Carlyle Group Inc (CG) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Carlyle Group third-quarter 2012 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to today's host, Daniel Harris. Sir, you may begin.

Thank you. Good morning, and welcome to Carlyle's third-quarter 2012 earnings call. My name is Dan Harris, and I'm the Head of Public Market Investor Relations at Carlyle. With me on the call today are our Co-Chief Executive Officers, Bill Conway and David Rubenstein, and our Chief Financial Officer, Adena Friedman. If you have not received or seen the earnings release, which we published this morning detailing our third-quarter results, it is available on the Investor Relations portion of our website or on Form 8-K filed with the Securities and Exchange Commission. Following our prepared remarks, we will hold a question-and-answer session for analysts and institutional unit holders. This call is being webcast and a replay will be available on our website immediately following the conclusion of today's call.

We will refer to certain non-GAAP financial measures in today's remarks, including distributable earnings, economic net income, and fee-related earnings. These measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting principles. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are included in our earnings release.

Please note that any forward-looking statements provided 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 that could cause actual results to differ materially from those indicated, including those identified in the risk factor section of our registration statement on Form S-1 as such factors may be updated from time to time in our SEC filings. Carlyle assumes no obligation to update any forward-looking statements. With that, let me turn it over to our Co-Chief Executive Officer, David Rubenstein.

Good morning, and thank you for joining us today. I am pleased to report that Carlyle had a very strong quarter. We continue to see attractive opportunities for investments by and distributions from our funds. During the third quarter, we announced or completed a large number of what we believe will be highly attractive investments. We saw valuations increase appreciably. We continued our industry-leading pace of realizations and distributions and we continued our strong fundraising pace. And thus, we are very pleased with the quarter's results.

But, our performance should always be viewed over the long term, at a minimum, on a rolling 12-month basis. With this type of long-term perspective in mind, we should also note that we are quite pleased with our year-to-date results. During our remarks, as we have done each quarter, we will focus on the underlying activities that drive distributable earnings, which we have always viewed and continue to view as the most important metric by which to evaluate the current and future strength of our business. I say current metric, because distributable earnings clearly show the results of our recent investment performance. And I say future metric, because current distributable earnings reflect profitable realizations for our fund investors. And when these investors receive distributions, they tend to reinvest with us, and by doing so, they restart the cycle, enabling us to invest, create value, and distribute more to our investors. In turn, we can produce distributable earnings to our unitholders.

Of course, we cannot guarantee that our having significant amounts of capital to invest will always produce an attractive level of distributions to our investors and then to our unitholders. But we believe our ability to produce strong and consistent distributions is second to none in our industry, and we remain confident in our ability to continue this record into the future. In sum, we focus on our ability to make attractive distributions to our investors, and in turn to our unitholders, and we believe our record in being able to do so is the best metric by which to judge our current and our future performance.

Now, let me turn to a few highlights. First, our year-to-date pre-tax distributable earnings on a pro forma basis are $512 million with $206 million generated in the third quarter. We continue to be pleased with our cash earnings performance. Second, we announced a quarterly distribution of $0.16 per common unit. Year to date, our pro forma post-tax distributable earnings per common unit are $1.52, and distributable earnings per common unit since we priced our IPO on May 2 are $0.91. While we do not know precisely how we will perform during the fourth quarter, we are optimistic that we'll be able to deliver an attractive year-end catch-up distribution. Third, we have now invested $4.6 billion in equity across our carry funds year to date, including $1.6 billion equity in the third quarter. We announced additional transactions during the third quarter with more than $4 billion in new equity commitments, which should close in the fourth quarter or early in 2013.

Fourth, as previously disclosed, our overall carry fund portfolio has appreciated 11% since the end of 2011, 18% in the last 12 months, and 3% in the third quarter. We saw particularly strong appreciation in our US buyout funds. Fifth, we have realized $11.9 billion in net proceeds for our fund investors so far this year including a very strong $5.1 billion in this quarter, arising from 117 investments across 34 carry funds. We expect that our diverse portfolio investments with varying maturities will continue to produce solid distributions to fund investors in the years ahead. Sixth, as we have discussed and anticipated in last quarter's call, our fundraising continues to be strong in a challenging market. During the quarter, we closed on $3.4 billion in new commitments for our carry funds, our hedge funds, a new CLO, bringing our year-to-date total of new commitments for our funds to $9.4 billion. Over the last 12 months, we have raised $10.8 billion in new capital commitments.

I want to take a moment now to highlight the continued growth of our global market strategies business. As I mentioned last quarter, investors continue to be in search of yield and we've continued to expand our GMS product offerings in response to investor demand. For example, during the quarter, we closed a $615 million CLO, our third new issued CLO of the year. At the end of the third quarter, we managed nearly $17 billion in CLOs. In early October, we announced the purchase of a 55% stake in Vermillion Asset Management, a commodities investment manager with $2.2 billion of assets under management across three strategies. We can now offer our limited partners the differentiated opportunity to invest directly in various commodity strategies, as well as to provide exposure to the agriculture, energy, and infrastructure sectors in our carry funds. We believe that combining Carlyle's expertise and global platform with the experience of the direct trading strategies employed by Vermillion will provide our fund investors with new opportunities to allocate capital to more liquid commodities strategies.

With the addition of Vermillion, our hedge fund partnerships will have total AUM of $12 billion across three distinct strategies, long/short credit through Claren Road Asset Management, emerging market opportunities through the Emerging Sovereign Group, and now commodities strategies through Vermillion. In the past two years, through a combination of organic growth and bolt-on acquisitions, AUM and our GMS platform, including the recent acquisition of the 55% interest in Vermillion, has increased more than 2.5 times, from $12 billion to over $32 billion. And, GMS is now a significant contributor to the Firm's overall asset base and earnings. We will continue to search for avenues of growth in this segment.

