of at the end of the year, yeah, do I think the IPO calendar and ability to monetize will stretch out a little bit? This is not about if. This is just when. This is just a when question. In terms of how we run the business, whether it is the fourth- quarter or the first- quarter, it is sort of irrelevant to us. It just has to be the right micro environment.
The other side of the coin is secondaries. It feels like it's become a very constructive environment for secondaries given the liquidity crunch at LPs and now incremental pressure on endowments, etc. With that in mind, I think investors sometimes forget that you have a dominant secondaries business, which could position you perfectly for this kind of sweet spot that we're in. I think it'd be helpful to get an update on how that business is tracking and what Carlyle is doing to better capitalize on this opportunity.
I'll make a high-level comment, and then I'll address your question. The high-level comment I make is the nature of private- capital is evolving at an exceptionally quick pace. What I mean by that is I do think if you went back just several years, secondaries was an industry specialization, which provided liquidity to secondary sellers. On the other- side, you had the primary business where you raised capital, you invested capital. In between, obviously, you had the other parts of private capital, which were evolving. Of course, you had different client channels. You had the emergence of wealth and now potentially the emergence of the retirement channel.
I think while those different pockets of expertise certainly exist in the way they maybe did five or ten years ago, I think when you think private equity and certainly the way that we think private equity, we do not think private- equity as, oh, U.S. buyout or secondaries. Private equity in and of itself is just an industry ecosystem now. Ecosystems are. What is really happening is it is becoming much more solution-driven. The conversations that you have when you are in the secondaries business or a Co-Invest business or now the financing business that we have built out, because all that intelligence is in that business for how do you evaluate, it is much more about how do you provide an effective solution. These are all the same clients. It is really about how do you integrate with your clients. It could be a wealth client in Asia.
It could be a wealth client in the U.S., in Europe, or it could be an institution. It is really about having the breadth of the platform because in one conversation, you can talk about deploying assets into the U.S. or Europe or doing a secondary or figuring out the right client solution. I do think it is just about private capital. There are a handful of us that are really dominant in what you would call this, what we would call the secondaries business. It is much bigger than that because it is really now becoming a solution-centric business around financing and AV facilities and how do we bring the most value to all of these discussions. By the way, these could be discussions from sovereign wealth funds to pension plans, as I said, to the wealth channel.
I think it is kind of the next evolution of this business. You see it happening in private credit where the discussion used to be like direct lending. Now it really is more about, hey, the full aperture of credit in private- credit, whether it is asset-based finance all the way through to opportunistic credit. How do you bring the best solution to those people that need capital and those people that want to deploy capital? That whole ecosystem is evolving at an incredibly fast pace.
So you obviously, like I said.
Yeah, secondaries is growing very quickly.
On that note, we're seeing a lot of your competitors raise upwards of $25 billion funds in this space. You have a fund in the market. Given your position broadly, should we start thinking about you being able to size to that scale?
I think our ability to deploy is exceptionally good. I think that we're not racing to have the biggest fund. I think we're really letting the capital and the opportunity set drive it. The footprint of that business, I was at the 25th anniversary AGM in Amsterdam a few weeks ago. Really, the future of that business will take a whole bunch of different paths. I do think when you think about the evolving wealth retail retirement channel, I do think the secondaries business, broadly defined, I do think really is a bit of a category killer because it has broad diversification, shorter J curve, very stable predictable returns. I think in a toolkit, in being a diversified private capital manager, I think it's incredibly fortunate that the founders bought AlpInvest in 2012.
I think it plays an incredibly valuable role across a whole bunch of different opportunity sets.
Last one on this. I think you rebranded it back to kind of Carlyle AlpInvest from Investment Solutions. What was the impetus for that? Is there something about the AlpInvest brand that you think can drive better growth?
