Carlyle Group Inc (CG) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Carlyle Group third-quarter 2013 earnings call.

(Operator Instructions)

I will now like to introduce your host for today's conference, Daniel Harris, Head of Investor Relations. You may begin.

Thank you, Marcy. Good morning and welcome to Carlyle's third-quarter 2013 earnings call. With me on the call today are our Co-Chief Executive Officers, Bill Conway and David Rubenstein, and our Chief Financial Officer, Adena Friedman.

Earlier this morning we issued a press release with our third-quarter 2013 results, a copy of which is available on the Investor Relations portion of our website. Following our remarks we will hold a question-and-answer session for analysts and institutional unitholders. We're going to limit each person to one question to allow everyone on the line to participate in a reasonable timeframe, so fill free to get back in the queue if you have additional questions. This call is being webcast and a replay will be available on our website.

We will refer to certain Non-GAAP financial measures during today's call. These measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting principles. We have provided reconciliations of these measures to GAAP in our earnings release.

Any forward-looking statements made today do not guarantee future performance and undue reliance should not be placed on them. These statements are based on current Management expectations and involve inherent risks and uncertainties, including those identified in the risk factors section of our annual report on Form 10-K that could cause actual results to differ materially from those indicated. Carlyle assumes no obligation to update any forward-looking statements at any time.

Before we move on to our quarterly remarks, I want to take a moment to remind investors in Carlyle, as well as the analysts that follow us, that we'll be hosting our first Investor Day next Monday beginning at 8.00 AM Eastern Time in New York it will be simultaneously webcast. Over the course of the day, you'll have the opportunity to hear from many of Carlyle's senior business leaders and fund managers. We are excited to have the opportunity to discuss the many positive developments that Carlyle over the past eighteen months since our IPO and look forward to see many of you there. If you have further questions, please reach out to me following this call. In addition, we have reposted a copy of this morning's earnings release to our website, which addresses a minor error on page 5 of the release.

With that, let me turn it over to our Co-Chief Executive Officer, David Rubenstein.

Thank you for much, Dan. Thank you very much for joining this quarter's earnings call. Our prepared remarks today are going to be briefer than our normal earnings call. We will be taking a deep dive into Carlyle at our Investor Day in New York on November 11.

Summarize our current position and perspectives, fundraising remains exceptionally strong. Our portfolio continues to perform quite well. We are distributing significant amounts to our fund investors, investing activity in our carry funds was up from the prior quarter, and we believed we are well positioned for strong performance in our key metrics for the future. With this high-level message in mind, let me now review the highlights for the quarter.

Four key points - One, we continued our strong pace in fundraising with the third quarter total of $6.5 billion giving us a total of $22.9 billion raised over the past 12 months. We believe that investors of all types and from all parts of the world are increasingly looking to Carlyle to address more of their alternative investment needs. Investors come in many types and sizes and they can speak for themselves, of course, but we believe our fundraising success is due to our track record over 26 years, our global brand, the reach of our Firm, and the quality and scale of our fundraising team. Two, we invested $1.9 billion across our carry funds in the quarter, slightly up from the third quarter over the second quarter. Three, our carry fund portfolio appreciated by 4% in the quarter and 17% over the past 12 months.

Notably, carry funds in our largest segment, corporate private equity, appreciated 5% in the quarter and a robust 25% over the past 12 months, driving substantial gains in accrued carry across our largest buyout funds. As of the end of the quarter, our net accrued carry position exceeded $1.6 billion, the highest level since our IPO and actually the highest level in the Firm's history. Four, our production of realized proceeds also continue to be strong at approximately $3 billion for the quarter and $17.8 billion over the last 12 months. Even after realizing proceeds of $3 billion, total AUM now stands at a record $185 billion. As our key metrics show, the underpinnings of our Business continue to strengthen and will ultimately result in increased harvesting of our investments for our fund investors and growth in our distributable earnings for unitholders over time.

For the third quarter, distributable earnings were $105 million. Over the past 12 months, Carlyle's distributable earnings have been $627 million. Our activity rate in the fourth quarter is developing along the lines we anticipated through out the year. Of course, we do not know precisely how our fourth quarter will develop. We are working on a number exits which are likely to produce healthy performance fees in the near term. Certain of the exits may close in December, but they could also slip into the first quarter of 2014. As we have always said, our Businesses is inherently long term and not one driven by quarter-to-quarter milestones. Most importantly our carry portfolio is strong, and we expect to be exiting a fair number of transactions in the not too distant future on attractive terms.