Moving on, I want to remind everyone that we believe we have four drivers of our business at Carlyle -- fundraising; investing; appreciating the value of the portfolio; and exiting. Collectively, we call these drivers the Carlyle engine. I would like to address, in most of my remaining comments, the fundraising element of this engine. Despite the fact that large parts of the world experienced an economic slowdown over the summer, we raised $3.4 billion during the quarter, bringing our total of new capital raised to $9.4 billion for the year. This figure compares favorably to the $6.7 billion we raised during all of 2011, and we expect additional new commitments in the fourth quarter. In other words, we have raised 40% more in the first three quarters of 2012 than we did in all of 2011. For this reason, we are pleased with the fundraising year to date, particularly considering the challenging fundraising market that we have discussed on previous calls.

Let me provide some additional color on our current fundraising efforts. First, we have had subsequent closings in our latest US buyout fund, Carlyle Partners VI, in our energy mezzanine fund, in our distress fund, and in our real estate credit fund. And, yesterday, we had a final closing on $1.1 billion for our mid-market US buyout fund, Carlyle equity opportunity fund. We expect a final close this year as well on Carlisle energy mezzanine fund. Like Carlyle equity opportunity fund, the energy mezzanine fund will exceed $1 billion in size. For both of these funds, we exceeded our fundraising target and we also brought into our investor base a good many investors new to Carlyle. Second, Carlyle Partners VI, our flagship US buyout fund, is the fund about which we are asked the most, for it is our largest fund in the market. It is targeted at $10 billion. We are on pace to achieve our size goal and also to do so on the schedule we set out for this fund.

Third, we continue to see robust inflows into our hedge fund strategies. We had approximately $380 million in new net subscriptions in the quarter for our hedge funds, and we have seen $1.7 billion in new net subscriptions year to date. Fourth, we expect to have a first closing on our fourth Asian buyout fund before the end of the year, and have a number of new funds which will start fundraising late this year or early in 2013. And fifth, we have recently started to gain traction within our AlpInvest fund-of-funds business on raising capital for a new commingled secondaries fund.

One last anecdotal comment on fundraising. In September, we held our annual Washington investor conference for our fund investors. Nearly 700 investors participated from around the world. This is the largest such gathering organized by an alternative investment management firm for its investors every year. This was our 18th year of holding such an investor conference. Bill Conway and I, along with our Chairman, Dan D'Aniello, have attended all 18 of these conferences. For the first time since the great recession began, we collectively sensed this year a real uptick in the interest level of our fund investors in committing capital to alternative investments and perhaps, more importantly, to our alternative products. And, since the conference, we have in fact seen real follow up with our investors on a great many of our funds. We firmly believe additional commitments will follow, but, of course, only time will tell.

Let me close with brief comments on Hurricane Sandy and its impact on Carlyle, and then on the election and its impact on private equity. Like other US companies, we have been very engaged in monitoring the impact of Hurricane Sandy on our business. Of course, our first priority has been the safety and security of our employees and those of our portfolio companies. While a number of our employees experienced hardship associated with lack of power, water or access to communications, thankfully none experienced serious injury. I am also pleased to let you know that none of our companies reported any substantial damage to their facilities, properties, or operations. Like others, some of our companies have experienced power failures and logistical challenges at certain sites related to the storm, and certain of our companies will undoubtedly report slower sales for a few days related to the storm. Other parts of our business, particularly those companies involved in infrastructure, construction, and logistics, could well see increased business activity in the short term associated with the rebuilding. Fortunately, as a global firm with a highly diverse set of funds and investments, we do not believe the hurricane will have any meaningful impact on our Firm's overall performance.

Now, the election. Today, in a nutshell, let us just say that we do not believe that the election will produce impactful changes on Carlyle or on the private equity world in the near term. But, as an American citizen, we hope of course that the US Government will begin to address seriously the mounting fiscal and financial issues facing the country. As a result of the election, as we all know, we have the same President as we had before, and each House of Congress is controlled by the same party as before, though in slightly different percentages. Overall, this does not seem to be a formula for rapid resolution on key issues facing the country, but hopefully some real progress will be made. The lame duck session in December will focus on fiscal cliff issues, and while Carlyle, like all companies, would like to see a satisfactory resolution of fiscal cliff issues, we do not believe any such resolution will focus on private equity in any specific way. Nor do we believe anything likely to happen in the lame duck will impact private equity or Carlyle in any way which was disproportionate to the way it will affect any other type of company in the country.

After the lame duck, we expect that comprehensive tax reform will likely be on the agenda of the new Congress and the President. However, we expect that any comprehensive reform will take at least two years. In the context of this reform, carried interest taxation and a great variety of other issues will no doubt be addressed. But our best judgment and information about what will happen on carry interest taxation does not yet enable us to say how this or any other issue of interest to firms like ours will ultimately be resolved. Perhaps in a few months, or sometime in the next Congress, greater clarity on these issues will be possible. Let me now turn it over to Bill Conway. Bill?

