Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                 TO

Commission File Number: 001-35538

 

 

The Carlyle Group L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   45-2832612

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1001 Pennsylvania Avenue, NW

Washington, D.C., 20004-2505

(Address of principal executive offices)(Zip Code)

(202) 729-5626

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of the Registrant’s common units representing limited partner interests outstanding as of August 13, 2012 was 43,221,452.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I – FINANCIAL INFORMATION   
Item 1.  

Financial Statements

     3   
 

Unaudited Condensed Consolidated Financial Statements – June 30, 2012 and 2011:

  
 

    Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

     3   
 

     Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2012 and 2011

     4   
 

     Condensed Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 2012 and 2011

     5   
 

     Condensed Consolidated Statements of Changes in Partners’ Capital and Redeemable Non-controlling Interests in Consolidated Entities for the Six Months Ended June 30, 2012

     6   
 

     Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

     7   
 

    Notes to the Condensed Consolidated Financial Statements

     9   
Item 1A.  

Unaudited Pro Forma Financial Information

     76   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     92   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     166   
Item 4.  

Controls and Procedures

     166   
PART II – OTHER INFORMATION      167   
Item 1.  

Legal Proceedings

     167   
Item 1A.  

Risk Factors

     167   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     167   
Item 3.  

Defaults Upon Senior Securities

     168   
Item 4.  

Mine Safety Disclosures

     168   
Item 5.  

Other Information

     168   
Item 6.  

Exhibits

     168   
SIGNATURE      169   
INDEX TO EXHIBITS      170   

 

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Table of Contents

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believe,” “expect,” “potential,” “continue,” “may,” “will,” “should,” “seek,” “approximately,” “predict,” “intend,” “plan,” “estimate,” “anticipate” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under “Risk Factors” in our prospectus dated May 2, 2012, filed with the Securities and Exchange Commission in accordance with Rule 424(b) of the Securities Act on May 4, 2012, which is accessible on the SEC’s website at sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in the prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

 

 

Prior to the reorganization on May 2, 2012 in connection with our initial public offering, our business was owned by four holding entities: TC Group, L.L.C., TC Group Cayman, L.P., TC Group Investment Holdings, L.P. and TC Group Cayman Investment Holdings, L.P. We refer to these four holding entities collectively as the “Parent Entities.” The Parent Entities were under the common ownership and control of our senior Carlyle professionals and two strategic investors that owned minority interests in our business — entities affiliated with Mubadala Development Company, an Abu-Dhabi based strategic development and investment company (“Mubadala”), and California Public Employees’ Retirement System (“CalPERS”). Unless the context suggests otherwise, references in this report to “Carlyle,” the “Company,” “we,” “us” and “our” refer (1) prior to the consummation of our reorganization into a holding partnership structure to Carlyle Group, which was comprised of the Parent Entities and their consolidated subsidiaries and (2) after our reorganization into a holding partnership structure, to The Carlyle Group L.P. and its consolidated subsidiaries. In addition, certain individuals engaged in our businesses own interests in the general partners of our existing carry funds. Certain of these individuals contributed a portion of these interests to us as part of the reorganization. We refer to these individuals, together with the owners of the Parent Entities prior to the reorganization and our initial public offering, collectively as our “pre-IPO owners.”

When we refer to the “partners of The Carlyle Group L.P.,” we are referring specifically to the common unitholders and our general partner and any others who may from time to time be partners of that specific Delaware limited partnership. When we refer to our “senior Carlyle professionals,” we are referring to the partners of our firm who were, together with CalPERS and Mubadala, the owners of our Parent Entities prior to the reorganization. References in this report to the ownership of the senior Carlyle professionals include the ownership of personal planning vehicles of these individuals.

