Carlyle Group Inc (CG) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Carlyle Group fourth-quarter 2016 earnings conference call.

(Operator Instructions)

I would now like to introduce your host for today's conference call, Mr. Daniel Harris. You may begin.

Thank you, Kevin. Good morning and welcome to Carlyle's fourth-quarter and full-year 2016 earnings call. In the room with me today are our Co-Chief Executive Officers, David Rubenstein and Bill Conway, and our Chief Financial Officer, Curt Buser. Earlier this morning we issued a press release and detailed earnings presentation, 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. To ensure participation by all those on the call please limit yourself to one question and one follow-up and return to the queue for additional questions. This call is being webcast, and a replay will be available on our website.

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

Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the risk factors section of our annual report on Form 10-K that could cause actual results to differ materially from those indicated.

Carlyle assumes no obligation to update any forward-looking statements at any time. Before I turn the call over to David, I would like to call your attention to a significant change in the presentation of our operating metrics. Beginning this quarter and adjusted for prior periods, we now include activity within our investment solutions segment in invested capital, realized proceeds and fund appreciation.

Investment solutions had already been included in net funds raised. Any metrics we discuss throughout the call will now include investment solutions activity unless specifically noted otherwise. During 2016, investment solutions invested $4.3 billion in new capital, realized proceeds of $8.6 billion for its investors, and produced fund appreciation of 12% across its platform, all of which are incremental to the results that would have otherwise previously been shown. With that, let me turn it over to our co-Chief Executive Officer, David Rubenstein.

Thank you for joining our fourth-quarter 2016 earnings call. Based on most of the metrics by which we measure ourselves, we have a very good year in 2016 and made progress on a number of important firm initiatives. We realized a record amount of proceeds for our investors of $30 billion in 2016.

We have averaged $28 billion in annual realized proceeds for our fund investors for the past five years. Our investment activity was robust. We invested a record of more than $17 billion in 2016. Our carry funds appreciated 12% in 2016, compared to 6% to 7% for global indices, thus once again significantly outperforming public equity markets.

Our underlying business performed well in 2016 despite difficult macro conditions, stock market volatility, persistent recession expectations, Brexit and obviously the uncertainty associated with the US election. Fortunately we are operating at a very favorable environment for the alternatives industry and for Carlyle.

For our fund investors, asset prices and significant levels of distributions have increased demand to allocate even more capital to leading alternative asset managers. We are certainly poised to benefit from this environment, and the risk of a near-term recession seems to have dissipated. Notwithstanding the strength of our underlying business and the favorable macro environment, our efforts to adjust some of the problems in one of our business segments, global market strategies, impacted our unit holder distribution this quarter.

Nevertheless, we declared a $0.16 per common unit distribution for the fourth quarter, bringing our full-year distribution to $1.55 per common unit for the year. Our decision to distribute the $0.16 to unit holders for the quarter broadly reflects a strong year that Carlyle had and our focus on providing strong returns for both our fund investors and our unit holders.

Over the four full years since our IPO, we have averaged about $850 million in annual distributable earnings and $1.90 in common unit holders distributions per year. During 2016 and continuing this year, we have met head on some of the challenges to our business, and we continue to pursue best-in-class personnel and financial resolutions to many of our business challenges. We believe the result of these efforts will be a more focused firm moving forward.

To be more specific about the charges in the fourth quarter, distributable earnings were negatively impacted by $175 million in cash charges in our hedge fund businesses. Of that amount, a net $150 million is attributable to losses from certain funds and vehicles associated with Vermillion Asset Management.

As you may recall we took a $100 million non-cash reserve last quarter related to these losses, which principally revolve around the misappropriation by third parties of oil owned by various Vermillion investment vehicles. We are actively pursuing remedies to recover some or all of these losses, but the amount and timing of recovery is uncertain.

In the fourth quarter, we repurchased investor interest in one of the Vermillion vehicles, thereby resolving potential claims and acquiring rights to be reimbursed from future recoveries. In addition to the commodities charge, we reached agreement during the fourth quarter with the founders of Claren Road Asset Management to sell our 63% stake back to them, and we incurred a $25 million expense associated with that separation.

We have now fully separated ourselves from the hedge funds ESG, Claren Road and the hedge fund component of Vermillion, and we are now focusing our efforts in GMS away from liquid strategies and toward our core strengths in global credit. We are committed to growing that business, and we are pleased with the new leadership enhancements in this business segment.

Now let me make a few comments about the strategic positioning of Carlyle's business segments. We have an outstanding corporate private equity business, which we believe is one of the largest, most global and most consistent performing in the world. We have been able to raise and deploy as much capital as we can responsibly manage and have developed a number of new scalable successful strategies in recent years.

Corporate private equity has also produced exceptional earnings for the firm and our unit holders, nearly $3 billion in distributable earnings over the past four years. And as we invest larger amounts, assuming we continue to achieve attractive returns, we expect that corporate private equity earnings will grow in the future.

Over the past four years we have deployed $25 billion across our CPE funds, nearly 30% higher than the prior four-year period. Due in large part to our long-term track record and consistency, we are well positioned for successful fund raises for our major funds over the next few years.

Our real assets business is an emerging strength. We have built we believe the best global natural resources business of any diversified alternative investment firm in the world. We have more than $15 billion in natural resource focused AUM across three fund families, NGP, international energy and power. Our performance relative to peers and broad-based market indices is strong, and that performance, specifically in US energy, positions us well to embark on our next capital raising effort for NGP's 12 domestic energy focused fund.

NGP's current fund deployed $2 billion in 2016 alone and is 91% invested or committed. In addition, we are preparing for a first close in our new global infrastructure fund, which will build the yet another fund family within real assets.

Our US real estate business continues to perform exceptionally well. Our opportunistic US real estate funds, with a combined $10 billion in AUM, appreciated an average of 21% over the past year. Our latest vintage fund, Carlyle Realty Partners 7 is now 68% invested or committed in just under three years and is already in accrued carry. And we have initiated fundraising for our next-generation opportunistic US real estate fund.

In addition we have successfully launched our US focused core plus real estate fund, and we see substantial growth in this area. While we have had some legacy challenges in international real estate, we have put most of those behind us, and we are now rebuilding our platform and working to raise new capital in Europe and Asia. We are confident we have positioned real assets for substantial earnings and asset growth.

