Carlyle Group Inc (CG) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Carlyle Group first quarter 2014 earnings conference call. (Operator Instructions). I would now like to introduce your host for today's conference, Mr. Daniel Harris, Head of Investor Relations. Please go ahead, sir.

Thank you, Charlotte. Good morning and welcome to Carlyle's first quarter of 2014 earnings call. With me on the call today are our Co-Chief Executive Officers Bill Conway and David Rubenstein, and are Chief Financial Officer, Adena Friedman.

Earlier this morning we issued a press release with our first-quarter 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 unit holders. Please limit yourself to one question and then returned to the queue for any follow-ups. And please contact Investor Relations following the call with any follow-up questions.

This call is being webcast and the 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 an isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. We haveprovided reconciliations for these measures to GAAP in our earnings release. Any forward-looking statements made today do not guarantee future performance and undo 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 material from those indicated. Carlyle assumes no obligation to update any forward-looking statements at anytime.

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

Thank you very much, Dan. Thank you for joining the call this morning. We are pleased to report today that after a strong fourth quarter and a strong full year in 2013 Carlyle is off to a robust start in 2014.

During the quarter from our 2013 base our investment pace improved, our portfolio continued to improve -- to appreciate, our ability to achieve new fund investor commitments accelerated, a number of our funds achieved attractive exits and several of our larger funds moved deeper into carry.

Specifically, we produced $183 million in pre-tax distributable earnings for the quarter, up modestly from $171 million in the first quarter of 2013. But more importantly over the past 12 months our distributable earnings are up 25% to $852 million.

Our carry funds appreciated 6% in the quarter and 18% for the last 12 months.

We raised new commitments of $5.5 billion, up from $4.7 billion raised in the first quarter of last year.

We realized proceeds of $3.1 billion, lighterthan the $4.1 billion realized in the first quarter of last year, but we still produced $249 million gross and $141 million net in realized performance fees.

We invested and committed $4.2 billion in equity of which $1.1 billion was invested in the quarter and the remaining $3.1 billion will be invested in coming quarters when the relevant transactions close.

And we achieved $322 million in economic net income in the quarter.

Bill and Adena will shortly provide more detail on certain aspects of this quarter's performance. Let me focus my comments on 3 areas; our progress over the past 12 months, the management team that we have assembled, and our fundraising activities.

Over the past 12 months the firm has become much stronger by a great many of the metrics often used to measure firms like ours. We raised $23 billion in new capital for our funds. We saw our net accrued carry balance grow by 36% to $2 billion. 72% of the fair value of our carry fund investments is today in carry versus 66% a year ago. Dry powder increased to $56 billion, $36 billion of which is in our carry funds at NGP.

Our AUM increased by 13% from $176 billion to $199 billion. We generated $16.3 billion of realize proceeds.

We transformed our natural resource investment business into four separate and scalable teams and with growing investment capabilities and resources in the U.S. and abroad.

We built out a full-service solutions business with the purchase of the remaining 40% stake in AlpInvest and then the acquisition of Metropolitan Real Estate, a real estate fund of funds platform, and Diversified Global Asset Management, a hedge fund of funds platform.

Turning to our management team, over the past several years we have put in place a senior leadership team that should enable the firm to grow and thrive well beyond a time when the founders change the current roles of the firm. Bill, Dan, and I are not planning to go anywhere for the foreseeable future, but we and our investors want to know that the future of the firm is stable and secure.

Our most recent announcement regarding Glenn Youngkin's promotion and Mike Cavanagh's appointment as Co-Presidents and Co-COOs is in line with our approach in recent years. Promoting individuals with long successful Carlyle track records and recruiting extremely talented individuals from outside Carlyle who have Carlyle type mind-sets and capabilities.

As we noted in announcing this promotion and appointment, Carlyle has always felt comfortable in having a co-leadership type arrangement. The news accounts at the time of the announcement reflected, I think accurately, the high regarding in which Glenn and Mike are held in the financial community. And the feedback we have received from our investors around the globe makes us believe that our investor base is quite pleased and comfortable with the decision we have made in this area.

We're also fortunate to have a strong group of investment professionals leaving our funds. Many of these leaders have been at the firm for extended periods which we believe confirm the attractiveness of the firm as a place to work and to build a career.

On average our Fund Heads have been at the firm for 9 years and more than 15 of our Fund Heads have been with Carlyle for 10 or more years. This type of investment professional stability and experience has helped us achieve our investment returns and has been a large factor behind our fundraising success.

The roles played by our Fund Heads and the roles played by more than 700 other investment professionals in the firm are supplemented by the professionals of the firm who lead various corporate functions and who also serve on our management committee.

In short, we think the firm has a wealth of talented next-generation leaders throughout our core areas. Many founder-led firms in all sectors, not just in the financial sector, have had trouble creating long-term transition plans. In our case we have been methodically working on this challenge for years.

While we do not claim that our current structure or eventual management transition plans achieve perfection, we do believe these aspects of our company are among the firm's real strengths.

And now let me discuss our fundraising progress. We are obviously pleased to see continued investor interest in and support for a variety of Carlyle offerings. More specifically, we routinely have a large number of new and successor funds in the market, our goal is to offer our fund investors a wide variety of strategies that they can choose to pursue depending on their own needs.

Last year we raised a large amount of money, $22 billion. A good portion of which was in our new U.S. Buyout fund.

This quarter we continue to raise large amounts of money but across a much more diversified set of funds. Specifically, we held interim closing on nine of those funds in the quarter including our first closing on our seventh U.S. real estate fund at more than a third of our target and closings in our new international energy fund and latest vintage Europe, Asia, and Japan funds.

We closed new issue CLOs in the United States and Europe for a total of $1.25 billion. We held our final closing on our Sub-Saharan African Fund reaching approximately $700 million in total commitments, well above our target of $500 million.

We saw continued net inflows through our hedge funds, we strengthened our relationship with a number of sovereign wealth funds, of the 25 largest such funds 22 invest in international private equity, 21 of these 22 now invest with us.

And finally, I should add, that the 5 largest funds we have, or will have on the market this year, are generally experiencing quite strong investor demand.

