Carlyle Group Inc (CG) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Carlyle Group second-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Daniel Harris, Head of Investor Relations. Please begin.

Thank you, Latoya. Good morning, and welcome to Carlyle's second quarter of 2014 earnings call. With me on the call today are our Co-Chief Executive Officers, Bill Conway and David Rubenstein; and our interim Chief Financial Officer, Curt Buser. Earlier this morning, we issued a press release and earnings presentation with our second-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 investors. Please limit yourself to one question, so we can give everyone on the line a chance to participate, and return to the queue for any follow-ups. Contact Investor Relations after the call with any 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 factor 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.

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

Thank you, Dan. Carlyle's second quarter was a very strong and quite robust one, as measured by the key metrics we and others use to judge our quarterly performance. And, just as importantly, in our view, during the quarter we also continued to make further progress in building out and strengthening a truly global, multi-faceted, alternative investment firm.

Now, let me be specific. Distributable earnings, which we regard as the most important metric, were $324 million, or nearly double the second quarter of 2013. Over the last 12 months, distributable earnings were $1 billion, or about 40% greater than the prior 12 months. Economic net income was $318 million, or more than double the second quarter of 2013.

Our existing carry fund investment portfolio, which consists of $64 billion in fair value in the ground, appreciated by 5% in the quarter and 11% year to date. Over the last 12 months, this portfolio appreciated by 20%. Today, we have 14 of our significant funds in accrued carry, and 8 have paid cash carry in the last 12 months, including Carlyle Europe Partners III, which distributed carry earlier than we previously expected.

Put another way: Despite realizing almost $800 million in net realized performance fees over the last 12 months, associated with almost $19 billion in realized proceeds for our fund investors, our net accrued carry position has actually increased by more than $500 million over the same period, to a record for us of nearly $2 billion. We believe this sizable net accrued carry balance should give investors comfort that our methodical, long-term focus on fund performance will continue to drive ongoing earnings.

AUM during the quarter grew to $203 billion, the highest in our Firm's history, and this growth occurred despite our having realized proceeds for our fund investors of $6.5 billion in the second quarter. Fee-earning AUM, as of the end of the second quarter, was approximately $146 billion, which is almost 10% higher than a year ago. Fundraising continues to run at a high level, reaching $7.4 billion in the second quarter across a diverse group of funds, bringing our first-half total to $12.9 billion in new, capital commitments. We invested $3.4 billion in the quarter for a total of $4.5 billion for the first six months of 2014.

With respect to the longer-term matters that I earlier mentioned, let me highlight two occurrences during the quarter. First, Mike Cavanagh is now officially on board, and working out of our New York and Washington offices. As I believe everyone listening knows, Mike is our co-President and co-COO, and joins a 20-year Carlyle veteran, Glenn Youngkin, in that position. We believe their combined talent and experience, alongside a deep, global bench of next-generation professionals, places the Firm in a very enviable position for many years into the future.

Second, as part of our ongoing effort to expand our real assets platform, Carlyle exercised its option to share in the incentive fees for NGP's 10th fund and all future NGP funds. Specifically, on NGP-X, where exits are expected to occur over the next several years, Carlyle will now have a 40% participation in incentive fees. As you know, we previously acquired a 47.5% share in NGP's management fees on all funds.

Beyond that action, we are currently in the market with three energy funds. Our first international energy fund, our second US power fund, and NGP's 11th fund. In the first half of 2014, because of the appeal of these three energy funds and our seventh US opportunistic real estate fund, we have raised almost $4.4 billion in new equity capital for our real asset segment, which is actually more than we raised for any of our other segments during this period.

Finally, let me address fundraising in some detail during the quarter. The substantial capital raised during the quarter reflected two trends that we currently see in the fundraising market. First, while fundraising for the private equity industry is still below the record levels of 2007, fundraising levels have been consistently increasing every quarter.

And second, it should be pointed out that fundraising is increasing, especially for the large, diversified alternative investment firms. The largest, most diversified firms are raising an increasing percentage of the dollars now being invested in alternative strategies. We expect these two trends to continue.

During this quarter, $5.5 billion of the $7.4 billion in capital we raised was in our carry funds. This past quarter, we had a final closing on our second global financial services fund, and also closings on nine other carry funds, as well as in our business development company. We also saw net inflows into our hedge funds and into our solutions business.

We expect to have final closings during the third quarter in our fourth Asian buy-out fund and our first international energy fund, with both funds expected to have closings at levels above our initial target sizes. The international energy fund will be the largest first fund raised in Carlyle's history.

Finally, we closed two CLOs, one in Europe and one in the US, this quarter for a total of $1.2 billion. We also raised $400 million for a new commodities financing vehicle that is part of our Vermillion platform. In sum, we had a successful fundraising quarter, and we expect reasonably strong fundraising performance for the remainder of the year.

Now, let me turn it over to Bill.

Thank you, David. As David said, our portfolio, particularly our corporate private equity business, performed exceptionally well in the second quarter, with the carry funds appreciating by 5%. We generated $6.5 billion in realized proceeds for our investors in the quarter.

While our US businesses continued their strong performance, results in our European private equity business, both buyout and growth, were the big story of the quarter. With five offices and a 17-year history, we have a very strong corporate private equity business in Europe with an excellent track record. However, when we began investing our most recent European buy-out fund, Carlyle Europe Partners III, we struggled early.