We have successfully repositioned our investment solutions segment focusing on our strengths and phasing out of liquid businesses that we did not believe would meet our investment standards. AlpInvest has almost finished raising its largest ever secondaries fund at over $6 billion and is in the process of raising one of its largest co-investment programs ever.

AlpInvest returns continue to be among the industry leaders. Metropolitan's results and performance have also been solid and is about to embark on fundraising for its largest real estate secondaries fund ever. Over time we expect the strong performance in the funds to translate into greater levels of earnings for Carlyle.

In GMS, as noted, we are aggressively working to address and eliminate problems, improve personnel and enhance our already strong global credit business. One of our highest strategic priorities is to grow the various components of our direct lending activities. We have recruited some exceptional new people to help grow this business.

Over the past year, we generated $14 billion in gross new commitments despite the fact that our largest funds were not in the market. More importantly, we are positioned to achieve much more substantial fundraising results over the next three years, given the mix of very large funds we expect to have in the market.

In sum, the vast majority of our businesses continue to operate well, and we believe that the continued strong investment results in these areas, when combined with the robust interest in our new funds from our large investor base, places us in a solid position for the future. Bill?

Thank you, David. I will begin by discussing our business activity for the year and the quarter and then address our goals for 2017. For years we have talked about our economic model, which consists of fundraising, capital deployment, asset appreciation and realizations.

When we perform well for our fund investors, this model creates a virtuous cycle that allows us to raise larger funds, generate more income, and ultimately deliver higher distributions to our unit holders. During the year and the quarter, our business demonstrated strong performance by many metrics which gives us great confidence in the long-term prospects for our business.

Our most important priority is finding great investments for our fund investors. And we were able to deliver on this during 2016 as we invested more than $17 billion and we turned our prior investments into $30 billion in realized proceeds for our investors. One of our goals over the last several years has been to increase the capacity of Carlyle to invest more, by raising larger funds, developing new funds, and building out our natural resources, real estate and credit businesses.

For example, this year we invested approximately 50% more in our real assets segment than we have over the past few years. In private equity, we invested nearly $8 billion and 36 transactions during the year, including $2.6 billion in the fourth quarter. Remarkably, only five of our investments during the year were greater than $300 million in size, which further demonstrates the value of our global platform.

Even in a macro environment defined by high asset prices, we were able to find numerous attractive opportunities to invest around the world. Among the larger investments in the fourth quarter were Novolex, a packaging company based in the United States; VXI, a global BPO business with operations in Asia and the US; Schoen Klinik, a healthcare clinic in Germany; ProKarma, a US-based IT services company; and Logoplaste, a European packaging company based in Portugal.

We also completed a number of small buyout investments in South Africa, Europe, Brazil, Peru, Japan and the United States. In real assets, which includes natural resources, real estate and infrastructure, NGP continued its strategy of backing top-flight management teams in some of the most productive energy basins in the United States and deployed almost $1 billion in the fourth quarter. Our real estate business, primarily in the United States, was also very active and invested more than $500 million in the quarter in both new and follow-on investments.

Looking forward, we have announced a number of substantial investments which have or will close in the first half of the year. Several of the most significant of these are Atotech, a global specialty chemicals business we acquired from Total Petroleum, which closed in late January; the China and Hong Kong-based McDonald's franchise, which we will acquire in partnership with CITIC; and WellDyneRx, a US pharmaceutical benefits manager.

These and other already announced investments alone account for approximately $3 billion in capital to be invested, and obviously we expect to be able to deploy significantly more capital throughout the year. In addition to investing, we must create value and grow the value of the capital we have invested.

In 2016, our carry fund portfolio appreciated 12%, and it appreciated by 5% in the quarter. Among the funds that showed particularly strong performance during the 2016 were Carlyle Partners 6, which appreciated 29% in 2016, and Carlyle Asia Partners 4, which appreciated 31% in 2016. NGP 10 and NGP 11 both had exceptional performance during the year as well.

On the distribution side, we realized proceeds of $30 billion for the full year 2016. For our corporate private equity, real assets and GMS carry funds, we realized $21 billion for our fund investors, our largest year ever. More than 60 Carlyle funds in these segments produced realizations for our fund investors during the year.

And it is not just our largest funds that are producing for our investors. For example, our global financial services funds have been very active on the exit front, fully or partially exiting six investments in 2016 for just over $500 million in realized proceeds.

During the fourth quarter, we produced $8.7 billion in realized proceeds from exits too numerous to mention. We are active in most markets, block sales, recaps, M&A and IPOs, of which there were three, including PNB Housing in India.

To sum it up, 2016 was a strong year for many of the firm's operating metrics. We deployed a record amount of capital, grew the value of our portfolio substantially, and achieved record levels of realizations. This was great news for our fund investors who continue to trust us with large and growing pools of capital.

Looking to 2017 we have four key priorities. First, we need to continue to invest wisely, our most important job. With high prices and ample financing and market uncertainty, we believe that this is a difficult investment environment. The challenge for our over 600 investment professionals is to invest in those hard to find attractive deals and then help our portfolio companies create value.

Second, we need to make progress toward our goal of raising approximately $100 billion from 2016 to 2019. We raised about $14 billion in 2016 without many of the biggest funds in the market, and we have a lot of work in front of us. However, given our strong track record across many of the funds, and strong indications of interest from fund investors, we feel confident about achieving this ambitious but realistic goal.

Third, we need to build out our global credit business into a world-class powerhouse. With $30 billion of AUM, an excellent team and a solid track record across multiple strategies, we have a good platform to build on. However, that platform should be larger, more diverse, more global and over time produce a larger share of earnings for our unit holders.

And finally, as mentioned earlier, we need to clean up some of the issues that have negatively impacted us recently. 2017 is shaping up to be a year of transition as we complete the investment cycle for several major funds, eventually move these funds and others into carry and raise the next generation of funds.

As you have seen our, accrued carry balance and public portfolio have declined due to the robust exit activity, and we will work to build those back up during this period. During this transition year, we are focused on executing on our four key priorities, and if we can do so, and we believe we can, we are in a great position for substantial growth in 2018 and beyond.