In summary, we had a strong quarter by nearly all of the metrics by which we are measured. Our overall performance over the past 12 months has made us a much stronger firmthan we were a year ago. Our management structure placesus in a strong position over the foreseeable future and beyond, and our fundraising continues to grow at an attractive rate.

Now let me ask Bill to comment.

Thank you, David. Let me start with a comment about the investment environment. Given recent geopolitical and macroeconomic events we are surprised at how ebullient credit markets have been in 2014.

The world continues to be awash in liquidity and investors are chasing yield seemingly regardless of credit quality and risk. By leverage levels in the United States increasing by almost a full third over the past year spreads between investment grade bonds and high-yield bonds,a few weeks ago were around 130 basis points, almost 250 basis points below the 20 year average. Thus, the market is not assigning a significant premium to riskier assets.

We continually ask ourselves whether the fundamentals in the global credit markets are healthy and sustainable. Frankly, we don't think so. What does this mean for our global investments?

On the positive side, we are locking in low interest rates for our new investments and continuing to refinance existing debt. For example, one of our newest investments, Signode Industrial, expected to close in the second quarter recently announced its acquisition financing at a blend interest cost of 4.75%, the lowest cost of financing we have seen in any industrial transaction.

At the same time historically low interest rates and a high appetite for risk are pushing up leverage levels and contributing to rising asset prices. This is good news if you are a seller, but bad news if you are a buyer. Given these dynamics good deal judgment is paramount.

Despite the frothy investment environment by focusing on Carlyle strengths like carve-outs and mid-market deals we are off to a good start this year investing or committing more than $4.2 billion in equity.

Last year, we were very busy in China and Europe, we invested more than $1 billion in China, the most we have ever invested there in one year, and closed seven investments in Europe.

In contrast, this year so far we have been very active in announcing and closing deals in the United States. We have announced four carve-outs of global companies in the first quarter, two in the U.S. and one each in Asia and Europe.

In the United States we have agreed to acquire Johnson & Johnson's Ortho-Clinical Diagnostics business for $4.1 billion dollars in enterprise value. And also in the United States we agreed to acquire the Industrial Package Group, now called Signode Industrial from Illinois Tool Works for $3.2 in enterprise value.

In Asia our U.S. and Asia funds teamed up to announce the largest LBO in Korea since 2008 when we announced our acquisition of ADT Korea from Tyco for $1.9 billion in enterprise value.

And in Europe, in partnership with Schneider and PAI we agreed to acquire Custom Sensors & Technologies from a French firm, Schneider Electric, our first investment in our latest European buyout fund.

We have also signed or closed our second sub-Saharan Africa investment in J&J Africa, a panel of African logistic company based in Mozambique. A minority investment in Vogue International, a US-based hair and personal care products manufacturer. Three investments from our U.S. mid-market buyout fund including Traxys Group, a minerals logistic and trading firm; Bonotel Exclusive Travel, a tour operator; and ECi, a Fort Worth-based business management and e-commerce software solutions company. And a number of real estate investments in the United States with a growing focus on office and hotel properties.

Turning to our portfolio, the fair market value of our overall portfolio increased by 6% with corporate private equity growing by 8%, GMS carry funds by 3% and real assets by 2%.

Importantly, for public unitholders, the strongest performing funds included many of the large buyout or Real Assets funds that are either realizing or accruing significant amounts of carry.

Our publicly traded portfolio, which accounts for about 30% of our portfolio's total fair value, increased by 8%. Within a challenging investment environment the risk adjusted performance of our hedge funds was reasonably good.

Turning to realizations of which there were about $3 billion in the first quarter, we continued to exit a number of investments in our publicly traded portfolio. We sold shares in CommScope, Nielsen, an Allison Transmissions at multiples of invested capital in the 2.5x to 3.5xrange.

We announced our exit of BankUnited, an investment in our financial services and U.S. buyout funds at 2.7x our original investment costs.

We exited investments in Chimney, a Japanese restaurant chain; Tirumala, an India based private dairy company; and a number of U.S. and European real estate investments. And we negotiated a partnership with Altice, a large European cable and telecommunications company in connection with the proposed merger between Numericable and the SFR mobile communications group in France.

As part of the overall transaction Carlyle sold 7.5% of Numericable to Altice and then rolled over the remaining stake held by Carlyle into a stake in Altice.

In addition, we signed agreements to exit a number of investments, these included we agreed to sell Veyance Technologies, a Carlyle Partners IV manufacturer industrial hoses and conveyor belts. We agreed to sell an investment in our MENA fund, General Lighting Company in Saudi Arabia. And we agreed to sell our stake in Sermeta, a French manufacturer of heat exchangers in our third European buyout fund. These transactions are scheduled to close later this year and will help lay the foundation for sustained levels of distributions for our fund investors.

After completing 15 IPOs in 2013 we did not have any companies go public in the first quarter but we have a number lined up for the coming months assuming markets stay open and attractive.

So what does all this activity mean? Despite paying out substantial amounts of realized performance fees our net accrued carry balance continues to grow.

We continue to realize significant levels of cash carry from our U.S. buyout funds and many of our other funds are now are either realizing performance fees or will do so in the coming quarters.

In summary, we are particularly happy that our investment pace has picked up, our portfolio is performing well, and assuming attractive market conditions persist, we have laid the groundwork for strong distributions for the years ahead.

Adena?

Thank you, Bill. My remarks today will focus on our financial results as well as an overview of the balance sheet capital raises we executed this quarter.

As we highlighted in our release this morning, Carlyle generated $183 million in distributable earning this quarter, up7% from last year's first quarter. Distributable earnings for the quarter were driven by $141 million in net realized performance fees.

Distributable earnings over the past 12 months of $852 million are up 25% over the prior 12 months. A strong performance in our carry and hedge funds drove significant unrealized performance fees in the first quarter and were the main driver of Carlyle's $322 million in economic net income.

Carlyle generated $356 million in unrealized performance fees due to a 6% increase in the value of our carry funds. Notably strength in the U.S. and Europebuyouts drove those funds deeper into accrued carry. Firm wide, our net accrued carry balance which nets out performance fee based compensation and give back stood at $2 billion as of the quarter end, up 36% from $1.4 billion at the end of the first quarter of 2013.