It was really when it was the history here is again acquired in 2012. 25- year history, which I think if you fact-check me on this, I'll be pretty great. Net returns really are pretty consistent around 16%-17%-18%. There was one vintage year where it was a net 10%. It really was strategically not integrated into the Carlyle platform. Now, we have very strict walls for a bunch of reasons, obviously, because they're bidding on portfolios. In terms of leveraging the full strength of the Carlyle brand, this is just making sure that we leverage the full breadth of what the AlpInvest brand, which has developed over 25- years, and the Carlyle brand, which is obviously quite global and very powerful. That is the rebranding. It is not much more than that.
Strategically, we've worked quite hard to integrate the distribution of AlpInvest and their skill set into our institutional framework and also, obviously, into the wealth channel.
Got it. I think that's a good segue to the broader fundraising and growth outlook. You stuck with your 2025 guidance of $40 billion of flow, 6% FRE growth. You have two big insurance blocks coming in. Away from that, how should we think about the cadence and build to that 2025 target?
Yeah. It feels pretty good so far. We'll see how the third- quarter and fourth- quarter look. Again, in this policy environment, I think it's difficult. I'd have to give you real-time updates. It feels pretty good.
Got it. Any shift in the LP conversations through the last couple of months, and in particular through the lens of how they're thinking about allocating to the U.S. versus non-U.S. side of your businesses?
I would say that had started a while back. I would summarize it as last- year, this time, when I was traveling around the world, a lot of the conversations with the largest allocators in the world were, we're really overallocated to the U.S., but we're going to allocate more. I think when the new administration came in, that only accelerated in terms of thinking about allocation. I do not think there is a shift away from the U.S. Maybe some of that is happening in the liquid markets. In our business, the conversations when we talk about policy change and what is happening globally, we are committing capital for many, many years on behalf of our clients. They are committing capital for many, many years.
The lens through which they look at these things is really, what is the opportunity set and how do we think and how do they think about the global opportunity? My personal view on this is, and again, I think this was all in place before the recent policy shifts. I would say that if you think about what is happening in the world, clearly defense and energy as part of national security, and let's just broadly say national security, was becoming a dominant thematic. Whereas for maybe 30 years-40 years, that just was not the case. National security has become a dominant thematic. Data management, energy, infrastructure, these all kind of became somewhat increasingly dominant themes in discussions we were having with folks around the world. I do not think that would be a surprise to anyone.
Some of the other competing priorities remain sustainability, ESG in Europe. These things are all competing for shelf space. I would say there was certainly a shift in priorities. Let's just call it sort of something nationalizing and onshoring and investing locally. If we were sitting here a year ago, we would have felt quite strongly that there would be a pickup in defense spending globally. We are obviously one of the few large-scale leaders in aerospace defense. I do not think we would have thought Europe would be planning to spend over a trillion- dollars. It has been a pretty amazing pivot over the last several months in terms of how capital will be deployed. Now step back and ask yourself, what is the duration of this capital that is needed? It is long-tailed. Then ask yourself, where is it going to come from?
It is going to be difficult for sovereigns to fund everything they want to fund because of the inherent leverage across the sovereign universe. I personally think this means that I think banks to some degree can play a really vital- role. A lot of this capital is going to come from firms like Carlyle that have scale, that have ability to bring solutions, that have a global footprint, that can bring resources globally together to solve complex problems regardless of the jurisdiction, whether it is Japan's investment, Europe's investment, Canada, U.S., etc., and India. You have to be active in these markets. I think the capital demands are going to be enormous over the next 10 or 15 years. I think there is a general consensus around that. Private- capital will play the most material role there.
That seems very clear to me because we have the ability to deploy the duration and the skill sets. A lot of this will be funded by private- capital, which means private capital will be in demand, which means returns should be good. I do think it means likely cost of capital is up around the world. That does not mean the 10-year has to be some astronomically high number. It definitely means it will be otherwise higher than it might have been. I think that means the same for all global cost of capital. Even if you look at it today, this gets back to a bit of your earlier question. The term premium in the 10-year is not particularly high relative to history. I am a lot older than you.