“Carlyle funds,” “our funds” and “our investment funds” refer to the investment funds and vehicles advised by Carlyle. Our “carry funds” refers to those investment funds that we advise, including the buyout funds, growth capital funds, real asset funds and distressed debt and mezzanine funds (but excluding our structured credit funds, hedge funds and fund of funds vehicles), where we receive a special residual allocation of income, which we refer to as a carried interest, in the event that specified investment returns are achieved by the fund. Our “fund of funds vehicles” refer to those funds, accounts and vehicles advised by AlpInvest Partners B.V., formerly known as AlpInvest Partners N.V. (“AlpInvest”).

 

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Table of Contents

“Fee-earning assets under management” or “Fee-earning AUM” refers to the assets we manage from which we derive recurring fund management fees. Our fee-earning AUM generally equals the sum of:

(a) for carry funds and certain co-investment vehicles where the investment period has not expired, the amount of limited partner capital commitments and for fund of funds vehicles, the amount of external investor capital commitments during the commitment period;

(b) for substantially all carry funds and certain co-investment vehicles where the investment period has expired, the remaining amount of limited partner invested capital;

(c) the gross amount of aggregate collateral balance at par, adjusted for defaulted or discounted collateral, of our collateralized loan obligations (“CLOs“) and the reference portfolio notional amount of our synthetic collateralized loan obligations (“synthetic CLOs“);

(d) the external investor portion of the net asset value (pre-redemptions and subscriptions) of our long/short credit, emerging markets, multi-product macroeconomic and other hedge funds and certain structured credit funds; and

(e) for fund of funds vehicles and certain carry funds where the investment period has expired, the lower of cost or fair value of invested capital.

“Assets under management” or “AUM” refers to the assets we manage. Our AUM equals the sum of the following:

(a) the fair value of the capital invested in our carry funds, co-investment vehicles and fund of funds vehicles plus the capital that we are entitled to call from investors in those funds and vehicles (including our commitments to those funds and vehicles and those of senior Carlyle professionals and employees) pursuant to the terms of their capital commitments to those funds and vehicles;

(b) the amount of aggregate collateral balance at par of our CLOs and the reference portfolio notional amount of our synthetic CLOs; and

(c) the net asset value (pre-redemptions and subscriptions) of our long/short credit, emerging markets, multi-product macroeconomic and other hedge funds and certain structured credit funds.

We include in our calculation of AUM and fee-earning AUM certain energy and renewable resources funds that we jointly advise with Riverstone Investment Group L.L.C. (“Riverstone”).

Our calculations of AUM and fee-earning AUM may differ from the calculations of other alternative asset managers. As a result, these measures may not be comparable to similar measures presented by other alternative asset managers. In addition, our calculation of AUM (but not fee-earning AUM) includes uncalled commitments to, and the fair value of invested capital in, our investment funds from Carlyle and our personnel, regardless of whether such commitments or invested capital are subject to fees. Our definitions of AUM or fee-earning AUM are not based on any definition of AUM or fee-earning AUM that is set forth in the agreements governing the investment funds that we advise.

For our carry funds, co-investment vehicles and fund of funds vehicles, total AUM includes the fair value of the capital invested, whereas fee-earning AUM includes the amount of capital commitments or the remaining amount of invested capital at cost, depending on whether the investment period for the fund has expired. As such, fee-earning AUM may be greater than total AUM when the aggregate fair value of the remaining investments is less than the cost of those investments.

 

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Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.         Financial Statements

The Carlyle Group L.P.

Condensed Consolidated Balance Sheets

(Dollars in millions)

 

     June 30,     December 31,  
     2012     2011  
     (Unaudited)        

Assets

    

Cash and cash equivalents

   $ 449.5      $ 509.6   

Cash and cash equivalents held at Consolidated Funds

     1,553.7        566.6   

Restricted cash

     29.8        24.6   

Restricted cash and securities of Consolidated Funds

     80.7        89.2   

Accrued performance fees

     2,119.8        2,189.1   

Investments

     406.6        454.9   

Investments of Consolidated Funds

     23,585.3        19,507.3   

Due from affiliates and other receivables, net

     251.3        287.0   

Due from affiliates and other receivables of Consolidated Funds, net

     335.9        287.6   

Fixed assets, net

     61.1        52.7   

Deposits and other

     60.3        70.2   

Intangible assets, net

     594.9        594.9   

Deferred tax assets

     51.6        18.0   
  

 

