Carlyle's Fee Engine: How Credit and Secondaries Are Rewiring the Private Equity Model (NASDAQ:CG) - CG Stock Research Report

## Executive Summary / Key Takeaways * Carlyle is executing a structural transformation where Global Credit and Carlyle AlpInvest now generate 55% of fee-related earnings, up from 25% five years ago, creating a more resilient, capital-light earnings stream that reduces dependence on cyclical private equity realizations. * The firm is materially outperforming peers on capital returns, having distributed 150% of industry average capital to investors over the past year, which strengthens LP relationships and positions Carlyle favorably for future fundraising despite a challenging environment. * Management has raised full-year guidance twice in 2025, now targeting 10% FRE growth and $50 billion in inflows, driven by record capital markets fees, a $20 billion secondaries fund close, and Global Wealth inflows that have increased tenfold to $3 billion quarterly. * While Carlyle's $474 billion AUM and 7% year-to-date growth trail larger peers like Blackstone (TICKER:BX) and Apollo (TICKER:APO), its hyperscaler position in secondaries and insurance solutions provides defensible moats in high-growth segments that are less dependent on mega-deal execution. * The central risk-reward hinges on whether Carlyle can close its performance gap with peers while maintaining its capital-light discipline, particularly as CP VII approaches carry generation and the firm prepares to launch its ninth flagship buyout fund in a volatile macro environment. ## Setting the Scene: The Alternative Asset Manager's Dilemma The Carlyle Group Inc., founded in 1987 and headquartered in Washington, D.C., began as a traditional private equity partnership but now operates a fundamentally different business than its original buyout roots. The company makes money through three distinct engines: management fees on committed capital (generating predictable quarterly revenue), performance fees from successful investments (creating lumpy but lucrative carry), and capital markets services that monetize deal flow without balance sheet risk. This multi-revenue structure allows Carlyle to capture value across the entire investment lifecycle, from fundraising through exit, rather than relying solely on the binary outcomes of individual deals. Carlyle sits in an industry undergoing profound structural change. The number of U.S. public companies has halved over two decades while private companies have increased fivefold, creating a permanent shift in capital formation toward private markets. This expands the addressable market for alternative asset managers, but also intensifies competition for deals and LP capital. Unlike public markets where liquidity drives momentum-based pricing, private markets operate under arithmetic constraints that tie returns to fundamental earnings growth over multi-year holding periods. This discipline favors firms with operational expertise and diversified platforms that can deploy capital across cycles. Within this landscape, Carlyle occupies a distinct position. With $474 billion in AUM, it ranks among the top-tier alternative managers but trails Blackstone's $1.24 trillion and Apollo's $908 billion. This scale gap allows larger peers to spread fixed costs across more assets and access mega-deals that generate outsized fees. However, Carlyle's strategic diversification into credit, secondaries, and insurance solutions creates a more balanced earnings profile that may prove more resilient during PE downturns. The firm's 21-country footprint provides unique emerging market access, particularly in Sub-Saharan Africa and the Middle East, where competition is less intense and returns can be higher. ## History with Purpose: The 2020 Inflection Point Carlyle's transformation accelerated on January 1, 2020, when it converted from a Delaware limited partnership to a Delaware corporation. This structural change expanded the investor base beyond traditional PE LPs to include public market shareholders who value predictable earnings and dividend capacity. The conversion enabled Carlyle to prioritize fee-related earnings growth and capital returns, aligning its corporate form with its evolving strategy of building durable, capital-light revenue streams. The Fortitude Group Holdings investment, initiated in 2018 and expanded through 2023, exemplifies this strategic pivot. Carlyle built a 71.5% interest in the Bermuda-based reinsurer, creating an $87 billion insurance solutions platform that now anchors its Global Credit segment. Insurance assets provide sticky, long-duration capital that generates management fees based on asset values rather than investment cycles. The platform's recent $4 billion reinsurance agreement with Unum (TICKER:UNM) and inaugural $500 million funding agreement-backed note {{EXPLANATION: funding agreement-backed note,A debt instrument issued by an insurance company, backed by a funding agreement, which is a contract to pay a specified rate of interest over a period. This allows the insurer to raise capital by transforming future liabilities into investable assets.