We continue to be confident in our ability to generate future cash earnings for our fund investors and our unitholders. That optimism derives from our large accrued net-carry position and the strong performance of the key investments in our key funds. Strong fund performance, especially in funds and carry, led to economic net income of $195 million for the quarter. Economic net income on our last 12 months basis increased 15% to $926 million.

Let me now make a couple of comments on fundraising. This year will be, by far, our best fundraising year since the financial crisis and the second best in our Firm's history. We have 14 very attractive funds in the market and we remain active in launching new strategies that will satisfy our investors' interest. Our latest vintage buyout fund, which is Carlyle's largest new fund and which we believe will be a major source of future year distributable earnings, will complete its fundraising process in the next few weeks. It is oversubscribed. The final size will be no less than $12.9 billion. We are finalizing allocations and legal work and will announce the formal close of the fund in the coming weeks.

We also continue to make progress on a number of other funds including our Europe, Asia and Japan buyout funds, our Sub-Saharan African fund, our international energy, our financial services fund and our business development company. In October, AlpInvest closed it's fifth secondary's fund, bringing the total capital commitments in AlpInvest's secondary's program to $4.2 billion with over $750 million in new external commitments. Finally, we closed a EUR335 million CLO fund, our second of the year in Europe, and we are working now to close another CLO in the United States. In total, we expect to close more than $3 billion in new issue CLOs for the year. We now manage over $17 billion in CLO assets.

In late September we announced our intention to buy Metropolitan Real Estate Management, a global real estate fund to funds. We closed that transaction earlier this month. Metropolitan will be the second significant fund-to-fund strategy we offer in our Solutions segment along with private equity fund to funds through Alp Invest. The addition of Metropolitan to our Solutions segment will better enable us to provide a more complete range of asset allocation services to institutional clients. Metropolitan has a strong management team and we are excited to help the team expand its business. We view Solutions as a solid growing source of earnings for the Firm.

We continue to execute our strategy to grow the Firm, while investors are still cautious with allocations, Carlyle's investment performance, the diversity and strength of our investment strategies and an improving macro-economic backdrop have enabled us to grow continuously. We also see more upside over time has our new products gain transaction and our recent new fund launches and acquisitions continue to scale. Specifically, we continue to focus on building our natural resources capabilities, our global market strategies business and are still nascent but expanding Solutions' business. Together with continued strong investment performance, we are focused on building an even stronger, better and more diversified firm that delivers strong returns for our fund investors and growth in distributable earnings for our unitholders.

Bill?

Thank you, David.

Carlyle's investment pace picked up modestly in the third quarter to total of $1.9 billion, up from $1.3 billion in the second quarter. Over the last 12 months we have invested $9.1 billion in our carry funds, in line with our long-term average, but benefiting from $3.3 billion we invested in the fourth quarter of 2012.

We have been particularly active in Europe and believe that there have been excellent opportunities, particularly in midsize European companies precisely at the time when some other investors are turning away from Europe. Over the last 12 months we have completed 9 new investments in Europe, across our buyout, growth and distress funds. Despite the generally slow recovery of Europe, we see good value. While it is still early, each of these investments is performing in accordance with or better than our original plan. We have a great team investors in Europe, a long and successful track record, and are focused on finding good investments in the region.

Notable investments this quarter were three new European buyout investments, Alloheim, a German skilled-nursing firm; Chesapeake Limited, a British packaging company; and Marelli Motori, an Italian manufacturer of industrial motors and generators. We also made an investment by our distressed fund in Klenk Holz, a German manufacturer of wood products. In Asia, 7 Days Group, a Chinese a budget hotel group, was taken private by our Asia buyout funds and other investors. We made an investment with InterLink Maritime, in fuel-efficient, dry-bulk ships, and two growth-oriented investments in China, including a cornerstone investment in the IPO of Tan Wu International, a packaged food and beverage company. We also invested $640 million in our Real Assets segments. Slightly more than half of this amount was invested in real estate, with a particular focus on the United States, with the balance in infrastructure and energy.

We recently closed an investment on October 31 of approximately $500 million in Beats Electronics, a leading manufacturer and marketer of premium headphones and audio accessories. This was a minority investment by our US buyout group in a company that is well positioned in a market experiencing significant growth.