Thank you, David. I'd like to start by offering a few thoughts on the overall economic environment, and then move to our new investments, the state of our portfolio, and our recent exit activity. As you know, we collect and analyze data from our 200 plus portfolio companies providing us insight into the state of the global economy. In the United States, the economy continues to expand at a stable, yet unsatisfyingly slow rate. We are seeing some interesting trends. Capital spending and industrial production declined in the third quarter, showing continued caution by corporate management teams who have taken action to reduce inventories and limit unused capacity. In contrast, we have seen a notable acceleration in fixed residential investment and stronger than expected household spending. We remain cautiously optimistic that the combination of very low interest rates, the strengthening housing market, and the benefits of significant domestic energy discoveries will provide a catalyst for stronger US economic growth over the medium term.

The trajectory of our internal data on Europe changed during the quarter. Rather than steep declines, as had been the case for most of 2012, recent data suggests signs of stabilization. One of our proprietary European indicators, which accurately predicted about five months in advance the European contraction that began in October of 2011, is currently showing signs of modest growth. Conditions remain challenging, but our recent data are more favorable than what you read about in the headlines. To be clear, we aren't seeing strong evidence of a recovery, but European economies are not falling off the cliff. Rather, we believe we are witnessing a mild contraction.

Our perspective on China has not changed materially since the second quarter. Incoming data had been volatile with months of apparent stabilization followed by periods of renewed deceleration. We believe it is better to focus on longer-term trends. China is experiencing two secular shifts. First, it is moving from an export-oriented economy, heavy on infrastructure investment, to an economy where domestic final sales will make a progressively larger contribution to growth. Second, it is adjusting to a slower long-term rate of growth. Thus, we are observing uneven performance in different sectors. Some of have slowed, some are contracting, others continue to grow rapidly.

Elsewhere in the world, we see surprisingly rapid growth in household spending in Brazil. But, in Japan, we are seeing worrying decline in industrial output. We are monitoring Japan closely to determine whether the decline is limited to Japan or has broader implications.

Keep in mind that the economic environment is not the same as the investment environment. In fact, we think this is a great investment in which to invest on a very disciplined basis, even with weak and mixed macro growth signals. In the third quarter, we invested $1.6 billion in 86 new and follow-on transactions, in 16 countries, across 24 distinct carry funds. In addition, we announced, but had not yet closed as of September 30, 10 transactions, in 4 countries with over $4 billion in additional equity commitments, across 7 distinct carry funds. We expect these transactions to close in the fourth quarter or in the first half of 2013.

Rather than walking through each of the larger corporate deals that we announced in the quarter, we have included an appendix on page 31 of the earnings release. You will note that more than half of these investments, and virtually all of the larger ones, were made in the United States, with 62% of the equity for the committed transactions in the US industrial and manufacturing sectors. There is a reason for this. To put it bluntly, we believe that the best place in the world to invest today is the United States. I have already mentioned the very low interest rates, the strengthening housing market, and the revolution in the US energy markets, which will lower costs and drive growth in US manufacturing. Additionally, America possesses inherent attributes, attributes that are so often taken for granted -- like freedom, the rule of law, general trust in our regulatory agencies, our infrastructure, capital markets, universities, medical systems, Silicon Valley, et cetera, all of which, even given the many obvious improvements needed, are across the board highly advanced and systematically well working.

As we consider opportunities in other domestic economies -- developed economies, even those with weak economies at present, we believe that investing in market-leading companies in those economies continues to make sense. Thus, we announced investments in a leading small engine manufacturer with significant operations in Japan, a software company based in Germany, and an apparel company based in Italy. Notwithstanding the slowdown in China and other emerging markets, we continue to be bullish on particular types of investments in emerging markets. In this quarter, we announced two transactions in China, as well as two public-to-private transactions of Chinese businesses, two investments in Brazil, one in Turkey, and we completed our first investment in Southeast Asia. Each of these investments will hopefully benefit from a strong and growing middle class in their market.

We continue to be active in real estate investing, putting nearly $340 million to work in the quarter. We see signs of a recovery in the US housing sector, which is consistent with our view that during the recession there was an under investment in housing that affected all aspects of the housing sector. And, today, pent-up demand is creating attractive investment opportunities in the multi-family development, hotel, and senior living sectors.

As David mentioned, we recently held our annual investment conference, and a number of our investors asked two questions. The first was, why are we, Carlyle, pursuing all these deals when our competitors, both private equity and corporate, seem much less active? We responded. First, we have a larger corporate private-equity business than many of our peers, with more than 260 of our 600-plus investment professionals engaged in buyout and growth investing, dedicated to finding the best investments around the globe. This has been our core business for 25 years and our global reach and network helps us to find investments where others can't. And our experience gives us the comfort to pursue investments where others won't.

Second, the timing of some of these investments is coincidental. Examples of these are Dupont Performance Coating, Hamilton Sunstrand, and Philadelphia Energy Solutions, all of which we have been working on for over a year. Our business is lumpy by nature. Third, in other transactions, we created tactical advantages over our competitors. For example, we were the only investor in serious discussions with Sunoco about the Philadelphia refinery. In Hamilton Sunstrand, United Technologies was selling three different business units. We believe that they received bids from multiple strategic investors for each of these businesses. But, Carlyle and BC Partners, our partner on the deal, were the only ones interested in buying all three units, giving us the edge.

Another example is Genesee & Wyoming. We have been interested in the short-line railroad sector for years and we thought a creative way to invest in this area was to provide capital to Genesee & Wyoming, helping them to buy RailAmerica, creating an even stronger combination. Fourth, and finally, our transactions benefit from incredibly low interest rates. As an example, the weighted average cost of our debt on the recent Getty Images investment was only 5.25%. The high-yield market has become a low-yield market.