}} demonstrate how Carlyle is creating proprietary capital sources that competitors cannot easily replicate. The March 2025 NGP restructuring further reveals management's focus on alignment and flexibility. By eliminating restrictions on domestic energy strategies and reducing future management fee allocations, Carlyle took a $92.5 million impairment charge to position the business for long-term growth. This demonstrates willingness to sacrifice short-term earnings to remove structural constraints, a discipline that should benefit future fund development. The trade-off—reduced performance allocations from existing NGP funds—creates near-term headwinds but clarifies the path for building Carlyle-branded energy strategies. ## Strategic Differentiation: Building Hyperscale Moats Carlyle's capital markets business, which generated a record $150 million in fees over two quarters without taking balance sheet risk, represents a crucial differentiator. This monetizes the firm's deal flow and structuring expertise through pure fee income, creating high-margin revenue that doesn't require capital commitment. In an environment where banks face regulatory constraints on proprietary trading, Carlyle's ability to provide independent capital markets services positions it as a value-added partner rather than a competitor. The Carlyle AlpInvest secondaries platform has achieved hyperscaler status, closing its largest-ever $20 billion fund in Q3 2025. The secondary market is 10-15 years behind corporate private equity in maturity, with tremendous tailwinds from LP portfolio repositioning. AlpInvest's 25-year track record and consistent team create switching costs that newer entrants cannot overcome. The recent $1.25 billion GP-led collateralized fund obligation {{EXPLANATION: collateralized fund obligation,A structured finance product where a portfolio of private equity fund interests (or other illiquid assets) is pooled and then debt and equity securities are issued against the cash flows from these underlying assets. This allows General Partners (GPs) to raise capital against their existing funds.}}—the largest of its kind—demonstrates how Carlyle is creating new product categories that expand the addressable market beyond traditional LP secondary sales. In Global Credit, the convergence of insurance and private credit creates a unique value proposition. The Fortitude platform's ability to issue funding agreement-backed notes and reinsurance sidecars {{EXPLANATION: reinsurance sidecars,Special purpose vehicles created to allow investors to participate in a reinsurer's underwriting results by providing capital that supports a specific portfolio of risks. They offer a way for reinsurers to offload risk and for investors to gain exposure to insurance underwriting.}} transforms insurance liabilities into investable assets, earning fees on both sides of the transaction. The direct lending platform's 10 basis points average annual losses over the past decade, compared to market rates nearly double that level, proves underwriting discipline that preserves capital and maintains LP confidence during credit downturns. ## Financial Performance: The Mix Shift in Action Carlyle's Q3 2025 results provide clear evidence of the diversification thesis working. Fee-related earnings of $312 million grew 12% year-over-year, with margins expanding to 48% from 46% in 2024. This demonstrates that credit and secondaries growth is not just additive but accretive to overall profitability. The 13% year-to-date growth in total fee revenue represents the fastest pace in three years, driven by catch-up fees in AlpInvest's secondaries funds and activation of management fees on the $9 billion tenth U.S. real estate fund.

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Segment performance reveals the strategic rebalancing. Global Private Equity segment revenues declined 37% in Q3 2025 to $346.5 million, primarily due to lower realized performance revenues as realizations slowed. This validates the diversification strategy—relying solely on PE carry would have created significant earnings volatility. However, the segment's underlying health remains strong, with CP VII and CP VIII appreciating 20% over the past year and the Asia funds ranking in the top 5% of their categories. The $19 billion returned to investors over the past year, at 150% of industry average, proves that Carlyle's portfolio is maturing into distributions even if quarterly timing is lumpy.