A couple of our initial investments realized losses, and we paid high prices for two excellent companies: Applus, a global engineering and testing company based in Spain; and Numericable, a French telecommunications company. When the recession hit, business slowed and multiples contracted. Since then, however, the fund has recovered and thrived, and those two high-priced investments, Applus and Numericable, have become sources of strength for the fund.

Carlyle took steps to enhance these companies during and after the tough times. For Applus, we strengthened management, broadened the business outside of Spain, funded additional equity, renegotiated debt agreements, and completed significant add-on acquisitions. On Numericable, we improved margins in the B-to-B business, negotiating an amend-to-extend debt agreement; facilitated a high-yield offering in February 2012; worked to merge the second-largest cellular company in the region, SFR, into Numericable; and supported the Numericable transaction with Altice.

Over the past year, both companies have gone public, Applus In Madrid and Numericable in Paris; and now are both among Carlyle's top-10 public holdings. In the last quarter alone, Carlyle Europe Partners III appreciated 13%, and has appreciated 47% over the past year, a percentage gain that is more than double that of the Euro Stoxx 50 over the same period. The MOIC of Europe-III is now in line with Carlyle Partners V, a fund the market rightly considers a great fund, which is our US buy-out fund of the same vintage, and one of our best funds.

As a result of the portfolio appreciation and some attractive exits, Carlyle Europe Partners III realized cash carry in the second quarter, faster than we previously expected. With a remaining fair value of almost EUR5 billion, Carlyle Europe Partners III is a sizable fund, and is now in a position to make a meaningful contribution to realized performance fees going forward.

Worldwide, we realized proceeds through a number of sales this quarter, including 11 block sales from 10 different companies in various buy-out funds. In total, we realized $3.4 billion from these block sales. In addition, we sold Medical Park, the second-largest hospital chain in Turkey; we sold our stake in Sermeta, a French heat exchanger company; and we realized more than $800 million in proceeds from our real estate funds.

Two portfolio companies went public in the quarter, Applus, and Foresight Reserves, a company in the third Riverstone Carlyle energy fund. We have several other significant IPOs in the pipeline, in addition to the IPO of Healthscope, which went public in Australia last week. As Apple has previously announced, the sale of Beats Electronics to Apple is expected to close in the third quarter.

We closed a number of significant new investments in the quarter, most of which have been previously announced. Total invested capital for the quarter was $3.4 billion. New investments included: Ortho-Clinical Diagnostics, formerly a division of Johnson & Johnson; Signode Industrial Group, formerly a division of Illinois Tool Works; ADT Caps, a Korea -based security business we acquired from ADT, which is the first deal in our new Asia buy-out fund; Oyatsu, the Japan-based snack maker; Talent Partners, a firm that provides payroll and other services to the advertising industry; and investments in two energy mezzanine transactions, both related to the development of upstream oil and gas assets; and a number of real estate investments.

Looking forward, we announced a number of other investments during and right after the quarter; transactions which should close before the end of the year. These include the acquisition of Traxys, a metal trading company by our equity opportunities fund and our sub-Saharan Africa fund; the acquisition of Acosta, a full-service consumer packaged goods sales and marketing agency via our US buy-out fund; the take-private of SBI Mortgage; and the acquisition of Sunsho Pharmaceutical by our Japan buy-out fund; and the acquisition with a European partner of Custom Sensors and Technologies from Schneider Electric, our first deal in our new Europe buy-out fund, Carlyle Europe Partners IV.

The investment environment remains similar to that which I described last quarter, which is to say competitive and challenging. For a large-scale buyout, almost on a global basis, equity valuations remain high, caused at least in part by the very low global interest-rate environment. That said, we do continue to find attractive investment opportunities selectively in the large buy-out area, in the energy and real estate sectors, in small- to mid-sized companies, in our hedge funds, and in our business development company.

Let me conclude with a few points about each of our segments. Our corporate private equity business is in great shape. It continues to be our largest business, and contributed to earnings. We are raising large amounts of new commitments, creating value in our portfolio, taking advantage of opportunities to realize proceeds, and deploying capital in transactions we find attractive despite high market valuations. Our performance fees are becoming more diversified in private equity; a trend we expect to continue as more of our funds move into cash carry.

We continue to see opportunities to scale our global market strategies segment. We continue to [transition] new CLOs. Our hedge funds, which had flat to modestly higher performance in the quarter, saw new inflows. And our business development company continues to attract capital, and invest in good yielding assets. Our GMS carry funds continue to perform exceptionally well.

Our real asset segment is in a position to be a larger positive contributor to our overall results for the reasons we discussed earlier. As the earnings release shows, our most recent US real estate fund, Carlyle Realty Partners VI, has a 1.5 times MOIC, which is a strong performance for a young fund. Carlyle Realty VI is in accrued carry, and could soon be in position to produce cash carry. Overall, our US real estate business has been investing approximately $700 million per year; a trend we think can continue, if not grow.

Our solutions segment is successfully integrating Metropolitan Real Estate and Diversified Global Asset Management, alongside AlpInvest. Solutions launched several new products in the first half of the year, and is becoming a larger contributor to fee-related earnings.

In conclusion, I am pleased with our investment performance and results for the quarter and first half. Going forward, we expect that interest rates will remain low, debt financing will be abundant, and that asset prices will remain high. Under these conditions, we will continue to aggressively realize gains in our portfolio and be selective on new deals. If we are wrong in our expectations, I believe our portfolio companies are generally well positioned to withstand tougher capital market conditions.