Our net accrued carry equaled $6.16 per adjusted unit.

As of the end of the first quarter 72% of the fair value of our investments was in funds and carry up from 66% in Q1 of 2013 but down from 80% as of the fourth quarter. On a quarter-over-quarter basis while our overall accrued carry balance increased three of our smaller funds that were in catch-up as of the end of year end, as of year-end 2013 fell out of carry in the quarter. All three funds have strong portfolios and are likely to reenter a carry position in the coming period.

Carlyle generated $37 million in fee related earnings in the first quarter, lower by $2 million from both Q1 and Q4 of last year.

As I have done in prior quarters I would like to provide a brief review of the factors effecting our fee related earnings. First, over the past 26 years we have used fee related income to reinvest in our business, we are here to serve our fund investors and our reinvestment activity centers on hiring the best talent to generate strong investment returns and expand our capabilities.

Investing in systems and technology to improve LPs experience and launching new funds and strategies to meet their evolving needs. All of these activities accrue to the long-term benefit or our fund investors and ultimately our unitholders.

Second, our fundraising activities create short-term costs but long-term benefits and we continue to see that trend in our results. Specifically, in Q1 of this year we incurred $6 million more in internal fundraising commissions that we did in Q1 of last year primarily due to significant funds raised in our real asset segment. There are 2 timing elements to that expense. A, we do not expect our full year internal fundraising commission to be significantly higher than last year so we have front loaded some of that cost in the quarter; and B, of the dollars raised a significant portion with Carlyle U.S. Real Estate Partner VII for which we did not turn on management fees. Therefore, we incurred the expense without the offsetting revenue benefit in the quarter.

We do expect to commence fees in the funds in the second quarter which will generate an incremental earnings benefit going forward.

Third, we charge transaction fees when deals close, our first-quarter revenues related to those fees were lower than a year before because many of the deals that we announced in Q1 won't close until later this year.

And finally, exits drive realized performance fees but they can create a small drag in our fee revenues when the exit activity comes from funds that cost management fees based on remaining invested capital. This will includemost funds that have reached a significant harvesting phase.

In Q4 of 2013 of the $6.3 billion in realized proceeds generated by our carry funds $5.5 billion were in from funds in which the effective 2014 fee basis would be reduced.

But the profitable exits produce distributions for unitholders and distributable earnings for a unitholders -- I'm sorry, distributions for our fund investors and distributable earnings for our unitholders and therefore distributable earnings ultimately is the financial metric that defines our success. And our distributable earnings for the quarter and over the past 12 months have been strong.

Moving on to our capital rates for our balance sheet during the quarter, Carlyle issued approximately $303 million in secondary units and $146 million in primary units and we also issued $206 million in net cash proceeds to be an add-on to our 30- year bond. These capital raises bolstered our cash on hand fund future growth initiative.

One specific opportunity to generate financial growth will be exercising the options we acquired in the original NGP strategic investment to purchase 40% of the carry NGP fund X and all future NGP funds. We expect to exercise those options over the coming months. The revenue benefit over time should be significant based on NGP's strong track record and the current positive performance of NGP X a fund that is deep in accrued carry position.

The cost of exercising the options will be approximately $100 million. We expect the investment to be highly accretive to unitholders in the long-term and the return to be well in excess of our weighted average cost of capital.

We are very appreciative that our unitholders and debtholders continue to support Carlyle and as our partners share in our vision of growth and yield. We intend to pursue accretive opportunities when they are in line with our fund investors interest, and with our own corporate strategy, as well as being accretive to unitholders with a return profile in excess of our weighted average cost of capital.

Consistent with prior quarters, Carlyle's Board has approved the issuance of a $0.16 distribution to our unitholders with a record date of May 14 and a payout date of May 22.

As a reminder, with the vesting event on May 2 of certain restricted units for internal employees, the total common units outstanding associated with the Q1 distribution payout is 66.9 million units and its number of adjusted units on a fully exchange basis at the end of the first quarter was 323.8 million units.

With that let me turn it back over to David for some concluding remarks.

Some, we had a strong first quarter and seem well positioned to achieve our goals for 2014 and beyond. Now, we would be pleased to take your questions.

(Operator Instructions). Our first question will be coming from the line of Ken Worthington from JPMorgan. Your line is open.

Hi, good morning. I wanted to talk about the equity capital market environment, it appears to become more uncertain with some recent transactions breaking deal price and other deal price ranges getting lowered. Do you think the M&A environment is strong enough to make up for a less robust IPO market should the weak capital markets persist if we look at the remainder of the year? And does the frothy credit market present a risk to the outlook for the M&A environment? Thank you.

Thanks, Ken, for the question, this is Bill. I would say the following, that focusing first, if I can, on the credit markets. The credit markets just in the last three weeks have been buffeted by what I consider some crosscurrents, on the one hand by our calculations about 20 deals have actually flexed their pricing upward in the last three weeks and these deals range in size from deals of a couple hundred million dollars to over a billion.

And, of course the base rate is still very low but the spread is increasing, at least on those flexed deals, and that is far more flexed deals, frankly, than we saw in the last probably 6 months so it is a big -- that is may be an exaggeration, but there's a large number of flex deals.

On the other hand, the other crosscurrent, really frankly going in the opposite direction, is what we saw on the Numericable deal where we were a big shareholder in Numericable which is a merging with SFR and Altice is kind of a controlling shareholder now and they are taking us out and we are swapping part of our shares for shares in Altice and they had to raise roughly $20 billion in financing. It was a combination of different maturities, it was floating and fixed, it was done in both U.S. dollars and an euros.

And the deal, my understanding was 4x or 5x oversubscribed. What that demonstrates is that I think that for a large deal with a lot of liquidity that the deal is still attractive to the market, they're still searching for the yield, and they will go get it particularly because they know they can trade out of it if they want to or need to.

I think in terms of the question in terms of the markets, that equity markets and the impact perhaps of M&A catching up with that; I would say what is interesting that in the -- last year we did 15 IPOs and so far this year in the first quarter we didn't do any. I think that will change here in the second quarter where we will hopefully do some IPOs, but time will tell.