The second question that many investors asked at the conference was, how do I invest in these transactions? Our investors -- our fund investors are eager to put money to work. Many of their other investment options look unattractive. Annualized public-equity returns, even including dividends, over a 10- or 15-year period, have returned mid-single digits or below. Treasuries are paying next to nothing. The yield on high-grade corporate bonds is at historic lows. Investors need a place to achieve attractive returns, and we're providing them with solutions.

Turning to portfolio performance, our overall carry fund portfolio appreciated by 3% in the quarter, and is up 11% year to date and 18% year over year. Finally, in terms of exits and distributions to our fund investors, we realized proceeds of $5.1 billion for the quarter, bringing total realized proceeds to $11.9 billion year to date. Our third-quarter realization activity reflects the diversity of our platform, with proceeds from 117 investments and 34 carry funds. This quarter, we generated proceeds from secondary sales, sales to both financial and strategic investors, and dividends from some of our strongest cash-flow generating companies.

Secondary sales included -- block sales of publicly traded stock, including slightly more than $1 billion from the sale of Kinder Morgan stock in Carlyle Partners IV and our energy funds; a $721 million sale of stock in China Pacific Insurance Company in Carlyle Asia Partners I; and $367 million from the sale of our final ownership stake in Dunkin' Brands in Carlyle Partners IV. Outright sales included -- Talaris and our third-year buyout fund to Glory, a Japanese company; AMC Movie Theaters from Carlyle Partners III to Dalian Wanda of China; and Three Rivers National resources in Carlyle Riverstone IV to Concho Resources, a US corporate buyer.

As an example of a dividend, our fund investors also benefited from Booz Allen's dividend of $6.50 per share on our ownership of about 90 million shares of Booz Allen stock. Our portfolio announced [AUMs] of $62 billion in fair value of carry it work in -- of capital work in our carry funds. Of this $62 billion, $16 billion is held in publicly traded equities, and $31 billion represents transactions originally made in 2008 or earlier. As we said last quarter, we have a diverse portfolio that is ripe for monetization, providing us opportunities for future significant realization. I will now turn to Adena to discuss our financial results.

Thank you, Bill. Carlyle posted a strong quarter, with $196 million in post-tax distributable earnings, or $0.63 per unit, and post-tax economic net income of $204 million, or $0.66 per unit. As said earlier, Carlyle declared a quarterly distribution per unit of $0.16, our first full quarterly distribution since the IPO in May. Over the past few quarters, our distribution to public unitholders have totaled $0.27, compared to our post-IPO distributable earnings of $0.91 per unit. Looking forward to year end, we intend to pay out a catch-up distribution to all unitholders based on a level of post-tax distributable earnings generated since our IPO. Our intention is for our total distributions to unitholders in 2012, including our fixed distributions and year-end catch-up, to pay out a range of 75% to 85% of post-tax, post-IPO distributable earnings, absent any unusual cash requirements from acquisitions, debt paydown, or fund investments. As a reminder, we expect that we will announce the catch-up distribution in our fourth-quarter earnings release in February 2013, with the cash distribution to follow in March.

Comparing our results to prior periods, we posted pre-tax distributable earnings of $206 million, compared to $115 million in the second quarter of 2012 and $244 million in the third quarter of 2011. Our realizations and carry generating funds increased in the third quarter versus the second quarter of this year, whereas the third quarter of 2011 also experienced strong carry generating realizations. Over the last 12-month basis -- on the last 12-month basis, distributable earnings of $748 million are roughly unchanged, compared to the prior 12-month period, with net realized performance fees up 7% from the prior year, and fee-related earnings down 14% over the same period, due to unfavorable foreign exchange adjustments, long-term growth initiatives, and Firm preparations for the IPO, driving operating US dollar denominated expenses higher.

Carlyle's third-quarter 2012 pre-tax economic net income, or ENI, of $219 million compares to an economic net loss of $57 million in the second quarter of 2012 and a loss of $191 million in the third quarter of 2011. The positive comparison is largely attributable to portfolio appreciation during the third quarter driving positive performance fees, versus portfolio declines in the second quarter of 2012 and the third quarter of 2011. On a last 12-month basis, ENI of $808 million is lower versus the prior year of $1.2 billion due to strong portfolio appreciation and the recovery period following the financial crisis. The recovery and portfolio values resulted in both Carlyle Partners IV and Carlyle Partners V surpassing their preferred (inaudible) returns in the fourth quarter of 2010 and the first quarter of 2011, respectively, causing a cumulative catch-up of performance fees in those periods.

Moving to our key metrics for the quarter, as of quarter end, Carlyle had total assets under management, or AUM, of $157 billion, up from $156 billion in the second quarter of 2012 and $147 billion at the end of the third quarter of 2011, while fee-earning AUM of $115 billion compared to $112 billion in the second quarter of 2012 and $113 billion at the end of the third quarter of 2011. As our engine hums along, we will have a natural regulator on the growth of our AUM. There are four key factors that drive changes in AUM in our carry funds -- fundraising; changes in portfolio value; exit activity; and Firm-level acquisitions. Whereas new fund commitments drive AUM up, they are made at the equivalent of a one-time value to reflect the purchase price of the investments made with that committed capital. In contrast, our successful exits are hopefully at valuations well above the entry price, many times at 2-plus times value and therefore results in a greater relative decline in AUMs.

Specifically looking over the past 12 months, while our fundraising efforts have been quite successful over the period, with $10.8 billion raised in new commitments, our exit activity has driven distributions of $15.2 billion. Other contributing factors to AUM are changes in portfolio value and acquisitions. Our carry fund portfolio appreciated 18% over the last 12 months, and we made two CLO group acquisitions, both of which drove our overall AUM up year over year. Overall, our AUM grew by $10 billion in the last year, but many factors played a role. Our AUM roll forward tables on page 21 of the release provide additional information regarding the changes.