Let me now turn it over to Curt Buser, who has been with Carlyle for 10 years, and who assumed the role of interim CFO during the second quarter. Curt?

Thank you, Bill. As David mentioned, our pre-tax distributable earnings for the quarter were $324 million, nearly double last year's $163 million. On a post-tax basis, distributable earnings per common unit were $0.93 in the quarter. And for the first half of 2014, Carlyle's produced $1.45 in distributable earnings per common unit.

With this quarter's $0.16-per-unit distribution announcement, Carlyle has now announced unitholder distributions of $0.32 per unit thus far in 2014. So the year-end true-up payment continues to build at this stage of the year. This quarter's distribution has a record date of August 11, and a pay-out date of August 22.

Distributable earnings this quarter were comprised of $80 million of fee-related earnings, $232 million of realized net performance fees, and $12 million of realized investment income. Drilling down a bit more, the $80 million in second-quarter fee-related earnings was a record, and compares to $37 million in the first quarter of this year. Certain of the components of the change this quarter are episodic in nature, and are not likely to recur on a regular basis at the same level as this quarter.

The two most significant components were: first, Carlyle benefited from $25 million in catch-up management fee revenues, attributable primarily to closings in our second financial services fund, fourth Asian buy-out fund, and our international energy fund. We generally expect some level of catch-up fees each quarter when raising new funds, but this quarter's catch-up fees were greater than we normally see.

To put this quarter's result in perspective, we earned $8 million in the first quarter of this year in catch-up management fee revenues, and averaged about that same amount per quarter during 2013. The $25 million in catch-up management fees more than offsets the direct fundraising costs this quarter of approximately $16 million, driven by the $7.4 billion in new capital committed during the quarter. The fundraising costs this quarter were slightly below the first quarter. Even though we raised more capital in this second quarter, we were raising substantially all of the capital this quarter from internal resources, which are less expensive than external sources.

Second, Carlyle also generated $30 million in net transaction fees during the second quarter, largely in connection with various investments made during the quarter. This quarter's revenue should not be inferred as a new trend, but rather based on the timing of certain investments being closed. Our reported transaction fees are net of a management-fee offset we provide to our fund investors, which is generally 80% of the gross transaction fee.

Shifting below the line, there are a few expense items to also highlight. Compensation expense, exclusive of performance-fee-related compensation and equity-based compensation, was $178 million, or approximately $6 million higher than the first quarter, as we continue to build out fund teams and back-office support. Interest expense was higher versus the first quarter, due to the $200-million add-on to our 30-year senior notes issued in March of this year.

Moving on to net realized performance fees: The $232 million we generated this quarter was driven by a diverse set of realization events, with the majority of realized performance fees generated in two of our US buy-out funds, Carlyle Partners IV and Carlyle Partners V, as well as carry realized for the first time from our third European buy-out fund, Carlyle Europe Partners III. Some of these exits were accelerated into the second quarter from activity we expected to occur later in the year, given strong equity markets. In addition, we generated realized performance fees from seven other funds during the quarter.

I want to spend a moment on the performance fees we realized from Carlyle Europe Partners III, a fund that has a current multiple of invested capital of 1.7 times, and remaining fair value of $6.6 billion. During the quarter, we had partial or full exits in five Europe III portfolio companies: Applus, CommScope, Sermeta, Moncler and Numericable.

As we have discussed previously, we generally defer taking carry on funds that recently move into a carry position until certain internal criteria are met, to minimize potential claw back. Consistent with this approach, we took less carry on the Europe III exits than otherwise allowed under the partnership agreement, to manage potential claw-back exposure. Specifically, we took approximately 10% on the transaction gains for the three of five exits we did take carry on this quarter. By the end of Europe III's fund cycle, assuming continued strong performance of the fund, Carlyle will have received or realized a full 20% carry rate.

Realized investment income is the final component of distributable earnings, and Carlyle generated $12 million in realized investment income this quarter, including a $17-million pre-tax gain on a European real estate investment. The tax associated with this real estate gain is approximately $7 million, which increased our tax provision in the quarter.

Shifting to economic net income, pre-tax ENI was $318 million in the quarter and $1.4 billion over the last year. The 5% carry fund appreciation helped drive approximately $262 million in net performance fees in the quarter. These strong performance fees and solid fee-related earnings were partially offset by unrealized investment losses, primarily related to [erplan] and certain other European real estate investments, which may persist throughout the remainder of 2014 due to the expectation for continuing erplan losses. In addition, our European real estate business continues to contribute to our unrealized investment losses, as we continue to work through the challenges in this portfolio.

The tax provision on economic net income was $81 million in the second quarter, which was higher than our recent trend. The reason for the higher tax provision outside the $7 million in tax I mentioned earlier relating to the real estate investment income, is there was a larger component of ENI from the solutions segment, which pays corporate taxes.

Post-IPO equity-based compensation is included in ENI, and it increased to $20 million from $14 million last quarter and $5 million in the fourth quarter of 2013, largely driven by the $170 million in equity compensation granted in February of this year. Looking forward, in the event that Carlyle grants additional equity awards in connection with new hires, or pursuant to annual grants in early 2015, we would expect another increase in equity compensation expense.

As we have said throughout this call, this was a solid quarter for Carlyle, and the metrics that underpin our Business point to continued strength growing forward.