When I got out of college and I was selling uni- bonds, I was selling uni bonds for 12% tax-free. I was uniquely bad at it. Think of how bad you'd have to be at something to not be able to sell 12% tax-free. Yet I sit here with you today. It has to have some levity. It just cannot all be about cost of capital. I think the cost of capital will be higher in aggregate over the next 10- years. That is really how our clients are thinking about it. If we scanned the vast majority of our clients and said, do you think you'll be allocating more to private capital for the next 10- years? The answer is yes.
On the aerospace and defense point, it just occurred to me, do you think there's enough demand for both capital and LP demand to start thinking about a dedicated strategy given your positioning there? Or do you think it's too niche?
No, it's not too niche. It's just a question of what is the best. Again, this is not about, oh, can we launch a separate fund to do this as a dedicated vehicle? I think the answer is, what are we solving for? If we're solving for an ability to provide capital, maybe in a more flexible way, that could be it. Or could it be different parts of the capital structure? We don't want to disrupt the success we've had by building this vertical out in D.C. for 37- years. One of the first transactions we did at a firm was in the aerospace. We have a very, very long history here. We don't want to disrupt 38- years of expertise there. Are there things we could uniquely do? Probably yes.
I'm going to move to retail. You've had a lot of traction with your wealth products. I think the AUM's up more than 60% over the last- year or flows.
That's about right.
How do you see the demand unfolding there in 2025? Any impact from the recent volatility? If there is continued market volatility, how do you expect that to play out for the rest of the year with your PE product launching?
We sit here with the S&P essentially flat. For all the volatility, we're sort of back where we started, right? The bond market's performing well. As I said before, credit spreads are tight. The demand in the wealth channel broadly, and I think we sit in the U.S., we tend to think about this as a really U.S.-centric phenomenon. This is not a U.S.-centric phenomenon. This is a phenomenon in Japan. This is a phenomenon in Europe, Southeast Asia, Middle East. We're on platforms in the Middle East, bank platforms all around the world. I think we're still in the early innings of this global shift towards wealth wanting to come into the space. Our advantages here are the breadth of the platform, so our ability to create solutions that have all the right parameters, and really the Carlyle history and the Carlyle brand.
If you're in the Middle East or if you're in Japan, and we're in Japan for 25- years, the team has established an incredible track record that has a credibility in Japan such that when the Carlyle name is on a platform, people know Carlyle in Japan. That is the strategic competitive advantage. We just need to make sure that certainly as an industry, we execute well as all this capital comes in. I do think at the margin, when you think 10- years forward, big flows like this out of wealth, insurance capital will be the big marginal drivers of capital. Certainly, all of our historical clients will be incredibly important, whether they're endowments, foundations, pensions, sovereign wealth funds. This marginal capital that's coming into the industry now will be defining.
We mentioned the PE product expected later this year. What's the kind of lab up- to in terms of expanding the suite into other asset classes beyond what you have now?
Busy labbing.
Yeah. Busy labbing.
Yeah. Busy labbing.
Fair enough.
Busy labbing.
In that vein, Apollo and KKR have launched hybrid, illiquid, liquid products. What are your thoughts around.
Busy labbing.
That's it.
Busy labbing. No, I think let's take the question seriously. Sorry, do you want to finish it?
What are your thoughts around partnering with a traditional manager to do something like that, which would be a better- fit for a mass affluent investor?
I think it is all a question of, again, what are you solving for? We have all the product capabilities. The real question is, flip- it around to who is the client? That is the single most important thing. There is a very big difference between, let's say, a wealth client managed by an advisor on a bank platform or one of our RIA partners versus when you start going into sort of, let's call it the 401(k) channel or the retirement- channel, call it somewhat of a new- frontier. I think this is all about making sure that the client that you are approaching, that you are solving whatever problem it is that they have. That is how we are thinking about it. There are lots of ways you could, if you were in a lab with us, you could start in a whole bunch of different places.