Turning to the Firm's four segments, our Corporate Private Equity segment produced distributable earnings of $145 million. Positively impacting Corporate Private Equity in the quarter were large block sales in Kinder Morgan, Dunkin' Brands, SS&C, and China Pacific Insurance Company, in addition to several closed private sale transactions. Year-to-date distributable earnings from the Corporate Private Equity segment of $326 million accounts for 65% of Firm-wide distributable earnings thus far in 2012. Third-quarter private equity ENI of $177 million resulted from 5% appreciation of the portfolio in the quarter, as well as strong realizations across 16 funds. For the year to date, the portfolio has appreciated 12%. Corporate Private Equity ended the quarter with $53 billion in total AUMs and $37 billion in fee-earning AUMs.

Fundraising continues for our latest vintage US buyout fund, Carlyle Partners VI, as well as multiple other corporate private equity funds. For Carlyle Partners VI, specifically, we have now received commitments of $3.7 billion in capital, which is on plan with our expectations when we launched the fund in the first quarter of 2012. We have not yet turned on the fees because the predecessor fund, Carlyle Partners V, is still investing in new deals and, therefore, the commitments into Carlyle Partners VI are not yet included in our fee-earning AUM. Fundraising remains challenging across the industry, but we are pleased with our progress year to date and expect to see flows into our funds continue during the fourth quarter.

Global Market Strategies, or GMS, which David focused on earlier, ended the third quarter with $28 billion in fee-earning AUMs and $30 billion in total AUMs. These results do not reflect the October 1 acquisition of a 55% in Vermillion Asset Management, which added $2.2 billion in total and fee-earning AUM to the asset base. Distributable earnings were $28 million for the third quarter and $83 million year to date, which accounted for 17% of Carlyle's overall distributable earnings thus far in 2012. Within GMS, during the third quarter, we raised our third and largest new CLO in 2012, with $615 million in new assets, and have raised over $1.6 billion in new CLO assets year to date. Our GMS carry funds appreciated 2% in the quarter and are now up 17% year to date. Our first generation energy mezzanine fund will close with over 4 -- with over $1 billion in commitments, and has been active in energy investing during the quarter. Net subscriptions into our GMS hedge funds were $397 million and do not reflect any impact from the 55% interest in Vermillion. Our hedge funds ended the quarter with $9.8 billion in total assets under management, up from $9.6 billion in the second quarter of 2012.

Moving on to Real Assets, distributable earnings for the quarter were $31 million and $80 million year to date. In terms of fund performance, our real estate funds experienced 5% appreciation in the quarter and 12% year to date. Our energy funds declined 3% in the quarter, but have appreciated 6% year to date. Asset deployment in our latest US real estate fund, which had its final close in December 2011, continues at a rapid pace, with 42% of the fund already deployed or committed. We recently started fundraising for our next generation Asia real estate fund, and we expect new fund launches across the real estate platform to occur in 2013. In addition, as noted earlier, we continue to evaluate options to enhance our energy offering.

Our last segment is the Fund of Funds Solutions. Distributable earnings were $3 million for the quarter. As noted previously, we have also begun to see a pickup in fundraising in this segment and expect to have a first close in AlpInvest commingled secondaries fund V in the fourth quarter. We continue to focus on ways to develop this business and expand the offering set to both current and potential new clients.

Now, moving to expenses. Excluding performance fee-related compensation expenses, our operating expenses were $205 million, down from $213 million last quarter and $212 million in the third quarter of 2011. Fees compensation expenses declined 8% since the third quarter of 2011, due to changes in bonus accruals related to shifts in compensation associated with the IPO, partially offset by additional hires. Third-quarter G&A of $69 million increased $13 million when compared to the third quarter last year, primarily due to unfavorable foreign exchange adjustments, but also influenced by higher fundraising costs and a continued build out of Firm-related infrastructure associated with the IPO. Interest expense of $5 million declined from $15 million in the third quarter of 2011, primarily due to the redemption of the (inaudible) notes in the fourth quarter of 2011 and first quarter of 2012, as well as debt paid down during the second quarter with proceeds from the IPO.

Moving to the balance sheet, at quarter end, we had $770 million in cash and $500 million in a loan payable. Our net accrued performance fees are approximately $1.2 billion as of quarter end. And, on-balance-sheet investments attributable to unitholders are $216 million at quarter end. In summary, we are pleased with our third-quarter results of $0.63 per common unit of distributable earnings and $0.66 per common unit of economic net income. And we are excited about the future prospects of the recent investments we chose to make this quarter and how they will benefit our engine in the years to come. With that, let me turn it back to David for some concluding remarks.

Thank you, Adena, and thanks to all of you for listening today. As I think you heard this morning, Carlyle's engine was active and successful throughout the third quarter. We raised $3.4 billion. We invested or committed over $5.6 billion. Our carry fund portfolio appreciated 3%. And our realized proceeds totaled $5.1 billion. We are confident -- actually, very confident -- about the state of our business today, and quite optimistic about the future direction we are heading. We're now ready to take your questions.

(Operator Instructions) Howard Chen of Credit Suisse.

David, you touched on the broad-based success you've seen in fundraising across a variety of strategies. But I was curious, on a relative basis, do you feel or are you seeing any meaningful differences amongst those fund families? Where is fundraising proving to be incrementally more or less challenging today?