 

   

 

 

 

Total assets

   $ 29,580.5      $ 24,651.7   
  

 

 

   

 

 

 

Liabilities and partners’ capital

    

Loans payable

   $ 500.0      $ 860.9   

Subordinated loan payable to affiliate

     —          262.5   

Loans payable of Consolidated Funds

     12,565.0        9,689.9   

Accounts payable, accrued expenses and other liabilities

     197.2        203.4   

Accrued compensation and benefits

     1,204.7        577.9   

Due to Carlyle partners

     —          1,015.9   

Due to affiliates

     265.9        108.5   

Deferred revenue

     59.3        89.2   

Deferred tax liabilities

     69.0        48.3   

Other liabilities of Consolidated Funds

     1,316.7        568.1   

Accrued giveback obligations

     133.4        136.5   
  

 

 

   

 

 

 

Total liabilities

     16,311.2        13,561.1   

Commitments and contingencies

    

Redeemable non-controlling interests in consolidated entities

     2,534.2        1,923.4   

Partners’ capital (common units, 43,221,452 issued and outstanding as of June 30, 2012)

     197.6        —     

Members’ equity

     —          873.1   

Accumulated other comprehensive loss

     (4.2     (55.8

Partners’ capital appropriated for Consolidated Funds

     1,122.2        853.7   

Non-controlling interests in consolidated entities

     8,225.8        7,496.2   

Non-controlling interests in Carlyle Holdings

     1,193.7        —     
  

 

 

   

 

 

 

Total partners’ capital

     10,735.1        9,167.2   
  

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 29,580.5      $ 24,651.7   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

The Carlyle Group L.P.

Condensed Consolidated Statements of Operations

(Unaudited)

(Dollars in millions, except unit and per unit data)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Revenues

        

Fund management fees

   $ 239.9      $ 219.2      $ 474.3      $ 447.2   

Performance fees

        

Realized

     116.7        92.5        397.3        494.9   

Unrealized

     (337.1     253.2        23.1        725.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total performance fees

     (220.4     345.7        420.4        1,220.4   

Investment income (loss)

        

Realized

     2.4        9.7        1.6        42.8   

Unrealized

     4.6        10.9        26.9        19.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income (loss)

     7.0        20.6        28.5        62.0   

Interest and other income

     2.7        7.2        5.4        13.1   

Interest and other income of Consolidated Funds

     219.2        163.1        430.7        330.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     248.4        755.8        1,359.3        2,073.1   

Expenses

        

Compensation and benefits

        

Base compensation

     149.9        88.6        256.0        175.3   

Equity-based compensation

     94.2        —          94.2        —     

Performance fee related

        

Realized

     32.1        31.8        66.4        84.8   

Unrealized

     (97.7     22.3        (42.9     57.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total compensation and benefits

     178.5        142.7        373.7        317.9   

General, administrative and other expenses

     84.0        77.8        175.2        144.3   

Interest

     6.2        15.8        16.6        32.8   

Interest and other expenses of Consolidated Funds

     179.5        104.3        364.0        190.9   

Other non-operating (income) expenses

     0.7        5.2        (3.4     20.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     448.9        345.8        926.1        706.5   

Other income (loss)

        

Net investment gains (losses) of Consolidated Funds

     386.6        (92.7     1,258.7        (277.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     186.1        317.3        1,691.9        1,089.6   

Provision for income taxes

     10.6        6.7        22.3        12.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     175.5        310.6        1,669.6        1,076.8   

Net income (loss) attributable to non-controlling interests in consolidated entities

     357.9        (61.1     1,222.8        (191.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Carlyle Holdings

     (182.4   $ 371.7        446.8      $ 1,267.9   
    

 

 

     

 

 

 

Net income (loss) attributable to non-controlling interests in Carlyle Holdings

     (172.1       457.1     
  

 

 

     

 

 

   

Net loss attributable to The Carlyle Group L.P.