If you put the client at the center of everything you do and you say to yourself, "Okay, look, let's just say it's the 401(k) channel. Okay, what are the key parameters?" Obviously, you want to have historical outperformance. What you want to make sure you're doing is you're helping in that particular channel that all the liquidity provisions are met. Right now, there's, I don't know, 30+ million teachers, firefighters in the United States that are already on plans that have private- assets. The pension plans may have caps on private capital of 35% or 40% or higher. Effectively, those plans are just managing the liquidity function. All of these school teachers, all these firefighters, etc., they already have the exposure to private markets in their retirement plan.
It is just that question of, as we continue as an industry to expand out, we just have to make sure that we get all the aspects of what is the return expectation? Do you get outperformance? And do we manage my outperformance, not just the performance of the asset class and how it fits into the portfolio construction, but the liquidity construction as well? I think we just have to make sure we solve for all those parameters quite thoughtfully as an industry.
Helpful. Insurance. We mentioned briefly the $8 billion of block transactions coming through Fortitude this year. Remind us how these particular transactions flow through your results. More broadly, how the reinsurance pipeline is looking, what Fortitude's capacity is to take advantage of more of these opportunities this year.
Yeah. When I arrived at Carlyle, there were a lot of extraordinary things that I was privileged to be part of. Obviously, the team, the iconic nature of the business, largest CLO business in the world, a lot of great things all around the world. One of the great things was Fortitude had been established. Fortitude is valuable for a whole host of reasons. One, we have great partners in Fortitude. Just the asset in and of itself, Fortitude is fantastic. On behalf of Fortitude, over many years now, we have been managing capital for Fortitude. That gave us the internal DNA to manage assets for an insurance enterprise. That learning is super- critical. That has given us, again, a whole team internally that understands asset liability management, regulatory considerations, reporting requirements that insurance companies have.
Of course, now we're being able to build out and extend that across the entire insurance space. Because it's noticeable and sometimes it's significant, it gets a lot of focus if Fortitude does a reinsurance transaction, which ultimately we manage a portion of those assets in private capital for Fortitude. That gets a lot of attention. It's certainly very valuable in terms of contributing to our franchise. The real value is in the partnership with Fortitude and an ability to build out that expertise because it gives us real skill sets internally in terms of how to be the best provider of solutions to insurance broadly. Now, beyond that, the future of how insurance evolved, I think, will be fascinating. It's one of the most dynamic parts of the industry right now in terms of competitive dynamics in insurance, regulatory changes globally in insurance.
It occupies a lot of mind share for me and the senior leadership and Mark Jenkins and the whole team that drives our credit solutions.
On that, there's an inorganic side to the story, the insurance story for a lot of people. You got a lot of buzz on the last earnings call. Any updated thoughts on the potential to use the inorganic channel to broaden the insurance business?
Yeah. I think when I first showed up, you rightly asked me how you're thinking about inorganic growth. I really downplayed it. I downplayed it because I felt like at that particular point in the company's life- cycle, there were lots of things the team needed to work on with me. I really needed to get to know the team and our clients and immerse myself in it. It was not off the table back then. All the things I went through before in terms of optimizing the capital management, the cost structure, the growth initiatives, they just seem so obvious that doing something inorganic in a period of me being a new CEO just did not feel high on my priority list. I would say we're certainly capable of executing anything that would make sense. I think it's got to really be right.
Culturally, we do not lend ourselves to meeting serial acquirers. The firm's made some when I mentioned AlpInvest, I mean, AlpInvest, I think the firm acquired something for like net $25 million. There are only a handful of us in the world that even provide that service at scale these days. That is obviously worth many, many, many billions in terms of its implied market- value. I think that it would have to really tick a lot of boxes for us. Obviously, the strategic sense has to fit both financially. The footprint has to make financial sense. It has got to be accretive. It just has to tick all the right boxes. When I think about the footprint of what we have at Carlyle, it is so extraordinary from the secondaries business to the credit business to insurance to everything we can do in private equity, infrastructure, etc.