Let me now turn it over to our Chief Financial Officer, Curt Buser.

Thank you, Bill. I will start with two comments. First, I want to comment on the $175 million in 2016 charges in GMS.

As David described, these charges relate to our commodities business and our separation agreement with Claren Road. As a result, our earnings for 2016 are $175 million less than what they otherwise would have been. Our third-quarter results for GAAP and ENI included $100 million of discharge, where as the full amount is included in the fee-related earnings this quarter, as we have now resolved certain of these matters.

We have attributed all of these losses to the GMS segment. I will discuss segment by segment results later, but we saw meaningful progress in corporate private equity, real assets, and investment solutions in 2016, where our results met or exceeded our expectations.

Second, total assets under management dropped in part because of the disposition of the hedge funds. Total hedge fund AUM at the end of the third quarter was $5.2 billion and was $0 at year end, resulting in a decrease in assets under management. Our active realizations in the quarter largely drove the balance of the decrease in AUM, while new capital raised in the quarter was relatively light.

The elimination of the hedge funds will have a positive impact on fee-related earnings in 2017, while decreasing both management fees and expenses. Fee-earning assets under management is expected to grow again in 2018 after raising new capital and activating the related fees.

Moving on, across the firm, fee-related earnings and distributable earnings for 2016 are lower relative to 2015, due primarily to the fall off in earnings in GMS, as well as lower catch-up management fees in corporate private equity in real assets. The lower catch-up management fees are consistent with what we said at the beginning of 2016 and reflect the fewer large funds we had in the market during 2016.

We continue to actively manage operating expenses with cash compensation expenses 7% lower in 2016 than in 2015. Fundraising costs will increase in 2017 given the larger amount of capital that we expect to raise, and this will put pressure on fee-related earnings in 2017, relative to 2016, since, as you know, we generally expense all fundraising costs upon raising new capital.

Economic net income would have been $481 million in 2016 exclusive of the $175 million in GMS charges as compared to $397 million in 2015. Net accrued performance fees stood at $1.1 billion at December 31, 2016, compared to $1.3 billion at December 31, 2015. Accrued performance fees have drifted lower as we have average net realized performance fees of over $700 million annually for the past several years.

We are encouraged by the early performance of our current vintage of carry funds, and we believe that over time we will rebuild our accrued carry balance. Finally, equity-based compensation was effectively the same between years. Now let's turn to a review of our business segments.

Corporate private equity had another great year with record realized proceeds of nearly $15 billion and distributable earnings of $739 million. Fee-related earnings in corporate private equity were $91 million in 2016, down from $106 million in 2015. This is largely due to a decline in management fees from 2015 from a falloff in catch-up management fees as well as the effect of continued active realizations.

In addition, cash compensation expense, exclusive of performance fee related compensation decreased $26 million in 2016, and lower fundraising costs resulted in lower G&A expense. For the fourth quarter, net realized performance fees in CPE were $159 million, primarily from the final sales of public positions in Booz Allen Hamilton, CVC, and CommScope, as well as the sale of Zodiac Pool in our European buyout funds.

Net realized performance fees in 2017 will likely be driven more by M&A activity rather than block sales of securities in public companies. As a result, net realized performance fees in 2017 will likely fluctuate more on a quarterly basis than was the case in 2016.

Moving to real assets. Real assets produced distributable earnings of $49 million compared to $73 million a year ago, primarily due to a decrease in net realized performance fees. The decrease in 2016 is primarily due to realizing clawback of $36 million on two legacy energy funds during the fourth quarter.

In 2016, fee-related earnings were $54 million in real assets compared to $72 million a year ago when we earned $15 million more in catch-up management fees. Realized investment income was negative $21 million in 2016 due to realized losses from Urbplan. As both David and Bill have discussed, real assets is well positioned for meaningful growth, and this can already be seen in the increase in accrued carry from US real estate and NGP, resulting in a substantial increase in economic net income for the segment in 2016.

Shifting to global market strategies. Distributable earnings in GMS was a loss of $157 million for the year, reflecting the $175 million in charges previously discussed. We expect growth in GMS fee related earnings in 2017 as a result of turnaround fees in two recently raised funds for the full year, Energy Mezzanine II and Carlyle Strategic Partners IV, both of which are substantially larger than their predecessor funds.

Our BDC continues to perform well, generating net realized performance fees of $8 million in 2016. We will see cost reductions in 2017 related to the hedge funds but expect to invest in people and infrastructure as we build our global credit business.

In investment solutions we generated distributable earnings of $20 million in 2016 up from $13 million a year ago. Most of the earnings from this business have been from fee-related earnings, with $18 million generated in 2016, double the amount earned in 2015. While investment solutions is a modest contributor to overall firm earnings today, we expect to see earnings growth in investment solutions this year and beyond as we raise incremental capital at market fee rates and as its funds produce greater net realized performance fees.

We expect investment solutions to continue to grow earnings both from raising AlpInvest's new secondary fund and additional products and over time from our increasing participation in their performance fees. As you may recall, we only participate in performance fees earned on investments made since our acquisitions, and the preponderance of those funds have carry waterfalls that are backend loaded. With that, let me turn it back to David for some closing comments.

Thank you. As we have outlined in our remarks our core business had a very good year based on our key metrics. Obviously we are disappointed that our efforts to address some of the challenges in our GMS segment resulted in losses in that segment.

But by taking on these issues head on and investing to grow other parts of the firm, we are putting Carlyle in a good position to invest wisely, create value, and create growing earnings for our unit holders. We are now ready to take your questions.

(Operator Instructions)

William Katz, Citigroup.

Thank you for taking my question this morning. I guess first question, David, you mentioned and, Bill, you mentioned, that you feel pretty good about raising $1 billion over the next several years. I'm sort of wondering if maybe fleshed it out a little bit in terms of where you see that opportunity, and just given the events of 2016 are there any incremental headwinds from investors taking a step back with all the noise going on with some these other businesses?

Well, we are confident that we can raise the money that we set out to raise, because the track record is pretty good at the things that we are going out for reloads of, and we have already been in the market talking to investors early this year and last year about some of these large fundraisers, and we've -- the situation -- I don't want to ever seem overconfident, because that is not a good thing to do.