Our portfolio continues to strengthen. Our carry funds have appreciated 13% year to date and are up 17% over the last 12 months. Our private portfolio appreciated 2% in the quarter, while our public portfolio increased 10%. Our fourth and fifth US buyout funds continue to perform well, appreciating 10% and 5% respectively in the quarter. Our financial services fund also appreciated 11% in the quarter taking it further into accrued carry and positioning it to produce cash carry in the fourth quarter of 2013. A number of our other key funds, including Carlyle Europe Partners III, with a net IRR of 8%; Carlyle Asia Partners III, with a net IRR of 7%; and Carlyle Realty V, with a net IRR of 7%; continued their movement toward exceeding their preferred-return hurdles and producing performance fees. None of these funds is yet accrued carry. Our largest hedge funds remain well above their high watermarks for the year. Over our entire business, despite realizing net performance fees of over $320 million so far this year, our net accrued carry balance has grown by over $400 million and now stands at over $1.6 billion.

Turning to realizations, we have produced $17.8 billion in realized proceeds over the last 12 months, with approximately $3 billion in the current quarter, third quarter. Approximately half of these proceeds were in our corporate private equity business while real estate and energy each contributed 20% of the third quarter realized proceeds. Notable realizations this quarter were, the final exit of our positions in Boston Private and in SS&C. We also executed box sales in a number of companies, including Wesco and Allison Transmission. We closed the sale of 650 Madison, a marquee property in New York City, as well as numerous multifamily residential properties. We closed the sale of the Ashley, a Chinese infant formula company. We realized proceeds through the IPO of Kaiyuan Hotels, a China based high-end hotel chain, and as usual a number of our portfolio companies issued dividends in the quarter.

At the end of the quarter, the publicly traded portfolio in our carry funds exceeded $14 billion. We have already taken two companies public in the fourth quarter of 2013, one of which, CommScope, has added more than $2 billion in market value to our quarter-end public portfolio. With such large liquid positions, we believe we will be ready to take advantage of opportunities to sell when the opportunity arises and the price is right.

David has already mentioned our 2013 fundraising efforts. With $51 billion in dry powder, $31 billion of which is in carry funds, we have been in the process of reloading our capital. Notwithstanding the present challenges of finding the right assets at the right prices, we are doing what we should be doing, building value across our portfolio and exiting when possible and appropriate. Our investment business model is built upon limiting our downside risks. While we are far from perfect, our job is to generate attractive, absolute returns. Based on our experience in the most recent funds and our deep bench of investment professionals globally, I remain confident in our ability to put our dry powder to work.

Let me now turn to Adena.

Thank you, Bill.

With our Investor Day in just five days, I will keep my comments brief and make a few points about our results and overall financial position. Specifically, I want to discuss the quarter's financial results, spend some time on our accrued carry position, and finally highlight the impact of recent acquisitions. As David mentioned, pre-tax distributable earnings were $105 million, which led to after-tax distributable earnings per unit of $0.32. Your to date, on a post-tax basis, Carlyle has generated $1.33 per unit of distributable earnings. Over the same period, we announced cash distributions of $0.48 per common unit for the first three quarters of 2013. Our fourth-quarter fixed distribution is targeted at $0.16. To reiterate our distribution policy, we will expect to distribute between 75% to 85% of our annual post-tax distributable earnings to unitholders, which will be accomplished through true-up distribution based on our full-year 2013 results.

Fee related earnings for the quarter were $40 million up 52% compared to the second quarter and reflect the impact of strong year-to-date fundraising as well as the impact of acquiring the remaining 40% interest in AlpInvest as of August 1. Over the last 12 months our fee related earnings are now up 22% compared to the prior 12-month period. With fundraising still running at a robust level, we expect to see ramping management fees coupled with associated expenses to raise that capital. In the short term, we will also benefit from catch-up management fees in funds that are in the process of fundraising over the next year, such as our latest Asia and Europe buyout funds. If we look at management fees, the $281 million in the third quarter 2013 is up 20% compared to last year's third quarter, driven by $23 billion in new funds raised over the past year as well as our partnership with NGP Energy Capital Management and our increased AlpInvest ownership position.

The $80 million in G&A this quarter was slightly below the second-quarter level reflecting the sustained high level of fundraising activity in the Firm, but also with a focus on managing expenses were possible. Base in equity compensation moved up to $157 million this quarter, reflecting the addition of the 40% of AlpInvest we did not own last quarter as well as a slight adjustment to our expected full-year compensation levels.

Moving to accrued carry, our net accrued carry balance reached $1.6 billion this quarter, an 11% increase over the prior quarter. Our balance grew not only because of the 4% appreciation in our carry funds but also due to a more modest level of exit activity in the quarter, which would otherwise put downward pressure on accrued carry. As we've noted before, our accrued carry balance is a tremendous asset to the Firm that is likely to produce robust future cash revenues as harvesting activities increase across our mature funds in future periods. The timing exits is never an exact science, but we feel very good about the health of our portfolio and the resulting net accrued carry position, which is now up 34% since year-end 2012 all of which will benefit unitholders as profitable exits continue in funds in carry.