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

Thank you, Curt. As we have just tried to convey, Carlyle had an excellent quarter in all of our key metrics. We are especially pleased that our focus of late in Europe has shown strong results in producing new investments and enhancing the value of existing, longer-term investments. Of course, we recognize that a strong quarter's results in Europe and overall does not guarantee strong results every quarter, but we are pleased with the second quarter's results, and believe preliminary signs for our fundraising investment activity in the future are looking positive as well.

Now we would be pleased to take your questions.

Thank you.

(Operator Instructions)

Michael Kim, Sandler O'Neill.

Hey, guys, good morning. So, it seems like US buyout and your hedge fund businesses have really driven an outsized proportion of performance fees more recently. So just thinking -- looking forward as the real estate and Asian and European buy-out platforms increasingly come online, just wondering if you could talk about the potential trajectory in terms of carry and/or distributable earnings as you look forward?

Okay, this is Bill. First of all, a little bit of the premise isn't quite right. I would say that in the most recent quarter, the performance fees were driven by the two big US buy-out funds and by the European buy-out fund, with the two US funds contributing more than half of all the performance fees. I would say that that trend in US buyout has actually been in existence for quite a while. Although the US buy-out funds seem to becoming less important than they were -- still big and the biggest, but not as high a percentage.

The hedge fund performance fees -- we tend to book those in the -- we do book those in the fourth quarter. So once we know what the results for the year are, we're then able to calculate the hedge fund performance fee and realize that performance fee. Obviously, we're accruing based upon the results earlier in the year, but it's not until the fourth quarter that we really know what those performance fees are going to be. Last year, they were strong. This year -- we're only halfway through the year, we will have to see what they turn out to be for the year as a whole.

Going forward, one of our goals is to make sure that we get more and more of our funds into carry, both in the corporate private equity segment, where we want to move funds like our Equity Opportunities Fund, our Energy Mezzanine Fund, both of our Asia buy-out funds into -- to the extent they aren't, into cash carry, and more and more of that. Hard to comment on a trajectory going forward, other than I'm fairly hopeful for more of the same in the corporate private equity business.

Now, in the real assets business and in the GMS business -- the GMS business is actually down from last year, but I consider that really just episodic in nature. The kind of thing that last year's second quarter had some fund closings, and had some significant gains in our distress business, but didn't repeat in this year's second quarter. I look at the GMS business over the last couple of years going from making $20 million to making a couple hundred million dollars a year, so I see it through the lens of that type of long-term performance. Our goal is obviously to continue that going forward.

I think the big opportunity, frankly, is in the real assets business, where our real estate businesses, other than our US real estate business, have struggled, and we're working to improve that performance dramatically. And then, as David mentioned in his remarks, we're building the energy segment. It's already a great segment, but you take our energy mezzanine business, NGP, our power business, our international energy business, and the residue of Riverstone, and it's a great business. There we have a lot of those funds are beginning to get raised. As David mentioned, our international energy fund will be the largest first-fund we've ever had.

Okay, that's helpful. Thanks for taking my question.

Ken Worthington, JPMorgan.

Hi, good morning. First, on NGP X: I don't think you were in a position to share metrics last quarter, but given the purchase of carry, would you share MOIC and IRR information for the fund now?

And then, were there any restrictions in the timing of the exercise of your option? My assumption is you try to exercise the option as close to the fund going into cash carry as possible, unless there was some restriction. So I'm trying to figure out if the exercise of the option means we should be expecting some cash carry shortly?

Ken, this is Curt Buser. Thanks for your question.

We're very excited about the opportunity with NGP. And just to kind of recap where we are, we currently have a 47.5% management fee interest in NGP for all their funds. We exercised our options to acquire 40% of the fund X carry and all future NGP funds. At the completion of NGP's investment period, we'll actually acquire an additional 7.5% stake in management fees from NGP, giving us a total of 55% of their management fee revenues.

In July 1 -- that was really the key date for exercising NGP X; end of June, we exercised NGP XI. We're very excited about our relationship. NGP's historical performance has been very good. And we don't like to comment upon future performance, but we would expect the future performance hopefully to be in line with what they've done to date.

This is Bill. I would just add that NGP I through IX all earned carry, and for somebody to put nine funds in a row into carry, I think that is a spectacular performance, and it's a performance we expect to continue on X and XI.

Okay, thank you.

In terms of expenses, you had both Adena leave and Mike came on board this quarter, potentially creating some noise in compensation for either 2Q or 3Q. Any extent you can tell us if compensation or the run rate was a little high or a little low in 2Q, given those dynamics?

So, as I said in my script, Ken, we were about $6 million higher than Q1, but really it had nothing to do with either of those factors. And I don't believe that those factors will have a material impact on our quarterly compensation.

Perfect. And then lastly, Carlyle has a number of investments made in conjunction with other private equity firms. In these situations, how do you think about the timing of an exit? Do you prefer to exit together? Do you prefer to go it alone? I'm sure it is situation-specific, but at this point, you have got a number of investments that seem ripe for harvesting, where you're in it with one to two other sponsors, and some color about exits would be great.

Okay, Ken. I would say that, generally, you go into a buy-out deal, and at the front end hopefully you and your partner are aligned, and you have the same vision for what's going to happen and what you're going to do in a certain situation. And, of course, the first thing that happens is what you expect doesn't occur. And hopefully the partnership is strong through that process.

Usually, in our deals, we agree for some period of time that we're going to stay in sync with our partner. And then after some period of time, we can go our separate ways. Obviously, nobody really likes a kind of a rush to the exit or a rush even for the entrance, because it can really skew things and hurt your limited partners.