It is never appropriate, but what we are finding now is that investors over the last year or so in our funds and in competitor funds that are good as well, are saying that they are nervous that they are going to be squeezed out of funds and won't be able to get in them. So they want to know what do they have to do to get into the first closes of these funds and how much can they get in terms of the size.

It is different than a couple years ago when people would wait till the end of the fund was raised and kind of come in at the end and maybe try to change the terms somewhat. Now what you are seeing is that people want to get in early. I am fairly confident. Obviously the world can always change, but I am fairly confident.

The second point that you address in all the years I have been the doing this with fundraisers around the world and meeting with investors virtually nobody ever asks about the performance of the parent organization. The people that go into the funds are interested in the deal teams, what those deal teams could do and what they can generate for them, and they don't really tend to focus on the earnings of per share of Carlyle per unit.

This is not an issue. The kinds of things that you have likely been interested in and the people in this call are interested in and we're interested are not the concerns that we really pick up from the people who invest in the typical funds. Does that answer your question?

That is very helpful, and a follow-up would be on G&A, maybe, Curt, you could give some perspective here. Could you help us just on crossing the fourth quarter maybe level set what the fourth-quarter looked like? And how do you think about that into 2017 just given both the asset gathering and what appears to be a bit of a pickup on the spend within credit?

So, Bill, thanks for the question. In the fourth quarter if you look at the total segment results for G&A you will see a number that is about $157 million. That number includes $75 million really coming through of the charges.

That is $75 million that had not been booked yet of the $175 million and the net effect of the other two pieces which is zero. So if you think about the $156 million net of $75 million that is about $82 million in the quarter. The third-quarter you pull out the $100 million that we booked in the third quarter. That's $74 million of expense, and a year ago it was $74 million.

Just as I have said before we generally have been running in the low to mid high $70 millions for G&A, and that is really what I continue to see. We are very focused on I'll say core operating expenses, and we have been trying to manage that very carefully.

Okay. Thank you very much.

Ken Worthington, JPMorgan.

Good morning. I wanted to focus on maybe some of the issues that Carlyle announced. I think there has been a disproportionate number of fund issues in recent years that have resulted in reserves in charges and some ongoing losses at Carlyle at levels we don't see at peers.

So in recent years we have seen losses in Urbplan, there was the French tax issue. I think there was a $50 million reserve at the end of last year. We've got the investment and exit of hedge funds in GMS and solutions as well for $1 million this quarter. We have had these sort of periodic and large losses.

Can you help us identify what you think is maybe the underlying causes or reasons for the elevated level of special charges and losses? And are there steps that you can take to better protect unit holders from these sorts of charges or surprises in the future?

Craig, it is Bill. I'll take that question.

I would say that Carlyle is - it's certainly a very fair question. Carlyle has for years been a business that is willing to try a lot of new things and do some experiments, and sometimes they work out great. I think the [burtress] at NGP or the partnership we have with them is an example. Alpinvest is an example.

The business we built in Carlyle global partners is an example. Our international energy business is an example. On the other hand it is certainly the fact that sometimes it does not work out the way we had hoped and we and our investors had hoped.

Incidentally our hedge funds for a number of years three, four, five years ago were making us an enormous amount of money, and obviously that has turned around recently. I would say in terms of what we can do to avoid these kind of pitfalls in the future -- I think a couple of things. First of all, we are never going to stop experimenting. We are going to keep trying new things from time to time.

And secondly, I would say that we believe we put in some people in place who really can help us avoid these pitfalls going forward. I am very pleased with the people we put in at global market strategies. There was an interesting article in the Wall Street Journal earlier this week about or last week about that. Some of the names were mentioned in that article, and I feel like we have really strengthened the team there dramatically. But believe me as the three largest holders of the units are in the room here, we take great -- we spend a lot of time worried about this as well. I would say of course we tend to focus on our core business which is actually in good shape, and of course now we are thinking about the future as opposed to the past, but there is no doubt we have stumbled.

Okay. And then just as a follow-up question. You have new leadership in credit. As you think more about the plan to build out credit, can you just give us some more flavor on how you think that strategy will evolve?

Are you leaning more or do you see the opportunity for lift outs to kind of grow that business? I know you want to extend into related areas. Would acquisitions even be considered at this point? Just more flavor on how you plan on executing the build out. Thank you.

I think some of the build out is going to occur and has already -- is beginning to occur in some of the things that we have already done. For example our Carlyle strategic partners which is our fourth distress fund is three times the size of Carlyle strategic partners 3.

Our energy mezzanine business, which is very active, is more than twice the size of its predecessor fund as well. So that is an example. I think some of the strategies that we have in place will grow in size.

Secondly I think some businesses will grow by frankly the demand. And I'll give you an example for that. That would be our CLO business. Despite the fact that it does have extensive capital requirements with the new risk retention rules that may or may not be repealed, they are part of Dodd Frank, it is a business that we are very well-positioned. It is $20 billion in assets, and we probably have about 40 different CLO vehicles.

They are the type of funds that went through the 2008, 2009, and 2010 problems which were problems for a lot of credit vehicles. Ours did very well during that time. I think the lowest had a return of 4%, and most of them were double digits. We have a great team running that business, and I expect that that business can grow, as well.

Thirdly I think our BDC number of our competitors have much bigger BDCs than we do. We have been growing that, and I think we can continue to do that. There are some other places that we are looking at expanding in European credit, maybe expanding in real estate credit. There's just some areas we are still contemplating, but we have very high hopes, and I think we have a very high team to implement that.

Thank you very much.

Robert Lee, KBW.

Thank you good morning. I am just curious within PE, are you at all rethinking your long-term strategy of having a broad range of sometimes smaller funds and maybe in your fundraising the com maybe moving away from smaller niche funds to really having just some bigger, more -- whether it is North American or global funds that will do a wide variety of things, and maybe that is one way of helping and FRE over time?

Thanks for the question. This is Bill again. I'd say that obviously we like to do funds that can really scale.

Not every business can be a US buyout or Europe buyout or an Asian buyout, but I think generally we like to see funds that we can get to at least $1 billion in size and ideally multiples of that. An example might be today Africa. For example I think we are early in Africa.