There's no pressure. I also have three great shareholders in addition to all of you shareholders in the room who take a bit of a long-term perspective and just want to see value creation over time. Certainly, we're well positioned if the right opportunity came along.
I'm going to end on a capital question. On capital markets, it's obviously been a big piece of your FRE growth story. You provided a sneak peek on the 1Q call on initiatives to kind of grow that, broaden it, restructure that to unlock more value. Can you give us a little bit more color on what that means, what you've done there, and the path for further growth, which has already been pretty substantial?
Yeah. These are, again, our nuances. The firm, when I showed up, had an amazingly well-developed capital markets team. They really were focused almost exclusively on the liability management, not on also being a revenue-generating part of the firm. That is a much easier piece to build than the first- piece. The first- piece was super well developed, great team. As I mentioned, Bloomberg put out a piece, I do not know, maybe two- years ago, and ranked a lot of the firms in terms of, I will broadly say, most conservatively or well-managed capital structures in portfolio companies. Carlyle was at the top. It is an incredible team. Getting the team to work with the fund heads in terms of how to think about monetizing our capital market skill set because they do a lot of work on these transactions.
When they're running liability management, they do a lot of the liability creation. This is something other firms have been doing for years. It was really just a question of creating the right incentives, positioning the business properly, driving the initiative, and turning the lights on, if you will. All the pieces were in place. Now, what we haven't done is we haven't decided, hey, we want to compete with other people who, okay, the JPMorgan, Morgan Stanley, Goldman Sachs of the world, and commit a lot of balance sheet to capital markets. We don't have a desire to do that. What you saw us do was really take the fee-generating engine piece of this up to the 150 that I described over six- months, again, which would have been our best year ever. That'll be episodic. It'll be driven by activity levels.
Quarter- to- quarter, you may see volatility in the capital markets numbers. Personally, I think that's wildly irrelevant. We're not committing capital. We don't have dead balance sheets sitting there. This is just embedded operating leverage. Again, we don't historically look at it this way. We did go back because smart folks like you were asking. It does look like at peak levels, this could be a $350 million activity. There are still parts of our business as they evolve, which just because of historical creation, we're not allowed to participate in this activity. That'll even free- up over the next couple of years as we launch new businesses. We feel really good. I mean, I think the team's done an amazing job here pivoting quite quickly to this opportunity.
To end, I'm going to go back to capital. I think you think the stock is cheap. How should we think about the timeline or how you're thinking about repurchases with that big $1.4 billion authorization you have?
I think you should think I tried to buy it personally during the sell-off. The lawyers would not let me do it, which I think does not seem right to me. Anyway, I can say that at the conference, I think. Yeah, I think we as a company are on, I think, an amazing journey. Like I said, I am super proud of the teams. If you think about record FRE margins, record FRE in what is really globally a difficult capital-raising environment, $50 billion over the last four- quarters, $14 billion of inflows in the first- quarter, the momentum behind the firm is really, really great right now. We have the real estate business, which will be wrapping up that fund raise shortly. They are going to consume a lot of the available real estate capital that even gets raised this year. Their performance is so extraordinary.
There is a lot of really good things happening at the firm that we feel great about. I think the stock will react over time. Again, I do not really love when CEOs pitch their stock. Since you asked, I think it is super cheap. I work at the company. I know the team. I know what they are capable of. I know the market environment. I know the footprint. I know the brand. I know the earnings power and the potential. When you look at just all aspects of it, the financial footings through to the power of what the firm and the trajectory, I think the idiosyncratic macro factors, I think all those things, the tailwinds are pretty extraordinary in the industry. I think we are really well placed. I do think scale really matters.
Having the scale at this particular point in the evolution of this industry is really vital. I think the next 5-10 years look really great for Carlyle. I feel good about it. I never really encourage people to buy the stock. If you buy the stock, great. We want to really deliver for you. If it is not the stock for you, then we understand it. I truly appreciate all you being here today. Thanks very much.
Thank you, Harvey.
Good to see you, man.
Yeah. Take care.
Thanks.