I am impressed by the recent strength in the M&A markets. You see it in the communications businesses and in the drug businesses, somewhat in the software businesses, as well, with strategic transactions in M&A picking up. So I think it can partially upset it but I think the equity markets, remember although they look a little bit less ebullient today than they may have a week or a month ago I still think they are very very attractive.

I also should also point out that just -- I don't know if you guys have heard it while we're on the call, but the U.S. GDP just came out at reported for the first quarter estimated at only up 0.1% and for what it is worth we think that this is initiated a lot by the cold weather. We do not see this in our portfolio.

We think the growth rate is running slightly under 2% today, frankly, we thought the estimates were overestimating the third and fourth quarter of last year what was happening with GDP, and the first quarter this year we think this is going to turn out to be a underestimate of what is really going on in the underlying portfolio .

Awesome, thank you for all of the color.

Sure.

Thank you. Our next question will be coming from the line of Robert Lee from KBW, your line is open.

Thanks. Good morning, everyone.

Good morning, Rob.

Yes, my question is maybe for Bill, I guess maybe David somewhat, but you talked about you are finding opportunity but the more challenge investing environment, I think, David, in the presentation you gave a couple of months ago you talked about returns on PE generally being (inaudible) market returns but maybe more in the mid-teens range, so how is that impacting how you underwrite transactions? Has there been any change or do you have to kind of adjust your own expectations now when you underwrite a deal?

What I had said for those who didn't know what I was talking about at that presentation or may not have been there, was that I think that investor expectations of rates of return have probably come down a bit the last year or two. And as we raise money I think investors today would say, if I can get a net internal rate of return on my private equity investments up 15% or 16% or 17% I am very very happy. Ten years ago they might have wanted something in the low 20s as a net internal rate of return.

Therefore, because investors have lowered their expectations a bit and they don't see other attractive alternatives we have found, and other firms as well, that fundraising is still pretty brisk and I think that is in part because people think we can get these kinds of rates of return.

As to how we underwrite the deals, Bill ?

I would say the following, first of all, although the investors may be willing to settle for a somewhat lower internal rate of return that hasn't been what we have been willing to settle for.

For 10 years we've been telling our investors that it will be very difficult for us to sustain the levels of return that we have been able to sustain, and for 10 years actually I have been wrong. We have been able to sustain those kinds of rates of return.

In terms of our underwriting process I would say that today , and of course remember we invest all over the world and we invest in lots of different asset classes, and so it is a little difficult to generalize and addition, of course, not every deal has got the same risk profile or at least expected risk profile as we see it. But in general, I would say we are still trying to underwrite our returns in the corporate private equity business with a gross internal rates of return in excess of 20%.

One thing I would say, sometimes one of the areas that we really have focused on a lot , frankly, is these large corporate carve-outs. The Axalta business which was the DuPont Paint business we bought from DuPont or the ortho-clinical diagnostics business we are buying from J&J, or a business we bought last year from Hamilton Sundstrand business that we bought from UTC and others. We have focused really on that business, it is a tough, dirty, job to take a big division out of a giant big Co. and set it off on its own.

We think we know what we're doing, we have a very good track record of doing that, we are looking for opportunities in that space it is a lot of hard work but hopefully we can do it and earn attractive returns.

Maybe as my follow-up, Bill, I guess a month or so ago you announced the new head of your private client group and David, you definitely talked about the high net worth marked as being a key mark you want to grow and get more penetration, if you could maybe just update us on some of the initiatives there and maybe your progress to-date?

You are referring to Jeff Holland who joined us who is heading our group there and he has a wealth of experience in dealing with retail investment products and also in dealing with people who help people like us raise that kind of money. Often large commercial and investment banks who have so-called feeder funds that they often use to raise money for our products.

Jeff just started so I don't want to say exactly what he will do, but we are looking at products that will be geared exclusively to -- that was thunder, for those who might have heard that --Are looking for products that are exclusively for retail investors, though a lot of what we are raising right now is money from retail investors who are coming into products that are for all types of investors.

In other words, right now we are raising a lot of money for our funds from retail investors, high network typically, and they're coming into the same funds that the institutional investors are coming into. But we have work underway and we will be having some more things that are focused only on retail or high net worth investors because they sometimes have different investment interests than the institutional investors and we don't have anything to announce today but we expect to be fairly active in this area.

Thank you and as a reminder, ladies and gentlemen, for today's Q&A session we ask that you please limit yourself to one question. If you have a follow-up please reenter the queue.

Our next question will be coming from the line of Mike Carrier from Bank of America. Your line is open.

Thanks. Adena, you gave some color on the fee related earnings, I'm just curious, on GMS was there anything on the fees that weigh on that this quarter? And then when we look on the performance side it just seems like the performance, the comp ratio out of the performance fees seems like it was higher and it seems like when we look at year-over-year it is more meaningfully higher. So I didn't know if some of the recent transactions, there has been anything that is more nuanced or has it been certain funds you will have different comp ratios that are making that shift from quarter-to-quarter?

Sure, so I will address both and I just want to confirm, your question on comp ration is related to the full firm or just the GMS?

The GMS was more on the fee revenues, the overall comp ratio was for the full firm.

Okay, great. So with GMS there were some [epothotic] fees that we received first quarter of last year and fourth quarter of last year related to winding down of certain CLOs and those fees generated it was about $7 million in the first quarter of last year and $5 million in the fourth quarter of last year.

We just did not have that kind of, those types of fees, those [epothotic] fees occur this quarter. We also had some catch-up revenues associated with finishing up the fundraising for CSP last year, and the fund is fully raised at this point. So those type of [epothotic] fees that we experienced last year we are not seeing more of. Where we are seeing benefit in GMS and growth in the management fees is in the AUM on the hedge funds they continue to have the growth in AUM year-over-year and then also the BDC that we launched. We are investing it now and that is a vehicle that is paid on invested capital and so as we invest that fund we will see fees continue to grow there.

We definitely have progress in the segment it is just the [epothotic] fees didn't recur.