Well, I think that clearly people like -- our investors like funds that have track records, so if you've got a long track record, it's obviously easier to raise money for a track record, like Carlyle Partner VI, so, obviously a sixth generation. Second, it's easier to raise money today where there's some fixed income or some distribution that's more regular than a typical private equity fund. And I think our success in raising energy mezzanine fund reflects that. It's an equity fund but also has a current coupon in effect from some of the investments. Clearly, all of the funds that we have today are ones that have made some resonance with investors, but nothing happens overnight. Even Carlyle Partners VI with a track record of 25 years can't be raised in a few months.

So I'd say overall, investors are coming back into the market. They recognize that alternative investments probably produce better returns for them than any other kind of investment. But nobody is overnight making large commitments that would welcome a fundraisers heart. It does take some time. I think overall we're now quite pleased with the interest level of our investors in reengaging. Sometimes I'd say a year ago or so, some investors were not as interested in making new commitments. Now I think that they are. But still you really have to work to get it.

Great, thanks a lot, David. And then Bill, switching over to the meaningful step-up in deployment, I realize any one quarter's results can be lumpy and impacted by things like timing. But is this quarter's pace sustainable from the context of capacity of your investment team? I'm trying to gain a sense if we roll forward 12, 18 months, it's reasonable to think that deployment activity can trend higher from the capacity of you and your team.

I think the teams, Howard, I think the teams have the capacity to invest at this pace and conceivably even higher. I would say that the US team, which led a lot of the transactions done in the third quarter, they were very busy, and now, they have to actually close the deals that have already been agreed, which they will be doing over the next three or six months. I would say over time, I'm counting on other funds other than the US buyout fund to step up their level of investing.

Great, thanks. And then continuing on deployment, Bill, you put a lot of money in the ground this quarter, and amongst that activity, did a few nonproprietary deals. Was hoping you could comment on the pricing environment for deals that aren't purely proprietary sourced, and how you gain comfort, with your value creation expectations, exiting investment committee.

I would say, Howard, that it's interesting. It's a combination of available financing, relatively low rates, the global network and what we think we can do with the companies, has not led to any reduction in our expected rates of return on the new investments that we're making. I think one of the things that gives us a lot of comfort is that we've been doing this for 25 years and over that period of time, we've made hundreds of investments.

Not that they all worked out, as you know. But I think generally, we've got a lot of confidence in what we've done. I would also say that I wouldn't trade places with any other firm when it comes to the deals we've done and the portfolios that we have in Carlyle now.

Understood, thanks. And then finally for me, touching on something you've mentioned a few times now, with respect to the financing environment. I think you gave an example with respect to Getty Images and the attractive financing there, Bill. We realize what that's being fueled by in terms of the common aid of central banks, but at what point do you become concerned and you see these signals that it gets a bit frothy and what do you do in that scenario? Thanks.

I would say, Howard, I'm concerned not that the markets are extremely frothy, that we've never seen rates this low. I would say the underwriting standards of the banks, though are probably not as loose as they were in the 2008, '09, '07, '08, '09 period but any time you've got rates at these very very low levels. Remember what's fueling this is that the central banks print all this money, and investors everywhere are seeking return and yield.

And first they go to the sovereigns. And then they drive down the rates on US Treasuries, Japanese JGBs, German bonds, you name it. And then they start looking through other asset categories. They'll go to high-yield corporate funds. And I saw earlier this week, I think, a 10-year DDD was done at 2.33%. It's -- you'd have to be not very aware not to be watching what's happening.

And I think from the standpoint of Carlyle's responsibility to our Limited Partners and our unit holders, we have a responsibility to really take advantage of this while it is being offered. And on the other hand, we also have the responsibility to be positioned for the fact that it's not going to go on forever. And so for example, you're not just trying to borrow money and use the benefit of these short-term very low rates, or in the short run, very low rates, but also, you're trying to make sure that you have covenants that give you extreme flexibility, that you have revolvers that can be used maybe for a time when things aren't as cheap as they are today.

Great. Thanks for the thoughts and for taking all the questions.

Ken Worthington of JPMorgan.

First, in terms of fundraising as well, you're in the market with CP6 VI, you mentioned Asian buyout with the first close coming, and I think European buyout, CP IV, will start fundraising soon. So how does being in the market fundraising your big flagship products at the same time impact the ability to meet or even exceed the fundraising goals? It feels like it would make things more challenging given market conditions, but I would figure you'd know that, and maybe there's actually even synergies out there, so we would love to hear your comments.

Okay, thanks for the question. First, these funds have long histories to them. They are not first funds, and therefore, they have an imbedded investor base. And as you know, typically investors re-up with a fund that's been reasonably successful. So, if we were raising three funds of these size that had no track records with them, I'd be more nervous. Second factor is that the funds have all done pretty well relatively speaking, and in absolute terms, as well, and therefore I don't think it is going to be as difficult to raise these funds as it might be for some other organization that might be trying to raise three funds at the same time with a track record that might not be as good as this.

Third, what we're now seeing is an influx of new investors into the private equity world, or alternative world, and that is not only sovereign wealth funds, which are stepping up and they can invest large sums, but a high net worth individuals, particularly those who are being rounded up in feeder funds, not unlike with all your organization or other organizations now have a pretty good business of rounding up high net worth individuals, putting them together in a so-called feeder fund and investing in our funds. And that's a business that we're seeing increased fairly dramatically.

So, we also have a very large fundraising team and it is a large world, so in any given time, yes, these fundraising teams are figuring out where the best place is for our fund heads to go, and since we have about 1400 existing institutional investors from which to pick, plus new investors, it is not as challenging as it might seem. On the other hand I don't want to make it seem like it's so easy that when we get our targets nobody will tell me what a great job I've done.