Turning to our strategic investments this quarter, on August 1 we completed the acquisition of the remaining 40% interest in AlpInvest, resulting in an improvement of approximately $6 million in fee related earnings to our results this quarter. Our interest in AlpInvest management fees now stands at 100%, while our interest in carry did not change from our original investments. We also closed the acquisition of Metropolitan Real Estate on November 1. Given the closing occurred after quarter end, Metropolitan did not impact our financial results this quarter, but in the fourth quarter we will include its AUM in our metrics along with the financial results. As of September 30, Metropolitan had $2.6 million in capital commitments. We believe the strategic capabilities we acquired will be extremely beneficial as we continue to build out our Solutions segments. You will hear more about the Solutions' strategy next week. We look forward to providing much more color on the state of our business next week in New York and at our Investor Day.

With that, I will turn back over to David for some concluding remarks.

Thank you, Adena. As you have heard, we will hold our Investor Day next week on the 11th, in New York, and we will have their the entire senior leadership of the Firm along with many of the Firm's leading investment professionals. We believe that program will provide those who are able to attend with a fuller sense of the breadth and depth of the Firm as well as our global reach. That occasion will provide a better form than this call to provide more detailed information about our Firm's activities and plans, and will enable us to better respond in detail to your questions. However, we are certainly pleased now to take a few questions.

(Operator Instructions)

Ken Worthington, JPMorgan.

David, just to extend your comments on fundraising. In terms of final closes of Carlyle funds, how do you evaluate the potential to increase the target size of funds? You mentioned CP V will be at least $12.9 billion. It's oversubscribed. So, when is it right to actually increase the size of the fund and when is that the wrong decision? Then, given how good the fund raising environment seems to be, are you seeing less pressure on fees? I'm sure clients always want lower costs, but are fees really not an issue given the demand for a number of your flagship products?

Thank you.

On the first question, obviously, when we set an internal target of what the level we would like to raise is, that is based on what we expect our ability to invest over that period of time. In other words, we do not tend to say, we will raise whatever we can raise and we will figure out later how to invest it. We do tend to go through, very carefully, what it is that we can invest over a period of time. At some points during the fundraising period, which may take a year or two, our ability to invest more, in our view, may increase. Sometimes it may decrease. Generally, we are within, I would say, 10% or 15% of where we're going to be ultimately. In other words, when we set a target we might increase it by 10% or so if we think we can invest more money.

Obviously, some investors are always interested in putting more into a particular fund than you might expect at the beginning. It is not a science; it is a bit of an art. We don't go out with very low targets and hope to increase them showing everybody that we have such a demand. We actually set targets that we think are realistic for the market and what we think we can invest.

In the case of Carlyle Partners VI, we had a target initially of around $10 billion, but $1 billion or $900 million to $1 billion of internal money, and we will have that. We will have about -- we originally thought we would have $10 billion of external capital and about $900 million to $1 billion of internal capital, for about $11 billion. We'll be above that a bit. Over the period of time, I think our feeling is we can invest this over the five-year period of time that we have to invest. That is how we did it.

Of the funds we currently have in the market now, many of them are relatively younger in their investment fundraising period, so it's hard for us to say whether we will need to increase them or we think we should increase them. In some cases we have turned money away without increasing the cap because we just didn't think we could invest the money.

In terms of the second question, there are three types of fees that I think people should focus on. One is the management fee, a second is the carried interest, and a third is the deal fee, so called. On the management fee, the pressure on that hasn't been as great as one might expect, only because those fees are more or less repaid, so it is in effect an interest-free loan, you might say in some respects. There has been less pressure on that.

There has been more pressure in recent years on the so-called deal fees. I think it is fairly standard now to have a deal fee of either 100/0 or 80/20 as opposed to the old days, 0/100 the other way or 50/50 in recent years. I think our fund will probably be in that neighborhood of what is common, the big US buyout fund.

In terms of the carried interest, there really hasn't been much pressure on carried interest. I think there's a general view that 20% seems fairly appropriate. Some people that get large managed accounts sometimes will take a 10% carried interest, but I'm talking about commingled funds, roughly 20%.

I'd say the real hidden fees that are affecting private equity, but not as directly as you might think, are one, the preferred return has stayed very high. That is in effect a hidden fee because it is a very high hurdle that you have to make in this environment.

Second, a lot of investors want unpromoted co-investment. If they take that unpromoted co-investment, and if they take that unpromoted co-investment that will effectively reduce their fee and carry, though it is a difficult thing to measure. Does that answer your question?

Thoroughly on all accounts. Thank you very much.