With regard to the comp ratio, I think it is probably good for me to give you a little bit of a breakdown in increasing cash compensation from Q1 of last year to Q1 of this year. If we look at it it's about $31 million increase in cash comp., and of the $31 million about 40% of that is result is an increase in solution which is primarily due to the acquisitions we completed after Q1 of last year. So that specifically is the majority that we required from the remaining stake in AlpInvest as well as the acquisitions of Metropolitan and DGAM.

So as those things came online we essentially acquired people that comes with the related compensation but we also acquired income and so that income is also accruing to our benefit. So that is 40% of the increase. About 20% of the increase or $6 million has to do with the timing on the fundraising commissions that I mentioned, where we just had significant commissions, particularly related to raising U.S. Real Estate VII and International Energy this quarter. And for U.S. Real Estate VII we just didn't see the fees turn on yet because the predecessor fund is still finishing up its investment period. That will show some benefit going forward, and that is, as I said before, a timing issue as opposed to (inaudible) with increase.

And then another $6 million or so relates to running in to promotions and merit increases and I think that is something that you will see every year where we have about a 4% increase in comp related to ongoing developments within our existing team. And as I said that's about 20% of the increase. And then the last 20% has to do with new people. That we had the full-year effect of some people coming in from 2013 as well as some early hires in 2014.

So if I were just to sum it up we had more than half of it was more technical in nature in terms of the increasing comp year-over-year and about 40% of it really is just the growing employee base that we have in terms of growth in comp and growth in people .

Thank you. Our next question will be coming from the line of Marc Irizarry from Goldman Sachs. Your line is open.

Great thanks, Marc Irizarry, Goldman Sachs. Just maybe some more color on the funds that slipped out of accrued carry mode. If I look at the table and the disclosure around the couple of funds that look like they're no longer accruing carry, can you give some perspective on those funds where the reversals of the accrual was it driven by private market valuations or are there some public comps in there? Just trying to get a sense of how much of the change, I guess, in the carry ratio or the funds that are in carry, that in carry ratio how much of that delta was driven by the few funds crossing back over?

Sure, so if you -- on page 26 of the release we do provide a remaining fair value analysis and the funds, the specific funds that were in carry last quarter or frankly in catch-up last quarter and are no longer in carry, our Carlyle Asia Growth Partners IV and then you have got Carlyle Equity Opportunity Funds I as well as a renewed II. Those are the 3 funds that cross back out.

In terms of starting with actually Carlyle Equity Opportunity Funds I, that actually crossed out because we made some big new investments in that fund and when we marked those investments upon entry into the funds they can be marked at cost minus the transaction fees and so that just drove down the valuation technically. The rest of that portfolio is doing extremely well it just has to happen to do when you burn in new investments that tends to be what happens when the fund is early in its carry life. And that is an early fund so it will be a while before we start to harvest significantly out of that fund.

In terms of Carlyle Asia Growth Partners IV, the majority of the change in the values there were based on the public markets and that fund is heavily invested in China and India and the markets in those regions, and the emerging markets were really mixed. It is just depending on what public securities we owned in that fund that definitely swung the valuation in that fund this quarter.

and then Renewed II, is primarily a private mark, and that just has to do with that fund has been toggling in and out for several quarters and I would expect it will continue to do that and it is a relatively small in our Riverstone portfolio.

Remember also -- this is Bill. That if a fund is not fully invested and you do a new investment in that fund, if the fund was in carry and was achieving at least , let's say the preferred return and paying back the expenses, then it can flip out of carry just because you did a new deal and you valued it roughly at cost.

Thank you. Our next question will be coming from the line of Bill Katz from Citi. Your line is open.

Thank you very much, I appreciate you taking the question. Just given the addition of Mr. Cavanagh to the executive suite, I'm still wondering about any type of change of strategic direction or incremental opportunity that that addition may offer ? Thank you.

We are very pleased that Mike has agreed to join us and he will be actually starting, I think, in June. We don't really see it as any change in our strategy of what we are going to pursue. We would like to just strengthen our next-generation leadership and also strengthen our current management structure and that is what really it did.

But it shouldn't be seen as we are going in a different direction than we were before. Obviously Mike can bring some great values to us and he will have contacts and insights that maybe we didn't have before, but you shouldn't read into it the we are going in direction A which is different than where we were before.

Thank you. Our next question will be coming from the line of Brennan Hawken from UBS. Your line is open.

Good morning. In the real asset section just hoping to flush out maybe the continued losses in the investment income there, I know that has been a, sort of repeating issue here and last quarter you indicated that felt fully accrued from a tax perspective for Europe; so, curious whether or not some of the losses this quarter had anything to do with that item? And maybe if you could help us out with how much is attributable to Lat. Am. and Europe, if those are still the two trouble spots and then whether or not may be due to going into clawback might've had something to do there? And then finally how long you might think Adam Metz it would take him to get that turnaround really going for that division? Sorry about the multiple parts I just don't want to get chastised by the operator for the follow-up.

Let me start with that. Given how many funds we have, to be honest, that we have so few that really need special attention or turnaround is really surprising. A biggest fund that we have to really focus on is our second European real estate fund and some of the problems that we saw on the European real estate market.

Adam was brought in to help with that turnaround and also to do other things for us with international real estate. He has worked pretty hard on effectuating some improvements there, there is nothing yet that we can cite that is going to say immediately be a turnaround that will reverse some of the problems we have had.

But I do think that Adam is an extraordinarily talented, well respected real estate person and we are very happy to have him. I think we will see improvements in the not too distant future but nothing immediately. Adena or Bill?

Sure, on the investment income there is no further effect coming from the tax position in Europe flowing through the numbers in the quarter. As we said we felt fully reserved on that based on the fact that we currently have related to that matter.

The $18.5 million of investment loss, about half of that really comes from the continued losses that we have in the real estate investment in Latin America. I mentioned on the last quarter call that will continue to be a loss that flows through our financials because we're consolidating that investment due to the way that we funded it and that company is currently operating at a loss. And so that will continue, you will continue to see that coming through.

The other half is coming from just a change in the value of a loan that the balance sheet made to this Europe II fund, the Carlyle Europe Real Estate Partners II fund that David just mentioned. That value will fluctuate based on the underlying value of the assets there. Just we had some change in the asset values there and therefore it took down the value of the mezz., the loan.