I do not think there is another major fund that has an Africa business. I think our current fund is about $700 [billion]. Someday it will be 25% of the people on this planet will be in Africa, and I think we are there and we are early, and we are working hard.

We have done some pretty interesting deals there, and we do it because we think we can grow it into a larger fund, multi billion-dollar fund over time. On the other hand as an example of trying something that did not quite work out we had a fund in the middle east, and it did business in Turkey and [lavonte] and other areas. It was not that big.

It actually did a wonderful job for our fund investor, made us a little carry. It was a good fund, good people. Given what happened with the Arab Spring and other things over time maybe we thought we were just a little too early for that fund, and so we decided not to raise another fund at this time anywhere in the Middle East because we did not think we could scale it.

I think we are a believer in feet on the ground. We have 30 plus offices around the world. I think we have learned that having people in the local markets, speaking the local language, being native is critical. For example we don't run our European business really out of London.

We have five offices, London, Paris, Munich Milan and Barcelona, so we are not just in one market. Same thing would be in Asia where we have about 10 different offices. I think it's our strategy is put people on the ground. I acknowledge we want to raise bigger funds that can be scalable, but we are still going to do continue to do some experiments.

Great and then maybe just as a follow up, I'm just curious from and an investing, a current investing perspective. There is obviously all kinds of uncertainty out there about future tax rates, border taxes and all kinds of things. How is that impacting your investment pace? Is it -- do you think it will actually slow it down for a while?

Because on top of that you have high asset values and easy financing. How are you trying to adjust or do you think it will impact your pace of capital deployment?

If I were to read the text of all my comments to you for the last 15 calls, I would tell you it is a difficult investment environment every single time. I have not yet seen a case where I've said this was really easy, and we can make a lot of money here. So it is always a difficult time.

I think you point out the issues that are affecting us today, and I would add one to it. The issues of ample financing, very high asset prices that is clear. The third one is really just the uncertainty. How is Brexit going to play out? What will President Trump -- which of his plans will be approved and the like?

It is kind of one of those things where we are very sensitive to it. We are watching it all the time. We are investors who invest frankly in what I'll call the micro. We are not really investing in the US economy or the European economy or even the Spanish economy.

We are investing in a particular company, a particular management team, a particular idea at a time. I think right now to phrase it a little differently, I don't think there is much room for error. That because of the high asset prices and the ample financing and the competitive environment and the uncertainty you really have to be very, very focused. You have to have a real plan.

Today -- maybe 20 years ago in private equity you made money on the first day. You bought these companies right, and you could grow the value a little bit. Now everything you buy, you are not making money really on the first day. You have to really build the value of those portfolio companies over time. We have for more operating executives.

We have consistent 100-day plans that we implement on these portfolio companies once we buy it. One of the reasons why our appreciation tends to exceed the appreciation for the global indices is because we are really working the money very, very hard for our investors. I guess I have great belief in the ability of Carlyle to evolve.

Yes, the world will change, and yes I don't know exactly what kind of directions but it will evolve, and we will evolve and we will be ready to take advantage of those. Certainly in the current environment there are some places where you have to perhaps be extra cautious. If you think that there is going to be a border adjustment tax then perhaps companies that are heavily rely on imports -- maybe companies that you put more time under the microscope making sure you are paying fair value or businesses have plans to deal with those kinds of events.

So far I would say it is added extra caution as opposed to caused us to not to an investment in any particular market.

Hey, Rob, this is Curt. Just to add onto that this past year was the year of I will say a lot of uncertainty. We invested most $18 billion even in the midst of that uncertainty, and you can see on page 3 of the press release it really came from the diversity of our platform that really helped us to achieve that even in kind of a hard investment environment.

Yes, and that showed up frankly in the fact that of all the investments we did, only five of them were greater than $300 million, and I think three were in the fourth quarter. In some of these markets you could actually build some the businesses and grow the value that way.

Let me just to add on the tax legislation that you alluded to. We sit here where we are talking from halfway between the capital and the White House. I wish we had better insights as to what was going to go on there than people might be around the world, and maybe we do in some cases, but it is hard to really know what this Congress is going to do or this administration is going to do on the final tax legislation.

I would like to remind people that when we have had major tax legislations before, significant, they usually take about 9 or 10 months before they go through Congress. And so as we sit here in February it is very difficult for anyone to really know, even for people based in Washington what is going to happen, so it is hard for us to say we're going to invest in this company or buy this company because we think the tax legislation will go one way or another.

I think it's very difficult for anybody to do that. I think we're cautious as Bill said, but we are not depending on what Congress is going to do in this tax legislation before we make decisions.

Great. I appreciate all the color. Thank you.

Mike Carrier, Bank of America Merrill Lynch.

Good morning everyone. This is Mike Needham in for Mike Carrier. First just on the $25 million insurance recovery for Q4, can you confirm that is related to the petroleum loss, and is that the maximum possible insurance recovery? And then are there any other outstanding items that we should look got four that could be two additional charges related to petroleum or other items?

Thanks, Mike. Great question. This is Curt. First $25 million of insurance recovery is really related to other legal matters that we have insurance recoveries for, but that was realized and reported here in the quarter. Having said that we are actively and aggressively pursuing recoveries on those commodity losses, both from the underlying cause issue, but from also from insurance related to that position.

Those are things we are working on. In the quarter we put our best judgments together in terms of really thinking about how to fully reserve for this and fully address it based on the information that we have available.

I can't tell you that there is not be anymore, but I can tell you that we really put our best thinking around it and came up with our best judgment based on what we know.

Okay. Thanks and just a couple questions on CPE. Performance looked pretty good for the quarter, but the carry was lighter. What drove the discrepancy? I think you guys called out CP 6 as being a little weaker. On CP 5 can you just update us on the percentage cash carry that you are taking. I think you were up to 15% in the past. I was just wondering if you're taking the full carry.

Again on CP 5 that's right that it has been about 15%, and we will continue to look at that with each deal that we complete and exit at a profit. For CP 6 it had a great year, 29% appreciation in the year. In the third-quarter it went into accrued carry, because of that fantastic appreciation.