Howard Chen, Credit Suisse.

David, you highlighted the potential for a number of exits in the not-too-distant future in the remarks. Has anything changed that makes you feature that pipeline now? Or is it just the right time given how long certain investments have been in the ground and the value you have been able to create? Adena, a quick numbers question. The 11% expansion in the net accrued performance fees, how much of this quarter's increase was attributable to funds crossing over? Any sense of what percentage of those fees are coming from funds that are currently pay and carry?

I'm going to let Bill pretty much answer that. Let me just say at the beginning, though, we really -- we don't say we want to close a certain deal by a certain quarter, and always able to do that, because sometimes you get regulatory concerns and other factors. We can't time precisely when these deals are going to close. We just aren't able to do that. That's really what I was referring to. Bill?

A couple things that might say, Howard, on the exit side. First of all, we have a public portfolio of about $16 billion now. Many of those companies are, we've been in a while or we own a lot of stock. We're not somebody who really thinks that we have to get the last dollar out of each stock price when we sell it.

A lot of times we are disappointed in the initial price that comes when we start taking companies public or selling blocks. People complain there is a big overhang or there is not enough liquidity in the stock or whatever. One of our strategies, generally, has been to be selling all the way up. If you were to look at the history of companies like Duncan Brands or SS&C, it defines how we like to do that.

We continue to have a lot of companies in the public portfolio, many of which you are aware of, in that $16 billion. CommScope we just took public, HD Supply, Wesco, Allison Transmission. We're taking companies public all the time. We hope to have in the next week or so, and at least one more IPO.

Obviously the public markets have been great. I would comment again that interestingly in the third quarter, by our valuation methodologies, our public portfolio appreciated 10% and our private portfolio appreciated only 2%. I don't think that there is such enormous precision on the private portfolio, but I would say that the public portfolio has tended to be more volatile than the public portfolio.

It tends to move up more quickly than the private portfolio. It tends to move down more quickly that the private portfolio. We think now is a pretty good time to exiting. That doesn't mean any of those companies that we will do secondary blocks this quarter, but if the time and the price is right I think we will. That can obviously affect the carry balance, the realized proceeds.

Also affecting the realized proceeds is we have one large private company that we're hoping to take public, hoping to sell this quarter. It has already been announced, it's been in the press. It's subject to a hard scribe through B&O. Time will tell whether or not that deal is closed this year. That's a pretty big swing factor in the current quarter.

In terms of the accrued carry, Howard, I would say the large majority of the accrued carry are coming from funds that are currently in a position to take carry upon realization events. We had one fund cross into carry this quarter, but with a very small additional balance. It's just starting to move into a carry position.

Even though it is in catch up, it didn't have a big swing factor in the accrued carry balance. It is really, the majority of what you're seeing is just a growth of the funds that are already in carry on are in a full carry position. You're not seeing that swing coming in from a catch-up situation or anything like that.

I might comment that in my remarks, Howard, I spoke about CEPIII, CAPIII and Real Estate V. Those are big funds that are close to moving into accrue and carry. In most of our funds, once you pass over your hurdle rate and have returned the fees, as David said, then the catch-up is generally 100/0.

You begin getting every single dollar of appreciation is going to the GP as opposed to the LP. We are hopeful in the coming months and quarters that we will have funds that move into that accrued carry that are very significant movers. It would be something I would be watching if I were a security analyst following our stock.

Understood. Thanks. See you on Monday.

Michael Kim, Sandler O'Neill.

My question relates to deal flow. It seems like most of the activity is still centered in real estate, energy, as well as overseas investments. I know the environment is always in flux, but now that you have pretty much raised the US buyout fund, any concerns around maybe a bit of a mismatch developing between where you've got a big pool of dry powder versus where the best investment opportunities maybe looking out over the next couple of years?

This is Bill. I'd say I wouldn't call it a mismatch at all. I'm not worried about investing it over the period of the fund. Certainly today, let's take last year's fourth quarter. United States was a very, very busy in the buyouts that we did in that quarter.

In the third quarter of this year, it really did no buyouts. It announced Beats already that will be in the fourth quarter. I don't see a mismatch. I will say it's tough out there, investing the money is, as I said, finding the right assets at the right prices is tough. This business is always tough.

Robert Lee, KBW.

Quick question on the GMS segment, just curious. Could you talk through some of the moving parts there? It looks like you had maybe, I do not know if it was some reversals of prior accruals in GMS, where you had some negative unrealized performance fees? Just trying to understand some of the underlying mechanics that may have taken place that generated that?