Okay, thank you very much there. And then a little bit more high level. How do you address or manage reputational and brand risk when making investment decisions? And I'm not sure this is totally related, but Chemring has made it into the press. Maybe give us some background there. But I'm really after the brand and reputational risk and how you think about that in the investment process.

Let me take that, if I can, David and Ken. Carlyle obviously values our good name, it's our biggest asset. A lot of times when our investment professionals or our fundraisers go to see someone, I want them to be able to put their business card down and it says the Carlyle Group on it and I want people to really think, wow, that's a first class organization.

The thing that we have done perhaps more in the last few years than in the early years of Carlyle is now on every investment that we make, we'll have a checklist done on the various CSR issues, labor, the environment, anything foreign corrupt practices act, we'll employ far more consultants to do things. Now there's no guarantees. You've got hundreds of portfolio companies and you've got more than 1,000 people working for Carlyle all over the world.

There aren't guarantees, but I think we have done a tremendous amount to try to ensure that we're playing by the rules. And I think also, we've come to the belief that playing by the rules is good business. It's not bad business, it's good business. Doesn't make it tougher to do business and it's a good thing.

On the Chemring situation, I think that they've been putting out the various releases on the timing, obviously, at a certain time and a certain price, we had a certain interest in seeing if a transaction could be put together based upon the information we received or the information we didn't receive. We decided this had gone on long enough and at this time, we're not interested in pursuing it.

Okay, great. Thank you very much.

Robert Lee of KBW.

Thanks, good morning. Had a couple of quick questions. First, maybe looking within GMS where you've had some good success in the fundraising, your hedge fund strategy, could maybe dive in a little bit deeper, I don't know, is there any one or two specific strategies, maybe it's one or two within Claren Road that's accounting for the lion share of the net subscriptions, or is it pretty broad based?

I would say, Adena will help me on this, but I would say that it's -- Claren Road is the biggest of the hedge funds and it's got multiple strategies within that hedge fund, and different investors are looking for different exposures there. The main fund at Claren Road closed earlier this year to new investors. I can still take additional commitments from existing investors, so that is a factor. I don't know, Adena, if we've mentioned anything on any of the specific funds?

In terms of the specific funds, we do have funds that are in the significant fund table in terms of performance and size, but I would say generally, Rob, that the inflows have been -- ESG has definitely had a very good year in terms of net inflows and Claren Road has as well despite the fact that the master fund is in fact closed to new investors. So it has been relatively broad based. Remember though that each of those fund groups has multiple strategies. So there's no one strategy that's dominating right now, and mainly because frankly the master fund, which is the largest fund, is not currently open.

Let me add a point to that. When we acquire these hedge funds, we do so in part because we think they have a good track record and they will add to our Firm's overall value, but we also think that we can help them with fundraising. They all typically have raised money before, or they wouldn't have the assets they have, but many of them don't have the international fundraising base that we can often help them with. And so we have found with each of these that we have brought investors to them, and those investors are reasonably satisfied with the performance and sometimes they increase what they already have with them. So we think that we'll be able to do this as well with Vermillion as soon as that's closely a part of our Firm as it is now, but we haven't yet really started doing fundraising for them.

Okay, great. And maybe a question on the AlpInvest. You mentioned, and we've clearly seen a nice pickup in capital formation there, but I think when you first did the transaction, one of the things that I think you guys talked about was the ability to take their expertise and apply it broadly across the Firm in terms of doing more strategic accounts or multi-asset class products, and I think you had that -- I forget which state it was, Wisconsin, or one of them. Are you seeing -- are you starting to see more of that? Is that starting to impact their inflows, more of those broader-based relationships?

Yes, to remind everybody, we have this relationship and we own this organization, AlpInvest that we bought from two Dutch pension funds, but they cannot invest in any of our funds, and we don't see any of the things that they do in terms of what they decide to invest in. However, we are able to help them in fundraising and -- as you suggest. What you're referring to is the Michigan Municipal Employee Retirement System, MERS, and we were helpful in introducing MERS to AlpInvest and they did become an investor with them.

What AlpInvest does is it has three large commingled funds, one in secondaries, one in fund investments and one in direct investments or so called co-investments. They are beginning to build a business around so-called managed accounts. That isn't going to be gigantic for them because they already have a gigantic commingled business. But the managed account business is a business that is one that they're beginning to build and I think that will have a lot of growth potential, and we're helping them on that because we have a fair amount of expertise within our fundraising group in how to help with managed accounts. Does that answer your question?

Yes, it does. And to confirm, I think, if I remember correctly, the original terms of the transaction, the assets they raise now, you have a greater future participation in at least any performance fee generation to the extent that's a part of the fee structure, is that correct?

You have a good memory.

Okay. Let's see, I think and the last one maybe for Adena, I don't know to what extent you could maybe provide some color, if there's any already known or announced realization in Q4 that we should be thinking about as we look at our DE forecast for the quarter.

We have continued to remain active in terms of realizations. And in terms of some of them, we will be realizing proceeds for LPs on other dividend type of situations like we did with Booz Allen. Those are recent to LPs but they're really a return of capital to them. In terms of exits, we have done additional secondaries and those are generally and publicly available. And I think that obviously we don't -- we're not going to give you any projections over the rest of quarter, but we have remained active so far this quarter.

All right, great. Thanks for taking my questions.

Marc Irizarry of Goldman Sachs.

Great, thanks. A question on carried interest taxation. Obviously, it's been a long dated issue. When you think about compensation for employees in the private equity business, if you will, and your franchise that you built and your overall Firm equity that you can provide, how should we think about, if at all, the changes in carry taxation could affect the way you think about compensating private equity professionals?