In the fourth quarter we deployed almost $1 billion in the funds. And generally when we deploy new capital it will get marked at a little bit below cost because the transaction fees that you incur and the dealer included cost and on fair value, and you end up with a slight appreciation if you will on the fourth quarter.

Now the interesting phenomenon is because that fund is in the catch-up phase of carry, clipped into carry in the third quarter, it will toggle a whole lot here until it fully invests. So in the fourth quarter on an accrued carry basis you see that the effect of Carlyle partners 6 offsetting a lot of the great appreciation elsewhere in corporate private equity.

And I would be remiss if I did not point that we had $159 million in realized performance fees on a net basis in the fourth quarter, so that business is continuing to really do a great job on all fronts.

Okay. Thanks.

Alex Blostein, Goldman Sachs.

Good morning everybody. So I wanted to touch on the outlook for FRE 4 2017 and more importantly get 2018. You guys are about to embark on the $100 billion fundraising initiative. It sounds like there is going to be some lumpiness with that in terms of recognition of management piece but also some up front expenses.

Help us understand putting altogether what it means for FRE run rate in 2017. And more importantly some of that AUM comes in in 2018. How should we think about the incremental margins on those revenues.

Thanks for the question. This is Curt. I am always careful about forward guidance. I don't like to do it, but I do like to help you think it through a little bit, so the right place to anchor on is how I think about what we have done in Q3 and in Q4 in terms of fee-related earnings. And when you pull out the noise it is roughly $30 million. That the right place to start.

We remain very focused on cost and we are also in the process of raising a lot of capital. That capital as we raise it will have a fundraising charge as we close on those commitments. That will be front end loaded.

Once we then get the fees turned on, those back end closes, they have the benefit of catch-up management fees, which really hurt us this year because we did not have any of our big funds in the marketplace, so we were lower on catch-up management fees. I think we're going to cycle back into a period where we will start to see catch-up management fees again, but that is probably not going to have a material effect until the back half of 2017 or 2018.

I think really when you are going to see the lift again in fee earning AUM is in 2018 after we have successfully raised a fair amount of capital, activated these and you will then start to see uplift again in 2018.

Got it. That is helpful thanks. And just a clarification issue. Are there any outstanding issues still remaining with respect to the legacy hedge fund businesses that might create any sort of conditional liabilities for you guys that could impact NID. I want to make sure this is it and it has been cleaned up.

It is always hard to say no more or all done. There's zero AUM in the hedge funds. The commodities business, we took this charge. It was our best judgment. I cannot tell you it is all behind us, but we are doing our best to put it behind us, and more importantly we are aggressively pursuing recovery avenues in this vehicle. It is a tough challenge, but we are taking it head on.

Got it. Great. Thank you so much.

Gerald O'Hare, Jefferies.

Maybe one more on the investment Outlook. You mentioned being well-positioned in US real estate or real assets in general, but I am curious if you could perhaps elaborate a little on the US real estate side of things. Types of investments, geographies and how you are positioning for or ahead of sort of a rising rate environment. Thank you.

Sure, this is Bill. The US real estate business in the United States is in two flavors. First is the opportunistic real estate business where we are investing now our seventh real estate fund. We tend to have a strategy that is very focused on demographics and discrete markets rather than GDP growth, and it is a strategy that has served us very well.

I think virtually all those funds, real estate funds, have gone to carry. It has been a great performance. They tend to do relatively smaller deals. It would not be unusual in a Carlyle US real estate funds to have a $5 billion of capital and have 100 different investments in that fund. It is a little different strategy than other people might employ, and as I said our demographic focus is something I think that sets us apart.

Demographics mean for example other than me almost everybody is getting older or maybe student education or storage or data centers or whatever it may be are examples of places that are perhaps less dependent on GDP growth like for example the office market might be would be one kind of example.

The second flavor of US real estate is in our core real estate business that is different. Most of the business we have our historic business is opportunistic. We -- in that business we try to earn somewhat higher rates of return than we were in the core real estate business. We have been raising that fund now for a couple years well over $1 billion. We continue to build it.

It is able to use the talent and the track record that we used in our other United States real estate business and so far the results there are encouraging, as well. Outside the United States our real estate business is relatively small, but actually it has become pretty active. In Asia we're focused on businesses like data centers and logistics.

I've done some interesting transactions there recently. And in Europe as well I think we are focused on rebuilding that business. We have been working on it a couple years. Improved the talent there and are very pleased with the recent developments there. But not a meaningful contributor to our earnings at this time.

That's helpful. Thank you and then one follow-up within real estate. You mentioned a follow on closed for the new core plus real estate fund in the quarter. Can you help us maybe size where you think that fund could go just the total AUM and actually are there return expectations, and where are they relative to the core real estate?

I would say in terms of the core real estate fund it is going to get bigger. Exactly how much bigger and how soon, I don't know. I see the progress. It is a business that, frankly, you have to face that business because it is an open ended vehicle. Your assets under management and your investment ideas are both growing at the same time. In most of our fund businesses you rate the fund and you invest the fund.

Here as you fundraise you invest and vice versa. You find deals that you think are attractive then you will raise the money for those investments. In terms of rates of return they would be lower in the core real estate area, at least initially it looks like they will be and to be expected, as they are thought to be deals of lower risk.

On the core plus that is a public vehicle, or not a public vehicle, it is an open vehicle. So it is a little bit different in the fundraising than a closed vehicle. When you get to a certain size we suspected it is probably around $1 billion -- when you get to that size you then find the consultants that are advising a lot of people who want to invest in this are feeling more comfortable that it is going to be a viable entity.

So we are approaching a size where we think the consultants will begin to look favorably upon it. Plus the track record of what they have invested in so far has done pretty well. I think it is one of those things where you get to a certain level and I won't say geometrically goes up, but it goes up fairly dramatically once you to get to that level, and I think we are getting close to that level.

Great. Thank you.

Brian Bedell, Deutsche Bank.

Good morning folks. Bill, I know it is obviously very uncertain in terms of what type of reform we get out of Washington, but under the assumption that we do get some reduction in interest deductibility, the potential of expensing upfront capital expenditures and maybe your view on how cross-border trade may contrast with potentially faster economic growth. I know there are a lot of things in there, but how do you think about the deployment environment under those types of scenarios and then in conjunction with that, the realization backdrop?