Rob, as you know with the hedge funds, we basically accrue performance fees throughout the year. Then at the end of the year, based on their performance on whether or not they're are over their high watermarks, we then realize that carry all in one quarter. As you are seeing through out the year, you're seeing basically a pretty strong performance fee accrual.

Every quarter it's going to be a little bit different based on the performance in the quarter. This particular quarter they a couple of the funds had a slight decline and others funds, frankly, did very well. On balance, you are seeing a slight decline. I think that is really what is happening within the quarter on the unrealized performance fees for the quarter in GMS. There's nothing more than that. It's just a little quarter-over-quarter movement.

I had a quick follow up. How much of the accrued incentives are related to the GMS segment? The hedge funds particularly?

We will provide that in the Q in terms of our breakout of the accrued performance fees by segment. We don't provide that in the earnings release, so I don't have it right in front of me. You can, obviously, see how much changed over the quarter, but the accrued carry balance itself is not provided in the earnings release.

Matt Kelley, Morgan Stanley.

If I can come back to Rob's question for a second? Within the GMS hedge funds, is there anything from a rate perspective were some of the larger hedge funds our positioned that we should be focused on for going forward as we think about performance there?

I'm sorry, from a rates perspective, you said?

Yes.

Not that we could comment on this call.

Okay. Second, a quick follow up on the funds crossing hurdle rates you're getting close. Anything changing in your perspective of how cautious to be in terms of accruing versus actually paying cash carry on these funds at this point? What metrics should we be looking for in terms of how you guys think about it? Obviously, understand that you're trying be conservative.

Matt, I'm actually going to spend some time on that on Monday, so that we talk a little bit about the idea of basically accrue and carry, and then taking it to the point of being able to take carry, and what do we look at when we make this decision.

We will spend some time on that on Monday. I'd like to make sure that we reserve the time to do it thoroughly. I would say that we do have certain measures that we do examine when we decide to take carry after a fund has been accrue and carry for a period of time. We will spend more time on that.

I do not think we are any more cautious than we were when we were a private company than we are now that we are a public company. The first step is to get the funds to make money. The second step is to get them over the hurdle rate. Then, the third step is to get them enough over the hurdle rate that you are certain they're going to stay over the hurdle rate after fees and changes in valuations that can occur.

It isn't just getting through the hurdle rate. You have to be well through it or really right at the very end of the fund before you're going to be taking that last dollar of carry.

Let me just add that everybody says they are conservative. Nobody says I am liberal in taking accrued carry, so you wouldn't be surprised to hear us say we are conservative. A best indicator of that is that in 26 years, I believe we have probably had a clawback of less than --?

Certainly less than, I would say, $30 million.

Less than $30 million, so we've distributed out to our investors about $90 billion over the 26 years, $90 billion back to investors. We have had clawbacks of about $30 million. We are pretty conservative. Again, this is probably an art rather than a science. You'll hear more about it on Monday.

Warren Gardiner, Evercore.

In both the traditional and alternatives base, we've been reminded recently of some the importance key-man risk. I guess in the alternatives space you guys are recently the beneficiary. I was wondering how you guys managed that risk? How much of an advantage or disadvantage being public has been? Now that some of the peers are public, does that create more of a fluid situation on that front, where we could maybe see some more movement than in the past?

Key-man risk is something, obviously, you're always worried about because you want to make sure that you are not going to lose your fund because people may have left for whatever reason. We have never really had that problem, in part because we tend to have a number of people running our funds. We often have co-heads and therefore if one person were to leave it generally doesn't have the same impact, but we also have fairly deep bench.

Then, the way our Firm works is we have a lot of people involved in the oversight process. We have never had a situation in 26 years where somebody left and all of a sudden the fund dissolved, or our ability to be the manager of the fund dissolved because we couldn't satisfy the investors on key man. You always want to make sure that you have a deep bench and you make sure your people are happy and well compensated, but this has not been a big problem for us, at least.

Understand, you can never have too much talent though.

It is less of a problem for us, then let's say the analysts community, because if one of you leaves one of your organizations, they often scrambled very quickly to find a replacement. We generally do not have as much of a problem, I would say.

Brennan Hawkin, UBS.

A follow up on Howard's point, and sorry if I missed this. When you guys said that realizations may slip to 1Q, is that a potential update for your prior broad guidance about distributable earnings? I think you had said in the past that this year was going to be roughly equal to 2012? Is the outlook now that maybe since some of these are slipping into next year, it might be a little bit lighter or am I reading too much into that?

I'd say it might be lighter, it might be heavier, depending upon the timing of what happens of the sales of public companies and the private company I mentioned.

Okay, so basically no update to that previous guidance then?

I would say no update other than what I just said.