Well, of course, we don't know that there's going to be any change any time soon and I would point out that under numbers that are apparent from the President's budget numbers and CBO, the amount of money that would be picked up by carry's interest taxation being changed from capital gain to ordinary is a modest amount. If you eliminate the enterprise tax from consideration, you probably would pick up no more than $10 billion over 10 years.

We have -- we have projected to have $10 trillion of additional debt over the next 10 years, this would pick up an insignificant amount. I don't think that it will be seen as a major revenue raiser. And of course, if other tax rates go up, capital gains rate were to go up and with the healthcare tax coming in, the amount of money that would be picked up by the change would be relatively less than the $10 billion, maybe half of that, because of the differential being smaller.

In terms of compensating employees, obviously we're in the same situation as other firms, so that if the rate were to change, we don't expect that people will leave our Firm to go to a competing firm, because they'd have the same tax issues. Will people leave the private equity business and go to some other business? We can't say for sure. Obviously it's a business that people like to do for reasons other than tax rates, but that's one of the concerns that we've always had about this issue, the law of unintended consequences.

And so you don't really know whether if you change the way they were taxed, whether the fact that the United States is the dominant private equity country in the world and dominant venture capital country in the world, whether that will change or not. We don't know and that's the debate that Congress has had. I expect that because these issues are so complicated, no resolution will occur in the very near term. Again it doesn't pick that up much revenue, and it's complicated what the impact will be on these important industries. In terms of thinking about it, in terms our compensation our employees, we haven't had to really focus on it, really, because we don't think any change is imminent. Bill?

Great. And then if we think about the fundraising environment out there today, David, is the J curve effect impacting fundraising for the bigger private equity funds? And as you pick up the investing pace, does that become less of an issue in terms of some LPs are sidelined right now, thinking that some of the -- getting the election, fiscal cliff behind us maybe there'll be more investment opportunities going forward? Do you sense that there's a pick up in fundraising that'll happen as your LPs think that money will be put to work even faster than it is today?

We hope that'll be the case for sure. There's no doubt that the US economy slowed down a bit in the second and third quarter compared to what had been projected. And I think some of that was uncertainty about where the election was going. And now that that's resolved, I expect that people will say okay I'm not going to wait four more years for another president, I'm going to start doing capital expenditures and investing again.

I think the biggest complication in the fundraising market for private equity has been the mega funds. And when I say mega funds, I mean funds above $10 billion. I think it's very difficult today to go out and try to raise a $12 billion, $15 billion, $20 billion fund and really nobody's really trying to do so. There's been a feeling that those funds might have been too big to be employed sensibly, and as a result, people who are raising their large US buyout funds are really raising funds that are going to be smaller than those funds that were their predecessor funds.

And that is a major change in the industry, as you probably know. Historically if you had a good fund, you would raise a successor fund that was bigger. Now if you have a good fund, you often raise a successor fund that is smaller. In Carlyle Partners V, for example, we have a top quartile performer. It was a $13.7 billion fund, we're out now raising a $10 billion fund. In a more normalized environment years ago we would be raising a much bigger fund. So, that's the biggest complication in the fundraising market is that investors tend not to want to be in gigantic funds as they were before, and therefore, you have to offer things that are smaller and more diverse products, I think.

Okay. And then one more if I could. When you think about building the diversification of your platform, how are you viewing acquisitions at this point? Are there some areas where you're focusing on building out sooner rather than later? And how do you think about buying versus building in some of the areas where you want to expand the business?

We don't have any preconceived notions. We look at each thing separately. Clearly what we have shown is that we are willing to make some acquisitions where we think we didn't have a presence that we thought was important to have. But we recognize though that you don't want to make acquisitions repeatedly if it's going to change dramatically the culture of your firm.

And one of our strengths is our one Carlyle culture, and if you spend all your time making acquisitions, you're not going to make sure-- you're not going to have that culture as permeating in the organization as much as you might like. So, we don't want to make acquisitions that are going to change the culture. We're going to do things that are going to duplicate what we have elsewhere. We do it judiciously. And while we've made a number of them, in the grand scheme of things, most of them new assets that we have under management is really coming from organic growth or successor funds to our existing businesses.

And I would also add that on -- we called -- we used the word acquisitions, but really what happens in places like Claren Road, Vermillion, ESG, AlpInvest, is that they're not acquisitions as you might think about it. In those businesses, we typically acquire about 55% or 60% of the business. The people that have helped build those businesses to that point in time are our partners in helping to build the business even further.

They see Carlyle's global network, our fundraising capability and other things, that can help them grow and perhaps be better and perform better. But they're not acquisitions in a normal sense. And I would also say that we are very culture sensitive. We spent 25 years trying to build the Carlyle to what it is. And I think it's -- we don't want anything to destroy that culture at all.

And in another part of your question, I would say in terms of organic growth versus acquisitions, it depends on the circumstance. I would say for example a business that we built from scratch was our Energy Mezzanine business. Two years ago, it really didn't exist. Mitch Petrick and the team at GMS recruited some people to begin to build the business. We did a couple of interesting deals. Our fundraising teams went to work. The global network supported them. And 18 months or so later, we have a fund of about $1.1 billion. I think that's the kind of thing we can do when we've got all of Carlyle working together.

Great, thanks.

Thank you. (Operator Instructions) I'm showing no further questions at this time. I would now like to turn the conference back over to Daniel Harris for closing remarks.

Thank you all for participating. We look forward to talking to you guys next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.