First thanks. I appreciate the question. I hope you will appreciate my it answer as much as I appreciate your question; and the answer starts with a great big I don't know. Let me give you an example of some things that are going on.

For example one might say that the inability to deduct interest expense would be a big negative for the private entity business and for any particular transaction. I think looking at it on isolation that may be true, but of course it is not in isolation. One of the other key pillars or one of the current plans that is being proposed is immediate deductibility of capital spending.

So imagine one borrows $100 billion and puts $100 billion into capital expenditures. You would have a situation where you would not be able to deduct the $5 million a year let's say of interest expense on that $100 billion you borrowed. On the other hand you would immediately be able to deduct $100 [million] that you spent for capital spending which would obviously overwhelm the interest deductibility.

I use that very small and very simple example to just say there is a lot of moving pieces here, and I don't know enough to give an answer as to how it is going to affect us. Obviously I am sensitive to all these different things. Located where we are and with the various experts we have we are right on top of it. But I don't know how it is going to come out. We are sensitive to it.

We are watching it every day. I think it affects our judgment a little bit right now, but more to come on that I suspect. And I apologize for not giving a square answer that is as clear as your question was.

No worries. I know it is obviously difficult to completely assess, but that's good color. And maybe just talk about I think the four different strategies in 2017, or the four priorities. Maybe two of those the fundraising one obviously the $100 billion through 2019 would auger for a pickup in that pace, a doubling of the 2016 pace.

Do you see that hitting stride in 2017? Or more of a ramp up as we get closer into 2018 and 2019? And then you also mentioned cleaning up more of the issues. Maybe if you could talk about what is left to do in that regard.

In terms of the fundraising, I actually would answer a little different question. First of all I would be disappointed if we don't raise a lot more in 2017 then we did in 2016 without putting a number on it. I think that if you think about where we are going to raise it -- funds like our US buyout, Europe buyout, Asia buyout, Japan buyout, I expect those big successful funds over a long period of time will each be bigger in the next generation than they were in the last generation.

That is an example. I think the other thing is if we can raise his bigger funds can you invest them? As I said we have 600 investment professionals around the world. Over the 25- or 30-year history of investing funds at Carlyle, I would say that I think we have invested more than 90% of what we actually have raised through our fund and I think we will continue to be able to invest it in that kind of range.

I don't have anything more to add on the cleaning up let's say some of the other businesses. Primarily they were of course referring [Harbor Million] commodities issues.

On the fundraising I would add that there are two large groups that I may have mentioned before are really dramatically increasing their amount of money that they are putting into private equity and other alternatives. That is the sovereign wealth funds, which are dramatically growing in size, and they are coming in large amounts to our funds and other finds, our peers, and also high net worth individuals through feeder fund or through family offices directly.

We continue to see an explosion of interest from those two groups not that the other groups that normally invest are not very interested in as well. We have also the factor that many people who invest in one of our buyout funds want to be in a second one, which is to say if they are in US, they may want to be in Europe. They might want to be in Asia, and we are talking to many of our investors about how they want to allocate their funds or what they would like to do in terms of all the funds we have coming to market and they seem quite receptive to the idea of going into multiple funds that have different strategies even though they are all Carlyle funds.

I would just add, David, the pressure to invest from our LP's is very strong today. They see the relative historical track record of private equity versus other asset classes, and our investors really want us to invest, and I think they see what we have done in the past. Sometimes I think their standards are lower than ours in terms of their desire to get the money invested an our way that we think about what we consider the kind of performance we want to generate.

If you look at general market projections from your organization that are on the phone, your people that do this kind of productions very often you will see that generally over the next 5 to 10 years the projections for public market returns and or public fixed income returns are fairly low compared to what the projections are for private equity returns. And that to some extent is fueling an interest by a lot of investors to get these much higher returns that are protected by others, not by us to be likely to occur.

And just on the fundraising global credit strategies. I would assume that is a big part of the $100 billion goal and do you intend to do basically all of that organically, or most of it organically?

It is a big part of it raising the money for global market strategies. We occasionally have looked at some small tuck in acquisitions in the global market acquisitions area. An example would be in that CLO business. In the last few years we purchased a number of CLO managers to really get in build additional scale in that business.

We had scale even before that. Some people wanted to exit the business because partly I think because of the capital demands that it has. That is an example of what we have done. We have looked, but I think most of the growth will be organic.

Thanks for taking my questions.

Michael Cyprys, Morgan Stanley.

Good morning. Thanks for taking the question. I just want to circle back to the legacy energy funds. It looked like a $36 million clawback that laid on the net reliance performance fees.

I'm just curious what the remaining exposure is and how we should think about the timing and likelihood for any additional coming through there.

This is the Curt. Thanks for your question. There are two remaining funds that we co-manage that we have not realized.

They are fully accrued from where they are on a clawback perspective. There is probably $22 million or $23 million net exposure to the firm at this point based on values as of the year end.

Okay. So $22 million to $23 million exposure max exposure left? Is that on a max basis?

Yes.

Okay.

That based on their essentially and close to pull clawback; that is the amount net of tax as of December 31 that is on our books.

Okay great. And then shifting back to the deal environment, I definitely hear you in terms of the deployment environment being a bit more challenging. Just curious if you can you talk about the competition for putting capital to work today?

There is certainly a lot of dry powder out there in the industry, and you're surely not the only ones with a lot of dry powder and raising more funds. I'm curious if you could talk about how the competition for putting or finding deals has evolved over the past year or two and how you are adapting to that in today's environment relative to peers.

I think the competition is intense. I think we have some tough competitors. It is interesting. When we -- I look at a transaction that may come from one of our funds somewhere in the world we look at some of the other people competing against it, and sometimes I look at the people who are competing against us, and I say gee, we are in the wrong place.

This is not our kind of deal because the competition doesn't look right to me. Years ago sometimes there wasn't the kind of competition there is now, but I would say for the last 5 or 10 years the competition has been intense and continues to be so.