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Global Credit and Carlyle AlpInvest more than offset PE weakness. Global Credit revenues surged 23% to $259.8 million, with distributable earnings up 57% to $126.4 million. The segment now comprises 45% of firm-wide AUM and has grown at a 33% CAGR over five years, creating a stable earnings base that performs across cycles. The $31.4 million dividend from Carlyle FRL in Q3 demonstrates how the insurance platform generates cash beyond traditional management fees. AlpInvest's performance was even more dramatic, with segment revenues up 30% and FRE soaring 84% to $87.5 million. AlpInvest now represents 23% of Carlyle's total FRE, triple its level from two years ago. The $31.1 million in catch-up management fees from the new secondaries fund shows how fundraising success translates directly to earnings, providing visibility into 2026 growth. ## Outlook and Execution: Momentum into 2026 Management's guidance raise to 10% FRE growth and $50 billion in full-year inflows signals confidence that the diversification strategy is accelerating. This suggests the 55% FRE contribution from credit and secondaries is not a ceiling but a foundation for further rebalancing. John Redett's comment that Q3 was a "lighter realizations quarter" but Q4 should see a "significant step up" implies that PE performance fees, while volatile, remain a meaningful part of the earnings equation. The pipeline for 2026 appears robust across all segments. Global Credit's insurance initiatives are expected to generate more than $20 billion in new AUM over the intermediate term, while the $10 billion asset-backed finance business raised $2 billion in Q3 alone. These flows are less dependent on M&A markets than traditional buyouts, providing growth visibility even if LBO activity slows. The Global Wealth channel's tenfold increase to $3 billion quarterly inflows demonstrates Carlyle's ability to access retail capital, a key differentiator as retirement space regulations potentially open new distribution channels. The timing of CP IX fundraising remains a critical variable. Harvey Schwartz's indication of a "fourth quarter kickoff" that is "not wedded" to a specific timeline shows discipline—Carlyle will not rush a flagship fund raise until deployment pace and market conditions support it. With CP VIII still actively deploying and CP VII approaching carry generation within the next 12 months, the firm can afford patience. This contrasts with peers who may prioritize AUM scale over performance, potentially compromising future carry. ## Risks: What Can Break the Thesis The ongoing U.S. federal government shutdown introduces meaningful uncertainty into capital markets and regulatory workflows. While Carlyle has not experienced material portfolio impact, a prolonged shutdown could postpone planned IPOs and delay deal pipelines. Carlyle's realization strategy depends on healthy exit markets, and regulatory capacity constraints could push $5 billion of signed transactions into 2026, creating a timing mismatch between expenses and performance revenues. Trade policy and tariffs present a more nuanced risk. While 80% of Carlyle's portfolio companies are U.S.-based services businesses with limited direct exposure, the broader impact on investor sentiment and risk appetite is significant. Harvey Schwartz's observation that the China-U.S. dialogue is "the biggest question on people's minds" reflects concern that a sustained trade war between the two largest economies could compress global growth and deal activity. For Carlyle, this could slow deployment in Asia, where funds have historically ranked in top performance tiers, and pressure portfolio company margins through supply chain disruptions. The endowment sector's potential stress, highlighted by JPMorgan's (TICKER:JPM) inquiry, is relevant because these investors represent core LP relationships. While Schwartz downplays broad-based impact, any material shift in endowment allocations away from private equity could affect Carlyle's fundraising, particularly for newer vintages. The firm's lower LP concentration compared to TPG (TICKER:TPG) provides some insulation, but a sector-wide retrenchment would challenge the $50 billion inflow target. CP VII's performance trajectory remains a key risk. John Redett's acknowledgment that it is "not expected to be their best fund" but is "well on that path" to hitting carry highlights the binary nature of PE performance. If market conditions deteriorate or realization timing slips, the fund could miss carry thresholds, eliminating a potential $100+ million performance revenue stream and damaging fundraising credibility for CP IX. ## Competitive Context: Scale vs. Specialization Carlyle's competitive position reveals a clear trade-off between scale and specialization. Blackstone's (TICKER:BX) $1.24 trillion AUM and 26% FRE growth dwarf Carlyle's $474 billion and 12% growth, giving BX unmatched bargaining power and cost efficiency. BX can spread technology investments and back-office costs across a much larger base, generating higher margins per dollar of AUM. However, Carlyle's 150% capital return rate versus industry average demonstrates superior portfolio management, a qualitative edge that LPs value when committing to new funds.