Marc Irizarry, Goldman Sachs.

Bill, for you, you talked with the value in Europe. If you look at the US, it seems like there is more growth equity capital investing going on than buyouts. What do think? When you look ahead, is there one or two things that might change, that might help change the mix in the way you're deploying capital in US buyouts?

I think in all our buyout businesses, Marc, we have to be really creative today. Sometimes when you think about the competition that we face, we face competition from other private equity firms, the strategic investors, although they are more active than they were, they are not as active as I thought they might be. I think you guys all know that the IPO market, there have been more IPOs done in the third quarter than any quarter since 2006 or 2007. The lineup is continuing to be strong for Carlyle and for everybody else. Some companies have the alternative of going public rather than taking capital from Carlyle.

I think we had to be creative -- examples of the creativity that we had to do in the United States, where for example, our investment in Genesee in Wyoming, when we did a $350 million pipe, or buying the Philadelphia energy refinery, or during the minority investment in Beats. It is great to do those classic carve outs that you like to do of Hamilton Sunstrand from UTC or Exalta from DuPont.

We are looking for those. I think were actually pretty good at carving a business out from a big strategic because it's quite a work that has to be done to take somebody from historical having been in a big co for a long time and now they're off owned by private equity firm.

Right now that pipeline is not that active, but it changes every day. We still expect will be able to invest the fund and not cut our return targets. The same thing would be true by the way in Europe. We're not lowering our IRR targets there. If the current situation were to persist for months and years, things could be very different, but as I say it is changing every day.

(Operator Instructions)

William Katz, Citi.

This is Neil filling in for Bill. My question is, I noticed in-carry ratio declined a little bit quarter over quarter. Perhaps that's due to some better performing investments rolling off in 3Q, but maybe you could provide some more color? Thanks.

We have some younger funds that have been in carry, but as they continue to deploy capital, they're going to toggle in and out of carry. Because as they get in a new investment, that new investment is generally marked just below cost and that will take down the returns over the short term for a fund. We actually had two of our newer funds, our younger funds, come out of carry for the quarter as they continue to make some new investments. They are obviously very likely to go right back into carry over the next few months. That takes all of the AUM in that fund suddenly comes out and that includes their dry powder. It creates a little bit of a swing factor in that in-carry ratio that you see, but it's nothing significant.

Ken Worthington, JPMorgan.

First, Adena, there were investment losses this quarter, I believe? Can you talk to us about the nature of that, if I got that correct? Then for Bill, market conditions are important for the investment side and the realization activities of Carlyle. You guys sift through a tremendous amount of data. Can you share with us your outlook for the public markets over the next 12 to 18 months in North America, in Europe and in Asia? Just so we get a sense of how you are thinking about investments and realizations over that time period? Thanks.

With regard to the investment loss, it was in our real estate area. We had a settlement of a matter in a particular fund and a co-investment that we basically settled out. It's done. It's a one-time thing, and we did have an investment loss that we realized as a result of that settlement. That is really what that was. In terms of the bigger question, Bill?

In terms of the investment environment, Ken, globally and how it informs our behavior, we do have 200 portfolio companies, roughly. We're constantly trying to bind those companies for data to help us make better decisions both on investments and how we monitor our portfolio.

Now, you guys are perhaps more experts in public markets than I am, but I would say that we expect the public markets to be strong for the next year or so, particularly because we expect interest rates to be very, very low for the foreseeable future. I think with very low interest rates and so much liquidity in the market, everybody can say, well I don't like Europe because I am worried about the governance in Europe. Or, I don't like gold because of some reason, or I don't like US equities because they run up so much, or whatever. You can go around the world and say, gee, I don't like anything.

The truth is the money has to be invested somewhere. People have to put the money to work. They can put it in high yields, now low yield. They can put it in US treasuries or Japanese government bonds or any of the other things that you look at. I think with these low rates, I expect that the public equity markets in the United States and abroad will be pretty strong.

If I went around the world a little bit, I think the United States has had a great run so far this year. I think it is up about 25% year to date in the public equity markets. Saw a story last night on the news that indicated every time that the stock market has been up 25%, I think since 1929 it has been up 25% to the first 10 months of the year 12 times. 11 times it kept going up after that for the balance of the year, on average like another 5%.

Now, I'm not predicting what the market is going to do, but think US equity markets will continue to be pretty strong. A lot of really good companies pay nice dividends. I think that is a pretty attractive place to put money.

I think in Europe, our business there is strong. Our portfolio companies tend to do better than the headline growth rates that you see in the press. We've actually been able to take advantage of the fact that one of the big problems in Europe is the financing markets.