Those of the changes and that will sometimes be positive and sometimes be negative kind of depending on how that portfolio is progressing.

Thank you for the color.

Thank you. Our next question will be coming from the line of Michael Kim from Sandler O'Neil. Your line is open.

Hey, guys, good morning. I just wanted to follow up with Adena on the recent capital raises. I was just wondering if you could walk through in maybe a bit more detail in terms of how you are thinking about capital needs going forward? You mentioned that NGP option but just beyond that any color on how you are thinking about the mix or the balance, if you will, between GP commitments versus just having some dry powder available for further bolt onacquisitions? And then related to that any color on what you are seeing in terms of the M&A environment in terms of supply pricing or just the competitive landscape more broadly?

Sure, with regards to the capital raises I think I would start by saying that as a publicly traded partnership it is very efficient to the unitholders for us to distribute earnings and I think that we do that because of the fact that we have an efficient way of streaming the income to you.

We think that is something we want to maintain and so we look at the fact that we are fundamentally a yield stock and we continue to expect to be one, but at the same time we want to fund growth. As a result we have used the capital markets as a means to fund our growth both in terms of investments in our funds, and I will go through that in a second, as well as strategic investments we want to make for the firm like that NGP options and other bolt on acquisitions that we will probably continue to do overtime.

So I think that you can see that we try to use a balance of equity and debt and will do that opportunistically depending on the health of those markets and how accessible they are to us and what we are funding in terms of the types of growth that we are funding. That is something that we would look at as a means to help fund growth.

In terms of investments in our funds, if you think about it we are making a 1% investment into all of our funds. If, for instance over the last several quarters we have invested about $8 billion, and we are making a 1% investment in our funds. Then you would expect that we would have kind of somewhere around an $80 million investment intake putting into the funds over time until those funds start to distribute back to us.

It will become a self-sustaining exercise over time but I think that right now we are building up the invested balance in our balance sheet and that will be a cash outflow for a period of time.

It is obviously a very high return activity for us. It is well in excess of the WAC and that is what will be measuring ourselves on in addition to providing accretion to our unitholders from anything we do. That is how we see the use of the capital markets.

I don't know if you want to add --

Just to add to that, financial service industry acquisitions are not always the easiest to do and all of you are probably familiar with some that haven't worked out throughout recent years and for other large firms.

In our case we have actually been pretty successful at making the acquisitions that we have made, they've worked out, I think, quite well and our return on invested equity there has been quite high. And so we are going to be continuously looking for other good opportunities that fit within our overall strategy of the businesses we want to be in.

Was your question about acquisitions by Carlyle or acquisitions in the broader investment environment?

Can we move on?

Our next question will be coming from the line of Warren Gardiner from Evercore. Your line is open.

Good morning. I was just wondering if you guys could give us a little more color on where maybe NGP X stands in terms of maybe an IRR or MOIC?.

As of right now because we don't own the carry in that fund we don't publish the returns in that fund, but as we go forward we would expect once we exercise the option that it will be included in our fund tables. As a general matter I can say that the fund is doing quite well and it has a strong IRR, it is finishing up its investment period and they have launched the fund raising for fund 11 is going well.

And perhaps we wouldn't exercise the option if the fund were not doing well.

Of course. Fair enough, thank you.

Thank you.

Thank you. Our next question will be coming from the line of Patrick Davitt from Autonomous. Your line is open.

Good morning. You have now 7 of the CT funds accruing carry but only 3 with LTM realized carry and the IRRs are getting fairly -- is getting a fair amount of GAAP between that 8% bogey and where they are now , I was kind of curious as to how you think we should think about that 3 catching up with 7 and what the timeline for that might be?

Sure, I will take that one. As we explained, I think at the earning day and maybe even on the last earnings call, it is not a total science determining when exactly we are going to take carry. The investors obviously hate it when you go into clawback, and so that, for example, our gross accrued carry is about $3.8 billion, and our gross clawback is about $40 million.

So we avoid clawbacks and that makes us maybe a little conservative when we're going to start taking the carry. I would point you in the earnings release, obviously, I think you have got it to the GAAP on maybe it is pages 26 and 27 -- let me see, if you look for example at Europe III, which is a very good example, total fund size was $5.3 billion, really it is fully invested now at just under $5 billion, total fair value of $7.9 billion and a 1.6multiple. That is the funded total.

Then when you go to the remaining fair value analysis you can see on CEP III that the remaining fair value actually exceeds the average fair value of the fund at 1.7x. You can do some of the multiplication yourself, I would expect that funds would be taking cash carry within a year , it is obviously a big fund when you have a 5 billion euro fund it is a lot of money hopefully we can move that into taking cash carry in that period of time.

Asia III is another one, although the gap is not as great there between the unrealized MOIC and the remaining fair value. It is another big fund, it is performing very well, it is exceeding its hurdle , it is another fund that I think will be on a similar time frame as well.

Remember also that although somebody might say well did he say it was going to be in 2014 or 2015, he said within a year or so? The answer is, no, he didn't say either of those things. We actually manage our business on a little longer perspective rather than a fairly artificial date of 1 quarter end or another. We look at what is happening.

I would say one other big thing, in order to realize carry it takes a realization event. If a fund is -- you invest $1 billion and it is worth $2 billion, and you are way over the preferred return, you have returned all of the expenses, everything is great, you can't take any carry until you have a realization event. Something has to happen, you have to start selling that investment.

I think it is a good thing if I would also recommend it order to get a handle on some of these things to look at the 10 largest positions that Carlyle has in the public markets. Where we have five of them exceed $1 billion in size, CommScope, Booz Allen, Pattern Energy, Allison, and Numericable and HD Supply is just under a billion. And it is public information when we are selling these positions and you can see which fund they are in and the impact it can have when we start to sell those shares. I would be looking for realization events and I think you are right to look at the gap between the realized MOIC and the unrealized MOIC and the remaining fair value of the capital.

So the key take away would being the GAAP in those MOIC is more important than the gap of the IRR from the preferred return?

They are both important but I would tell you, partly it depends on the timing of fund, the life of the fund. You get close to the end of the fund it shifts a little bit to which becomes the more important.