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KKR's (TICKER:KKR) $723 billion AUM and 16% growth rate, combined with its insurance platform's fee stability, present a more direct comparison. Both firms emphasize operational value creation, but KKR's faster AUM growth and larger FRE base ($1.03 billion vs $312 million) suggest stronger momentum. Fundraising success begets success—larger funds attract more capital, creating a virtuous cycle. Carlyle's hyperscaler position in secondaries and its 25-year AlpInvest track record provide defensible niches, but the firm must accelerate growth to avoid falling further behind. Apollo's (TICKER:APO) credit dominance and 24% AUM growth highlight the opportunity Carlyle is pursuing. APO's $908 billion AUM includes substantial retirement services assets that generate stable, annuity-like fees. Carlyle's $87 billion insurance solutions platform is smaller but growing rapidly, with the Fortitude partnership creating similar fee durability. This shows Carlyle can compete in the convergence of insurance and private credit, but APO's scale advantage allows it to originate larger deals and capture more economics. TPG's (TICKER:TPG) 20% AUM growth and agile fundraising demonstrate the pressure Carlyle faces from smaller, more focused competitors. While Carlyle's $474 billion AUM provides more diversification, TPG's ability to raise $18 billion in Q3 alone shows that scale is not the only path to growth. This suggests Carlyle's diversification strategy, while reducing risk, may also be slowing capital deployment compared to more focused peers. ## Valuation Context: Pricing the Transformation At $54.52 per share, Carlyle trades at 30.6 times trailing earnings and 6.6 times sales, a significant discount to Blackstone's 42.1x P/E and 15.8x sales. The market is pricing Carlyle's slower growth and smaller scale, but may be undervaluing the quality and durability of its evolving fee streams. The forward P/E of 12.3x suggests expectations of meaningful earnings growth, likely driven by CP VII carry and continued credit/secondaries expansion.

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The negative operating cash flow of -$2.61 billion in Q3 reflects heavy investment in growth initiatives and fund commitments, not operational weakness. Carlyle's $2.2 billion cash position and $1 billion undrawn credit facility provide ample liquidity to fund these investments without diluting shareholders. The $200 million in Q3 share repurchases, with $369 million remaining capacity, signals management's belief that the stock is attractively priced relative to the earnings power of the transformed platform. Debt-to-equity of 1.85x is higher than BX's 0.66x and KKR's 0.74x, reflecting Carlyle's corporate structure and investment in insurance assets. This increases financial leverage, but the capital-light model and stable fee growth provide coverage. The 2.57% dividend yield offers income while investors wait for the transformation to fully reflect in earnings, though the 78.65% payout ratio suggests limited room for dividend growth without higher distributable earnings. ## Conclusion: The Fee Engine's Critical Test Carlyle's transformation from a traditional private equity firm to a diversified alternative asset manager is no longer aspirational—it is measurable in the financial results. The 55% FRE contribution from credit and secondaries, the 150% capital return rate, and the 48% fee margin demonstrate a business that has rewired itself for durability and growth. This positions Carlyle to thrive in an environment where mega-deal LBOs are concentrated but secondary market activity and insurance capital flows are expanding. The critical test over the next 12 months will be whether Carlyle can close the performance gap with larger peers while maintaining its capital-light discipline. CP VII's path to carry, the CP IX fundraising launch, and the $20 billion in expected insurance AUM will determine whether the firm can accelerate AUM growth from 7% toward the 12-24% rates posted by BX, KKR, and APO. Success would validate the premium valuation and potentially narrow the multiple discount; failure would relegate Carlyle to a solid but second-tier position in the alternatives landscape. For investors, the risk-reward is asymmetrically tilted toward execution rather than market risk. The diversified platform provides downside protection if PE markets seize up, while the capital markets, secondaries, and insurance businesses offer multiple paths to earnings growth. The key variable to monitor is not quarterly realization timing but the pace of AUM growth in non-PE segments. If Carlyle can sustain its hyperscaler position in secondaries while scaling its insurance platform, the fee engine will generate sufficient earnings power to justify current valuations and reward patient shareholders through both capital appreciation and ongoing buybacks.