With our Global business, the way we have organized in Europe, some of the things that we have done, our CLOs and the like, we think that the European, at least our portfolio is doing pretty well over there. I'd say that the European market, you can still take companies public as well. We're hoping to take advantage of that.

Japan, Abenomics speaks for itself, I think. Although it has slowed down from its initial burst. I think Japan is still likely to have increasing public markets. China, although public markets have been down and down pretty dramatically for the last year or so, there are 600 companies in the queue right now waiting to go public in China. A lot of those companies are either coming to America to go public are going public in Hong Kong, as opposed to going public in China per se. We've actually taken advantage of the Hong Kong market ourselves.

I'm pretty optimistic about public markets and what they're going to do. What does that mean for us? I think that $16 billion public portfolio, a couple of things are going to happen.

First of all, periodically when the price is right, particularly when we own such giant positions of public companies, we'll be selling blocks and taking money off the table. Secondly, the portfolio will be increased because we will be taking more and more companies public and adding to the public portfolio. I think it is a pretty good time to have our business model.

Matt Kelly, Morgan Stanley.

Speaking of Europe, I wanted to get your sense for the hiring of Adam Metz from TPG. Should we take that as a sign that you could actually look to grow European and Asian real estate more than you might have thought a few quarters ago, given the weaker performance of the couple European funds you have talked about or maybe expansion into more real estate debt?

Adam Metz is an extremely talented real estate professional who has been in the investment business. He has been in the management business, and we had an opportunity to get him to join the Firm. We're quite happy that he was willing to do so. His main focus is to help strengthen and grow what we're doing overseas in real estate. We have a base in Europe. We have a base in Asia. We'd like to strengthen those, expand those and it may well include more than just equity, it could include debt. We have not completely decided.

We need to assess exactly what we should be doing to strengthen those markets and then perhaps other markets. We are very pleased at our ability because we have attracted a high-quality investment professional such as Adam. We'll just have to wait and see exactly what we're going to do. We can't be specific now, but it's likely that we will do more international real estate than we have done in the past.

Michael Kim, Sandler O'Neill.

On the fundraising side, it sounds like you continue to raise capital at a pretty healthy clip. Just trying to get a sense of the relative contributions from the different factors driving that success, in terms of more targeted marketing versus continuing to expand the LP base? In terms of new clients as well as more non-US LPs versus higher demand for alternatives from the traditional pension plans?

All of those. (laughter) I mean every one of those. That is the answer.

To be very serious, all those factors are at play. We have fairly significantly expanded our fundraising team. When you have more fundraiser that's like, as I say, it's like more IRS agents. When you have more IRS agents, you collect more. When you have more fundraising people, you probably raise more. Obviously, you have to have a product that people want to invest in.

Generally, if you have more fundraising people you will probably raise more money and we've built up a pretty good-sized team, but not just the way we did it before. We have people now who are specialists in given areas, so we didn't used to have, several years ago, specialists in real estate, for example. Now, we have specialists in real estate. We didn't, years ago, have specialist in GMS kind of products. Now we have specialists in those kind of products. The specialization has been a factor.

We also have people who in the fundraising team that aren't actually out fundraising so much but they're doing a lot of support work, which is so necessary. Today, for example, almost every significant investor wants a questionnaire to be answered. Somebody has to answer these questionnaires, and they are very lengthy. We have a team of people that does that.

Another factor is the increase in allocations that people make to private equity and alternatives. That's been a factor, as well. I'd also think, you see sovereign wealth funds are increasing their allocations, particularly significantly to private equity. Now for us, sovereign wealth funds represent a pretty big part of our investor base. I think it is now about 13% of our capital comes from sovereign wealth funds. We also see another phenomenon, which is that people like to invest with somebody they are comfortable with.

Increasingly, people who are already investing with us are giving us more money. I think today roughly 62% of our capital is coming from investors in five for more of our funds. Somebody likes the fund and they will be more predisposed to go into another Carlyle fund. Also, the economic environment is reasonably good for fundraising now because investors seem to have more cash to invest. They seem to think that alternatives will produce a pretty good rate of return in the future.

It is a combination of things. I do think our brand name is pretty good and that probably helps a bit. All those factors, and beyond that I did not know what else I could be more specific about.

Thank you. I'm not showing any further questions in the queue. I'd now like to turn the call back to Daniel Harris for closing remarks.

Thank you very much for your time and attention this morning. We do look forward to seeing most of you next week at our investor day. If you have any follow up questions after the call, please don't hesitate to contact us at any time. Thank you.

That does conclude today's conference call. You may now disconnect. Thank you, and have a great day.