It is interesting also that these funds generally require exceeding the preferred return and so what happens also is when you sell an asset, that is a big asset and you don't cover the whole preferred return on that, it can make it look like the entire fund is moving out of realized carry. It is kind of a strange mathematics, but generally you are right, look at both of those things and you're on the right track as to what we are doing.

Okay. Thank you.

Thank you. Our next question will be coming from the line of Christian Bolu from Credit Suisse. Your line is open.

Thank you and good morning, everyone. As dry powder continues to build and is now equivalent to roughly 40% of fee pay and AUM, in light of your comments on the frothiness of the market, at what point do you think you'll get some pushback from LPs when you try to raise new commitments?

Pushback with respect to?

I'm just trying to reason your commitments given you already have so much dry powder on hand already.

Investors don't really look at our dry powder. That is something that you and people who do what you do look at, and we look at it as well, but each investor looks at his or her own fund and what fund they're going to go into and what kind of rate of return they're going to get. They don't really look at our overall dry powder, there really look at our track record.

I don't think we are getting pushback from that factor. Right now we have seen a lot of interest in our funds and as some of you have heard me say probably more times than you want 60% of our capital comes from investors or 6 or more of our funds, and as a result we find going back to investors already with us is very very productive and they don't really focus on how much dry powder we have. They tend to focus on whether we can invest the money in a sensible period of time and get the rate of return they want. And generally that has been pretty good for us and I think for the entire industry. The industry right now is expecting pretty good fundraising numbers and I think we reflect that.

I think also it is a function of, I would think of it as dry powder per investment strategy or per fund. If you raise a $10 billion fund, if you are 3 years into a five-year investment period and you have invested 10% of a fund that is dry powder that everybody is very concerned with. Are you going to be able to get the full fund invested in the question.

Remember of the $56 billion as well about $20 billion of it is in the solutions business which is a different kind of dry powder that's being put together there than the dry powder in the other funds.

People also look at it fund by fund, tell me about my fund, its earnings, it's preferred return, it's expense ratio, it's covering it's capital, when are you going to sell that deal, when are you going to give me a distribution or realization? Not so much about the overall.

One final point I would make on this is that when you have a large amount of dry powder it does help you get deals sometimes, people come to the people who have the capacity to put forth large sums of money out and we are fortunate to have a fair amount of capital. We're seeing deals all over the world where people come to us and say, we know you have the money to do this, we would like you to consider this deal. And that has been a big advantage for us having this kind of dry powder.

Thanks for all the color.

Thank you. Our next question will coming from the line of Mike Carrier from Bank of America. Your line is open.

Thanks for taking the follow-up. Adena, when I asked the comp question I was actually talking about the performance or the incentive comp versus the base comp so I just wanted to find out if you have any color on that because it looks like the ratio picked up this quarter and I know it can vary by fund and all that kind of stuff so maybe it was something related to that? And then, Bill, on your M&A comment, I was just wondering when you look at the sectors and where you guys are invested is there any activities that you would say is picking up maybe more than other sectors or more than the overall market where you may be better positioned or is it much more of a broader comment for the overall business?

Let me start first on the investment environment and what sectors look particularly strong or less so. First of all, we invest all over the world but I will concentrate my comments on the United States which is where we have a lot of the industry specialization.

I would say that of the businesses we have, industrial has obviously been very strong partly it is a function of the U.S. Energy revolution but we have been very busy.

We did the Signode deal as part of that business, the Axalta deal was part of that business, the ADT deal was in that field as well. Allison Transmission is in the industrial business. So we have been very strong in the industrial side, and that is of course where there are carve-outs as people are trying to optimize their own business and what businesses do they want to invest in and grow, frankly, when something is a little bit of a corporate orphan to a big strategic sometimes it is pretty attractive to somebody like us.

That would be number one, number two, frankly, is healthcare. In that business we have obviously been successful with MENA care in the past and PPD which we did a couple of years ago. and of course, ortho-clinical business from Johnson & Johnson at a purchase price over $4 billion is obviously a very big deal as well. It is another carve-out where you have to take a big company out of another even bigger company as well.

Consumer, we see some action there as well , there is action all over the portfolio but if I had to cite 2 businesses I would probably say industrial and healthcare are the most active today in terms of both recent deals done in the pipeline.

Mike, with regard to your comp ratio question, thank you for clarifying, sorry I didn't understand it before. But on performance. fee related compensation versus total performance fees, the ratio is going to change quarter-to-quarter and I will give you a little bit of an explanation of it.

This quarter it was about 50% where as the first quarter of last year was around 60%. And the reason for that is going to be the composition of the carry. So where is the carry coming from?

In corporate private equity you're going to see a relatively consistent 45% comp. to 55% coming to the firm, 45% going to the themes, and that is going to be relatively consistent quarter-over-quarter by design. Whereas, if you look at total market strategy it really depends on where the performance fees are coming from.

So in the hedge fund we recognize proportion and consolidation of our hedge funds but we do have comp. against those fees as well and that ratio is going to change quarter-over-quarter just depending on how the performance is doing and it is not a fixed ratio. Whereas in the carry funds and that segment it is a 55% , 45% split.

So in this particular quarter most of the performance fees came from the hedge fund because the GMS carry funds increased 3% versus 9% of the first quarter of last year. But the ratio is just going to be different. That is not as much of a science.

I think that with real assets remember that Riverstone when we have carry that comes from Riverstone we have no compensation offsets, and we did have some carry in the first quarter of last year. We do not have carry coming off from Riverstone in the first quarter of this year and so the comp ratio is going to be different than it would be in the prior quarters.

Lastly, in solutions, I just want to remind you AlpInvest, the legacy business of AlpInvest, they received 85% of the carry on all of the legacy and carry that they owned coming into the acquisition back in 2011. And they received 60% on a go-forward basis on investments they have done since then.

So that ratio should improve over time in terms of how much we end up keeping, but for the most part they had very strong performance in the first quarter of this year versus the first quarter of last year and so they are a bigger part of our total performance fees and they end up with a very high comp ratio against that based on the legacy deal that we did with them.

I hope that explains the details, but it will fluctuate every quarter and every segment has its own characteristics.

Yes, thanks for the color.