We've never been a Firm, by the way, Ken, that likes to distribute even marketable securities to our LPs. Generally, they don't want them; and also, that can also lead kind of for a very unruly market situation.

I would say that, generally, we want to stay in sync with our partners. For example, last week when we took Healthscope public in Australia, we and TPG sold equal amounts of the stock. We're very much in sync in that secondary -- in that primary offering -- that initial public offering. I'd say that is more typical.

Later on, in some deals, particularly if we've got more than one partner, you can occasionally have a situation where there are some majority rules that are in effect that three out of the five or some number can determine what the partners are going to do. But even that tends to fall away, and people are not required to sell together or anything else. They can go their own separate way if they have different views of value.

Great. Thank you very much.

Thank you.

(Operator Instructions)

Brian Bedell, Deutsche Bank.

Hi, good morning, thanks. Just if you can -- Curt, if you can just touch on the CEP III dynamics for the carry? Like you said, you took 10% of the gains. Just given the variance of the internal benchmarks that you mentioned, should we be expecting that to move up to a higher catch-up rate going forward?

And then, just on fundraising -- I asked this in the first quarter as well. You're tracking -- you're farther ahead of your $15 billion to $20 billion annual target on the fundraising side. Should we expect that to pull back in, or are you definitively ahead of the $20-billion mark? Thanks.

Brian, I'll take the first part of that, and then David will answer on the fundraising.

So, with respect to Carlyle Europe Partners III, there were five exits in the quarter. We took carry on three of those; and again, net 10%. We did that, really, as funds that initially move into carry, we want to be very careful about managing our claw-back exposure.

So, really what we do is we look at a number of factors. We first -- obviously, you have to have an underlying deal or exit from a profitable transaction -- going to make sure that we turn the cost to our limited partner investors, and make sure they have been reimbursed. We need to make sure that the fund's cumulative returns are exceeding the preferred return or hurdle rate. And we have to really look at kind of the amounts that we've paid back to date in their respective and vetted gain in the fund.

That fund is at about a 12% net IRR versus a hurdle rate of about 8%, but made sense to take carry at this stage. And, as I said on my script, over the life of this fund, assuming things work out well, in total it's taken a 20% carry.

On fundraising -- fundraising for the entire industry is up for the first half of 2014 compared to 2013. It's up about 4% or so; and 2013 was up over 2012. Assuming global macro economic factors continue to be roughly what they seem to be now and what most people project, it would appear that fundraising probably will continue to be fairly robust for the remainder of 2014.

You are correct that our numbers appear to be higher than we once thought they would be. We're a little nervous about saying that you can extrapolate the first six months to the second six months, and add the two up, and we'll be higher than we were projecting. We don't want anybody to think we were below expectations. And so we don't want expectations to get too high.

But we're very comfortable that our fundraising products in the market are quite attractive to investors, and we don't think that there's going to be any diminution in fundraising generally around the world and in our own products. So, we're quite comfortable with where we are, but we don't want to have anybody raise expectations unduly.

Is that carefully stated enough?

Yes, that makes complete sense. Thanks very much.

Craig Siegenthaler of Credit Suisse.

Thanks. Good morning, everyone. Given that you'll receive 40% of future carry in NGP fund X, I believe you're also fundraising for the new agricultural fund, so maybe you can talk about the investing opportunities you see across the agricultural and energy verticals here? And I know you also attack energy from several different points, including both P/E and mezz. Maybe you can talk about how your effort here is really differentiated from some of your large competitors?

Well, the energy business -- we are very excited about that business. And it's an area where we think we can put enormous amounts to work throughout the whole energy stream, and up and down the capital structure of the businesses in which we invest. By some measures, the amount of additional capital that the energy businesses in the United States alone need to raise are just staggering numbers. Begins with a T instead of a B, in terms of the sheer size of investment required for the energy businesses in the US and around the world.

I think we are differentiated because we have a number of pieces, and our success will be determined by our extent to knit them together a bit. In the US business, which is, frankly, the best place to be in this business -- they don't change the rules on you too much, and you know what the laws are, both the environmental laws and the tax laws and the like. NGP is a great business. I mentioned about it going into carry on its first nine funds.

The international energy business -- we've got a great leader there. We've done business with him for more than 10 years -- very high expectations and hopes there.

In energy mezz, which is primarily focused on the United States -- that's the lending business. But it can really move up and down the capital structure. It is called energy mezzanine, but most of its deals have actually been senior loans. Kind of an example of the banks being intermediated or intermediating themselves, frankly, by not pursuing that particular business. And then, of course, we have the power business, and the United States is making an enormous conversion from coal, and to some extent, nuclear to natural gas.

David?

NGP raised an agribusiness fund, as you pointed out, and it closed above what they thought they would raise. They raised about $400 billion -- $402 million; it's hard to say that there's any one area in the world where there aren't enough private equity funds, but agribusiness might be one of them. It's not a business where there are very many private equity funds, to be honest.

And just think about this: There are 7 billion people on the face of the earth today, or when I was born, 2.5 billion people. Now, there is 7 billion, but there's half the arable land. So, the amount of land available for agricultural product harvesting is reduced, and the demand, particularly among emerging markets, for food supplies is much greater. As the emerging markets emerge and become wealthier, as they obviously are in China and India, sub-Saharan Africa, the demand for western-type food is increasing dramatically. So we think that that is one of the great growth areas in the private equity world, agribusiness; and NGP is out with a very good fund in that area, and have a very good person running it.