I think sometimes in some markets it is what I call the usual suspects, the big US global firms. Other times because we're brought in global we are competing with a lot of local firms it might be in India or China or Japan.

In some places of Europe are there a local competitors who are big strong tough competitors. It really goes back to what are you going to do with this business what you made the investment? And how are you going to try to improve the companies' operations?

We are blessed I think generally with having some really great management teams in our portfolio companies. I think we are pretty dependent on having good people to do those jobs. And I hope it will continue to the able to count of them to do them.

Let me add two points. One is that we are seeing strategic competition. It is not only the private equity firms. Strategic have a lot of cash and their stock prices are high. More of that than it was five years ago. Another point I wanted to make is that price is not the only decider in these kind of situations.

Very often firms like ours gather around the same price with some of our competitors or even some strategics. What the seller often wants is certainty that you are going to close. You're not going to renegotiate the terms, that you are going to treat the employees well, and that you are really going to honor your promises, and on those scores we actually do pretty well.

We think when there is tie our price we actually come out pretty well and that really gets to the reputation of our team and our firm, and we think that is one of our greatest values is the reputation we have with CEOs around the world. Many CEOs who run our companies after the company is sold they often become if not advisors to us they become investors because they like the way we treat investors and they like the way we handle ourselves. So we are actually raising money sometimes from our former CEOs who are very happy with the organization that they have been part of.

And let me just use some examples here, if I can. In my prepared remarks I mentioned Atatech, and I mentioned McDonald's China and McDonald's Hong Kong. Those are both great businesses, and they were competitive processes.

Ideally when you went you don't want to win because you just paid a lot more than everyone else as David was saying For example in the case of McDonald's China and McDonald's Hong Kong it is a business where McDonald's kept 20%. We and CITIC bought 80% of the company from McDonald's China. Obviously that we are a global firm with our track record was very helpful.

We have a big long-term very successful business in China that has been good for us and good for our investors over time. And CITIC was a great partner. CITIC is a state owned enterprise in China, a very well respected operating and financial company.

And frankly I think when we had them as our partner plus Carlyle, I really thought we were going to win that process and win it at a good price, and hopefully that will turn out to be the case. Similarly with the case of Atotech this is a case where we bought from Total. It was obviously a very high-priced multi-billion-dollar acquisition.

The business is about half in Asia and half outside of Asia, although Total is based in Paris. The business of Atotech was based in Germany. It is obviously a big supplier into the US market and in the US market. So there are a lot of things going on.

I think the fact that we were well represented in a lot of different places was very helpful to us to have that geographic reach of Carlyle. We've got a pretty good reputation in some of the chemical deals that we do, and so it was once again it was another set of circumstances where you tried to say do we really have an advantage in going after any particular idea? I think if you are looking at a business and a business could be bought or sold on eBay, probably it is not the kind of deal that we are going to do.

It is just going to go to the highest bidder and it will be 100 people in the process and you're going to be wasting time and money to do it. Those are two examples of recent developments that maybe show what we are looking for and the kind of deals we do.

Great. Thank you. I appreciate all the color.

Glenn Schorr, Evercore ISI.

Lots of talk about potential opportunities in infrastructure these days, rightfully so. I am a believer. I'm curious if you have thoughts on timing and size of opportunity and then what you are hearing from clients in terms of their interest and what funds do you now have in motion to capture that opportunity? I know there is a lot there.

First, we would prefer not to tell everybody what we are going to be doing in infrastructure and we would hope anybody listening to this would not want to compete with us. It's terrible business to be in. Please don't go into this business. Be very serious.

If you talk to any of the global pension funds or sovereign wealth funds, they have now taken infrastructure out of a basket of maybe real estate and given its own category, so they all seem to have money available for infrastructure. And their view is infrastructure is of two types: one, by existing infrastructure often called brownfields, where you are buying something existing like a turnpike and are going to make it more appealing as we have done once before in the United States, or you are doing what is called greenfields where you are building something de novo.

We are raising a what I will call a OECD fund, which is to say we will focus on Europe and the United States and developed markets more or less, Australia, Canada, and things like that are fairly developed. And we are willing to do Greenfields, but we are mostly focused I would say on some existing assets. We find a lot of interest in it. We have a fairly good team together. We have been in the business for a while.

We have added to the team, and I would say that is more interested this than I would have thought. What is being talked about in Washington obviously fuels interest as well. Whether Congress will allocate more money to infrastructure we don't know, but just around the rest of the world there is a lot of interest in this now, and I think our ability to be a major player here among the large firms like ours, will be significant. So we are very bullish on this area.

Okay. I appreciate that. Just the one follow-up I had I think David spoke recently and talked about the US dollar potentially be the greatest risk to the local economy this year and 2017.

I don't disagree, but I am curious on how do you manage for that? How do you manage at the firm level? How do you manage at the portfolio company level, or is that just stating a risk?

Let me say what I think I said, which was that it was a significant potential challenge because the dollar was getting stronger. Since then it has pulled back from where it was, but Bill may want to comment on more than me.

I think -- we are not currency experts. Most of us our funds for example tend to be -- are frequently denominated in local currency. For example, our Japan fund is denominated in yen.

Our RMV fund in China and we have a number of big euro funds. So those are investing in deals in their own markets in their own currency and while they have to be sensitive to the dollar, non-dollar funds actually have a chance to do very well if the dollar stays extremely strong, because depending upon what happens out there they may well have advantages to have a relatively weaker currency. I think historically strong dollar has led to major problems for emerging markets, because they tend to have a lot of dollar-denominated debt in those emerging markets.

I think it is a risk. It is a risk that has to be managed. I think when you are making an investment in an American company denominated in dollars, you're -- there is no hedge that you can put on. There is just a sensitivity to the fact that if this business is an exporter, and if the dollar stays very strong then is a headwind and the headwind has to managed by those companies.

If you have a good manager he or she will do what they need to do to manage around that problem. Maybe they will even turn it into an opportunity.

Okay thanks very much.

I am not showing any further questions at this time. I would like to turn the call back over to our host.

Thank you for your time listening to the call today. If you have any follow up questions, feel free to give investor relations a call. Otherwise we will look forward to speaking to you again next quarter.

This does conclude today's presentation. You may now disconnect and have a wonderful day.