Our next question will be coming from the line of Brian Bedell from Deutsche Bank. Your line is open.

Great, thanks for taking my question, most have been answered but one on just fundraising, that used to go pretty well, the question would be it looks like you are on track to exceed the $15billion to $20 billion guidance that you have for the full year? And then maybe if you could talk about some of the funds that you are in the market for in the near-term or is the first quarter basis running ahead of schedule?

Of course if I say we are ahead of pace and I set a high bar then I won't be able to say that we have exceeded our targets later on. I don't want to say we are ahead, we are in pretty good shape.

We did $22 billion last year, I think we projected we would do around $20 billion this year but I think we may well do more but I don't want to guarantee it. The funds that we have in the market that are experiencing enormous demand are our international energy fund and that is the first fund but it is somewhat unique because there aren't a lot of international energy funds, i.e. they don't invest in the United States. We have a very talented person leading that fund and that one will do quite well.

Our U.S. real estate fund, our seventh one, is meeting very strong demand as well.

Our fourth Asian fund is, I believe, going to exceed our target and that is in pretty good shape as well. We think that our European buyout fund which is doing quite well now is going to do well in the market and we have had a number of large buyout funds in the market and it is hard to have an infinite number of buyout funds in the market at the same time. U.S. fund is out of the market, I think the Asia fund will be out of the market in the not-too-distant future and a lot of our energies can also now focus on the Europe buyout fund and that will be pretty attractive.

NGP has its own marketing team that works closely with us but I believe that that is, as you heard earlier, in pretty good shape and will be very attractive as it raises money. We have a lot of other funds I won't go through all of them now but I would say that investors have money, they are more discerning than they might have been 5 years ago in some respects, they negotiate somewhat harder than they did in some areas but generally I think investors have money to deploy and I see it more ebullient now than I did in the last 2 or 3 years.

Does it seem like it is more than the fund raising demands, the demand for investments is sort of exceeding your ability to invest? In other words, turning down investments to some degree?

I wouldn't say that. Bill?

I wouldn't say that either. You know, David and I periodically argue whether or not he is better at his job or I am better at my job. In terms of putting the money to work. It varies all over the world by fund and by product. But I think its pretty well in balance. The market actually figures out that they don't want to give you money that you're not going to be able to invest and earn realistic returns as well. They look at the team, they look at the market environment, they look at the opportunity, perhaps the competition and all of those things considered I would say they are in balance pretty well.

The argument is that, I think Bill is doing a better job than I am doing and he thinks I'm doing a better job than he's doing. In other words, it is not that we are arguing that each of us is doing our job better, it is the other way around.

That's great. Thanks so much.

Thank you. Our next question will be coming from the line of Bill Katz from Citi. Your line is open.

Thanks so much. Mine will be a two part question; first part is can you update your thoughts on the ability to penetrate further into the U.S. retail channel? And secondly, you mentioned with all the growth capital you are raising some of the seed investments, I am sort of curious, when you look at your product set where you feel like you might be somewhat deficient? Thank you.

Well, raising retail products for a firm that has the kind of background we have is going to take a long time. It is not overnight that you can evolve the kind of products that we will want to evolve in our space just for the retail market. So it is nothing that is going to dramatically change our composition of the firm over night. But, we brought in somebody, as you heard, who is going to focus us on that and we have a lot of things in the works. But nothing that I think in the next quarter or so are going to dramatically change our earnings. But, it is an area that we are focussed on because increasingly retail investors are not happy with some of the products they have had over recent years from other areas and now they think that firms like our can justify the kind of rates of return that they want and can achieve them. But it takes time and I wouldn't expect overnight to see any dramatic change here.

And then in terms of the acquisition environment, Bill, I think that as we have always said we are going to be opportunistic and I think that if we look at where we have been doing acquisitions I think there will continue to be opportunities in those spaces generally. In GMS we have been active with the hedge funds and if we find some very creative and interesting and scalable hedge fund strategies we would probably continue to look at that space as well as in the credit space there. I think that in solutions we've done a fair amount, I don't think we see something that is imminent but that would be an area where we would continue to look at how we grow our capabilities. And I would say in International real estate, we look at both buy and build there so that is just we are always looking at how we are going to continue to reposition that business.

Thank you for taking my questions today.

One more.

Thank you, our last question will be coming from the line of Patrick Davitt from Autonomous. Your line is open.

Hi, thanks for the follow-up. I wanted to ask a question given your position in DC I think you have a unique perspective on this stuff. The last few weeks we have been hearing about increasing regulatory focus on so called hidden fees that maybe LPs don't know about that you charge your portfolio companies or whatnot, not you in particular but the industry. The wording was quite vague I am wondering if you have any thoughts or incite as to what exactly they are looking at and if at all it could be an issue for you and/or the industry?

I would say that we do not anticipate that that would be an issue for us. I think that what they are talking about has to do with transaction fees and portfolio advisory fees that are charged out to the portfolio companies and whether or not they are disclosing those fees appropriately to their LPs that they have the right amount of sharing of those fees with their LPs and just making sure that they are being open and honest with their LPs around the charging of those fees and making sure those fees are not, they are not over charging.

I think we feel quite confident that we do not, we are not big collectors of those fees, we do it when we can but we don't try to drive our business based on it and we have been very disclosive to our LPs. We have actually had a recent visit from the SEC just on a normal five-year basis, they do that for all of the investment advisors. We feel confident that we have done things the right way in that regard for sure.

Yes, I would say twice a year with our big funds we meet with the biggest investors in the fund on an international advisory committee, and as part of that we do a big portfolio review and investment environment review as well as we do a very transparent, this is how we value the portfolio, this is our valuation methodology, these are all the fees that we charge the portfolio company, these are the expenses. Frankly, what we have to rebate to them, the rebate rate is obviously very high today or 100% in terms of a lot of things. So, I would say, I worry about a lot of things but that is not one of them.

Okay, great. Thank you.

Thank you. That concludes our Q&A session for today. I would like to turn the call back over to Mr. Harris.

Thanks everybody for your time and attention today during the call. If you do have any follow-up questions please feel free to reach out to me after the call. And we do look forward to speaking with you again next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.