Great. Thanks for taking my question.

Mike Carrier, Bank of America.

Thanks a lot. I think when we look at the private equity business -- and that business is running well, and it's relatively easy to look at the outlook. I think when you look at the global market strategies, the real assets, the solutions -- based on some of the acquisitions, and then the interest that you're buying up, just trying to understand if you can provide any insight when we think about maybe next year -- whether it's the amount of assets that can be generating carry? Just trying to get some color on the dynamics over the next couple of years. Those other three segments -- what's the potential on the performance fee side?

Well, obviously, we don't give guidance, as you know, for what we think our financial performance might be next quarter or next year. We wouldn't be spending the time and money we're spending to try to build those businesses if we didn't think we could make them successful. How successful they'll be will be determined by our execution. And I have confidence in our ability to do that, and hope that, over time, our private equity business grows, and yet its share of our Business goes down.

Okay. Thanks a lot.

Brennan Hawken, UBS.

So, even though deployment picked up this quarter, it remains low, looking at it, especially vis-a-vis dry powder. So maybe some thoughts and comments on how you guys are thinking about investment opportunities, and if there's any difference in how you're approaching different geographies or asset classes? Any color on that front?

Well, I could give you a lot of color on that front. First of all, I think our investment pace has been pretty good, particularly in the United States. As you know, we did Signode and Ortho-Clinical. We did Vogue; we did ADT, which is part US, part Asia. And then we announced yesterday, or the day before, Acosta. Those businesses will be between $4 billion, $4.5 billion of equity in those businesses [having been] invested, which is a lot more, I think, than most other people.

I'd say the prices we're paying are not cheap, but we continue to think we can earn very attractive IRRs for our fund investors. And so, the United States is a very good place in which to invest.

No question that the low interest rates and the abundant amount of credit have raised valuations. If you do some simple analysis on what the impact would be of financing at one rate compared to financing at a rate 200 or 300 basis points lower, the numbers can be staggering. An extra 15% or 20% of a purchase price can be paid, and earn the same IRR under those set of assumptions.

I think it would be fair to say that the current world is a world of -- the United States economy adding about 200,000 jobs a month, growing about 2% a year, very cheap credit and abundant, Federal Reserve saying we are going to keep it that way, and high asset prices that have been moving higher. In my view, I don't think that anything is going to happen to change that. I don't see the catalyst in the United States or in China or even the X factor that is going to cause that to change. I know it will change, eventually. For now, we're taking advantage of it, but I think that that type of -- that view of the world is likely to continue.

If you then say: Around the world, what's going on? Europe is about -- Europe and Japan are both priced about 20% lower than the United States, at least in their public markets, which translates pretty closely to what's going on in the private markets as well. And I would say that is too big a discount.

I know they're going to grow less slowly -- more slowly than America, and I think they have other issues, in Europe particularly. But those discounts versus prices in America make it worthwhile -- taking a hard look at investments in Europe and in Japan. And then, of course, Asia is part of the fast-growing global markets.

So, I think that I'm satisfied with our investment pace to date. No question that prices are high, but I feel satisfied with the investment pace.

I would just add two things that have changed over the last, I'd say, 5 to 10 years in the private equity world that we're now seeing. Number one, there's greater acceptability by potential sellers of private equity as a source of capital. It used to be, in Europe or Japan, people thought that private equity people were not really appropriate buyers. But I think that's really changed and, therefore, there's more opportunities that we're seeing in Europe and Japan than we were years ago, and that's an important factor.

Also, secondary buyouts have had their ups and downs in terms of the way people look at them, but the results of secondary buyouts have been pretty robust for investors in recent years. And I think, therefore, you're likely to see more secondary buyouts. And while we haven't done as many of them as we have done carveouts, we do recognize that you can make a fair amount of money if you have a very good management approach and a very good kind of plan when you're buying a secondary buyout. And therefore, I think you're going to see a fair number of those continue as well in Europe and the United States.

Terrific. Thanks for all the color.

Ann Dai of KBW.

Good morning, I'm calling in for Rob Lee. I just wanted to go back to real assets, quickly. As we're starting to see performance turn the corner a bit, I was wondering if you guys could provide some color on what proportion of that improvement in returns is due to general market conditions, as opposed to improvement of fundamentals at the portfolio companies? And are there any examples you can provide there?

Or our skill set; you forgot that. (laughter)

And the skill set.

Okay.

Well, I'd distinguish -- real assets is a big business for us. It goes from real estate all over the world through the various parts of the energy platform.

In real assets, it's interesting: We continue -- we've continued for the last four or five years to invest at the same pace. We haven't changed our underwriting standards or return expectations. So, it doesn't strike me that it's either of the factors that you cited, or maybe it is all of them combined. In global real estate -- it has been a tough business for us, and we're fixing it.

In energy, each of the energy businesses is a little bit different, frankly. In energy mezzanine, which is a fund that we hope to move into carry in the next year or so, there, there just is an enormous opportunity because the banks, particularly the foreign banks that used to finance energy projects in the United States around the world, have withdrawn a lot from that business. And it's been a void into which we've moved.

NGP -- they've done a great job in good markets and bad markets. Energy prices up or down, crises around the world, fracking or pre-fracking, they've just done a wonderful job. And I think that I would say, there, that is the skill set perhaps in that case.

Okay, appreciate the color.

And quickly moving to your comments on the opportunities to scale GMS further, do you guys see that happening through acquisitions and list-outs? Or is it your intention to grow it more organically -- raise larger funds, upside some funds there? Just trying to get a sense of what you see driving growth and providing some leverage within that business?

The organizations or the parts of GMS that we have today, we think are in pretty good shape. And we expect to see a fair amount of organic growth. We're quite happy with the performance of most of the things we have in GMS. A couple things could grow a little bit faster than maybe they currently are, and we're working on that. We're pretty happy with where things are there.

But, we do get opportunities all the time that people present to us because the things that have gone in our platform from acquisition have done pretty well, and a lot of people like working in our Firm or I guess have heard good things about it. And therefore, we do see a lot of opportunities. And I wouldn't be surprised if we made some other acquisitions at some point or made some new businesses there.

Very often we're looking at starting businesses really by putting a team together that might not have a large amount of capital under management now, but will be after they get on our platform. We are opportunistic, we haven't precluded anything, but I suspect we'll probably have a little of everything. Growth of some of our existing things, some start-ups that we'll kind of fund, and then some acquisitions of things that have some assets under management already.

Great, thanks for taking my questions.

Glenn Schorr, ISI.

Thanks. Maybe just a bit backwards before forwards -- I appreciate the comments on the growth outlook for GMS. Just looking at the previous period, whether it be the quarter, or the last 12 months -- just ENI and some of the drivers are down. And I'm just trying to separate -- is that just a function of low rates, tight spreads, less opportunity? I'm just trying to get at what you think is the main headwinds in GMS, because I'm a believer in the growth drivers you just mentioned.

This is Bill, but Curt may fill in after me.

I'd say that the rates and lack of volatility can, over time, affect the hedge funds, which is a big part of the GMS business. And the whole hedge fund industry for the last couple of years has had a tough time. Our funds have done pretty well, but there is no question that when you have interest rates at zero and no volatility, it's hard for hedge funds to make money.

Returning to some of the other question we're talking about, if you thought about what we're doing there -- in the CLO business, we continue to issue a couple of CLOs quarterly. And some of them are kind of replacing CLOs that are running off -- that we issued five or six or seven years ago. Some of it is expanding the size of the business.

We built the BDC really from scratch; 1.5 years or so, it had no assets. Now it's got over $1 billion in assets.

CEMOF was a business we started and built from scratch, which is also in the GMS business as well. Today, it's got over $1 billion in loans outstanding, or assets outstanding or roughly in that range.

I think the fact that it is down versus a year ago is really, as I tried to say in my remarks, a function of a couple of things that happened a year ago. I know we had big gains on a couple of deals in our distress business, and they did not recur in the second quarter of 2014. The did occur in 2013.

And then, I think Curt mentioned the fact that we had some fund closings. People say: What does it mean that there's a fund closing? Why is there some more management fees that comes in? Suppose you have a fund closing, and there's $300 million committed, and everybody commits to pay a fee of 1%.

Well, then when you have -- and those people pay. Well, then when you have a subsequent closing, the people who close on the subsequent closing usually go back and pay fees to day one. So you have a real catch-up on the management fee, and that's what tends to happen in some of our businesses. It's been throughout our discussion today.

And that's what happened in 2013 with our energy mezzanine fund, as well as with one of our Carlyle Strategic Partners III, one of our distress funds.

Okay, I think I got all that.

Maybe just one quick follow-up. On the regulatory side, I personally don't see that many big inquiries and anything to be super scared about, but there does seem to be more inquiries, more suits. I'm just curious on how you can categorize it? Maybe in the context of -- should we expect a pick up in regulatory-regulated expenses? Any color would be great. I know it's a touchy subject to comment on.

Well, let me let Curt deal with the expense issue, but we obviously recognize that there are people in regulatory positions that do raise questions from time to time about certain things in the industry, but we don't really see any ongoing problem that we have to worry about. Obviously, the government can always come in and ask questions. But we have a regular dialogue with the SEC, for example, as other firms that are registered with the SEC do, and we don't anticipate any problems there of any note or anything worth commenting on now.

We don't think that Congress is likely to do anything in the near future that is going to adversely affect private equity, as opposed to anything else in the society. So, we don't have any real concerns in this area right now that I think are worth noting.

But Curt, on the expense issue?

I would just say -- David, I'd echo your comments. We're pleased with our compliance efforts to date. We continue to invest in both people and systems to support compliance, regulatory, and reporting matters. And we'll continue to do that to make sure that not only we're keeping pace, but hopefully kind of exceeding expectations.

Okay, doesn't sound like we have to worry about it being a P&L drag to any large extent. So, thanks.

Marc Irizarry, Goldman Sachs.

Great, thanks. David, can you talk about fundraising, and in particular, I guess there's different economics between raising funds internally versus maybe having to go external? As you look at the mix of fundraising, what you are in the market with today and going forward? As you shift maybe to more high-net-worth or global clients, is that what's impacting the internal versus the external? And do asset classes maybe play into that as well? Thanks.

Okay, well, first, most of the money we are raising is being raised by our internal fundraising group. We've got about 85 people in that group; not everyone is a fundraiser, but it's a whole group -- people do various functions for the group -- about 85 people or so. And most of the money we raise comes from our internal fundraisers.

However, we don't have the capacity, nor does any organization like ours, to do retail investing in-house, really. So, we do rely on external people from time to time. And sometimes they charge higher upfront fees then we would prefer; your own organization is pretty good at that as well. And we'd all wish they would lower their fees, but they don't seem to be lowering them. So for the time being, I expect the market will be that we'll probably pay some fees.

However, one point that is very important to note: When we raise money today from large institutional investors, very often they would like co-investment, very often they would like ancillary services, all kinds of conferences, and other things that we might provide for them, and information and all kinds of other things that cost money for us to do. We don't usually have the same thing from retail investors. So, while you might pay an upfront fee that might be higher, we don't usually have the same co-investment requirements. And co-investment obviously is something we're giving away more or less for free.

So we usually don't have those kind of things with the retail investors so far and, therefore, we're quite attracted to retail investors even though the upfront costs might appear to be higher at the outset. Over a longer period of time, it probably will be cheaper for us to raise money that way. But we'll have a mix, and I suspect other firms like ours will have a mix. Probably, though, for the foreseeable future, the vast bulk of the money we're going to raise is going to still come from our internally generated fundraiser team.

Okay, great, thanks.

Patrick Davitt, Autonomous.

Good morning, thank you. Could you -- and I apologize if you said this at the beginning of the call, I wasn't on -- but could you give us a little bit more color on how the portfolio companies are performing from a revenue and EBITDA standpoint, maybe globally and by industry?

How long do you have? (laughter) I would say this: Remember, we own about 200 portfolio companies around the world. And we have very good data that we're able to track from those portfolio companies, and compare it and analyze it versus what's coming out in the public estimates of industry performances and economic performances.

Generally, I'd say, in the last few months, that's been maybe a little weaker than the trendline had been. But I say that in the context of: When the United States reported a decline of 2.9% in the GDP in the first quarter, we just thought that number was flat out wrong. I'm sure it was the correct number, but it really did not reflect what was going on in the economy, as we saw it.

I think the United States still continues to grow. Europe is growing about 1%; Japan maybe a little better than that. As I mentioned, the US economy continues to chug along. And any month to month, it's almost really noise in the data before you can really say that you've got long-term trends in what's going on.

I do think that the economic situation that exists now is going to persist for a while, because I think the central banks have such power over what's going on. They've suppressed volatility, and they've made money abundant and cheap.

Okay, thank you.

William Katz, Citi.

Good morning, this is actually Neil filling in for Bill. At the start, you mentioned two big-picture trends. First, rising allocation; second, share gains. Within the allocations, where is the incremental interest coming from? And then secondly, is there any particular asset class or segment that you're seeing greater allocations to? Thanks.

Yes, first, let me give you some numbers. Historically, Carlyle gets about 30% of our money from public pension funds in the United States. In the last quarter, we got about 20% of our money there. So in other words, the US public pension funds, last quarter at least, were less significant for us.

And where is the increase occurring? Well, it's occurring from sovereign wealth funds. Historically, we raised about 14% of our money from sovereign wealth funds. The last quarter, about 25% of our money came from sovereign wealth funds. So, that's a big area of pick up.

We're also seeing some pick up in fund-to-funds. Historically, we get about 17% of our money from fund-to-funds -- various fund-to-funds around the world. Last quarter, we got about 23% from that source.

So, I'd say you're seeing more fund-to-fund activity, you're seeing more sovereign wealth activity, and we are seeing a pick up from high net worth. We didn't particularly see it last quarter, but we're seeing it previous quarters in high net worth. So, I would say the two biggest trends that I think are worth noting are in more and more high-net-worth individuals. You can call them retail, you can call them high net worth. Whatever you might use as the nomenclature, more and more of them are coming in either through feeder funds or other ways into alternative investments.

And secondly, the growth of the sovereign wealth funds is hard to overstate. They just have so much money, and they don't pay it out. Unlike US public pension funds, which are paying out money to pensioners, sovereign wealth funds typically don't need to do that. And so, because oil prices have been high for 10 years plus, because the Chinese economy and southeast Asian economies have been high and attractive for a while -- these southeast Asian and Chinese sovereign wealth funds, and the Middle East sovereign wealth funds, are doing quite well, and have a fair amount of cash.

In terms of things that they're looking for, everybody is looking for something that somebody else doesn't have. In other words, they all want something that's fresh, different, unusual. They want -- they're more willing to be first in the line than last in the line. Used to be, a lot of the large investors said: Call me at the end, when you finally got the fund ready to close, and I'll come in and take a look at it, and let you know what I think.

Now, a lot of them want to be at the beginning with sometimes special terms. Historically, all investors in the funds paid the same terms whenever you came in and whatever your size was. Now, the world has changed. If you are bigger, you get a discount. Typically you come in earlier, you get a discount. A lot of those sovereign wealth funds or other large investors now want to come in earlier, get a discount, and willing to pay in size.

Last: High rates of return are less important to some investors than the steadiness of rates of return. So, getting 30%, 25% rates of return is honestly less appealing to people now than having a steady, steady, let's say, 12%, 14%, 15% rate of return over a longer period of time. So we're seeing more and more demand for more steady products, and a lot of current income kind of products, too. So that's a big change from years ago.

Bill or Curt?

Still there?

Thank you.

Thank you. There are no further questions at this time. I'll turn the call back over to Daniel for closing remarks.

Thank you for your participation today. Please contact Investor Relations with any further questions you may have, and we certainly look forward to speaking with you again next quarter.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.