   $ (10.3     $ (10.3  
  

 

 

     

 

 

   

Net loss attributable to The Carlyle Group L.P. per common unit

        

Basic

   $ (0.26     $ (0.26  
  

 

 

     

 

 

   

Diluted

   $ (0.26     $ (0.26  
  

 

 

     

 

 

   

Weighted-average common units

        

Basic

     40,160,245          40,160,245     
  

 

 

     

 

 

   

Diluted

     40,160,245          40,160,245     
  

 

 

     

 

 

   

Substantially all revenue is earned from affiliates of the Partnership. See accompanying notes.

 

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Table of Contents

The Carlyle Group L.P.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in millions)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Net income

   $ 175.5      $ 310.6      $ 1,669.6      $ 1,076.8   

Other comprehensive income (loss)

        

Foreign currency translation adjustments

     70.2        (4.4     (188.4     27.1   

Cash flow hedges

        

Unrealized losses for the period

     (5.3     (1.1     (6.9     (1.1

Less: reclassification adjustment for losses included in net income

     1.8        1.4        3.7        2.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow hedges

     (3.5     0.3        (3.2     1.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     66.7        (4.1     (191.6     28.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     242.2        306.5        1,478.0        1,105.7   

Less: Comprehensive (income) loss attributable to partners’ capital appropriated for Consolidated Funds

     216.8        130.7        101.2        293.1   

Less: Comprehensive (income) loss attributable to non-controlling interests in consolidated entities

     (629.3     (53.8     (1,154.4     (71.7

Less: Comprehensive (income) loss attributable to redeemable non-controlling interests in consolidated entities

     (11.6     (29.9     9.2        (65.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Carlyle Holdings

     (181.9   $ 353.5        434.0      $ 1,261.5   
    

 

 

     

 

 

 

Less: Comprehensive (income) loss attributable to non-controlling interests in Carlyle Holdings

     169.7          (446.2  
  

 

 

     

 

 

   

Comprehensive income attributable to The Carlyle Group L.P.

   $ (12.2     $ (12.2  
  

 

 

     

 

 

   

See accompanying notes.

 

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Table of Contents

The Carlyle Group L.P.

Condensed Consolidated Statements of Changes in Partners’ Capital and Redeemable Non-controlling Interests in Consolidated Entities

(Unaudited)

(Dollars and units in millions)

 

    Common
Units
    Members’
Equity
    Partners’
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Partners’
Capital
Appropriated
for
Consolidated
Funds
    Non-controlling
Interests in
Consolidated
Entities
    Non-controlling
Interests  in
Carlyle
Holdings
    Total
Partners’
Capital
    Redeemable
Non-controlling
Interests in
Consolidated
Entities
 

Balance at December 31, 2011

    —        $ 873.1      $ —        $ (55.8   $ 853.7      $ 7,496.2      $ —        $ 9,167.2      $ 1,923.4   

Acquisition of CLOs

    —          —          —          —          357.3        —          —          357.3        —     

Contributions

    —          9.3        —          —          12.4        340.7        —          362.4        719.1   

Distributions

    —          (658.5     —          —          —          (813.9     —          (1,472.4     (114.8

Net income (loss)

    —          532.7        —          —          47.5        955.5        —          1,535.7        (20.8

Currency translation adjustments

    —          —          —          2.3        (4.1     (168.0     —          (169.8     —     

Change in fair value of cash flow hedge instruments

    —          —          —          (2.2     —          —          —          (2.2     —     

Contribution of equity interests in general partners of carry funds (see Note 1)

    —          261.1        —          —          —          —          —          261.1        —     

Reorganization of beneficial interests in investments (see Note 1)

    —          (64.1     —          —          —          64.1        —          —          —     

Reorganization of carried interest rights of retired senior Carlyle professionals (see Note 1)

    —          (56.2     —          —          —          56.2        —          —          —     

Exchange of interests for Carlyle Holdings units (see Note 1)

    —          (897.4     —          55.7        —          —          841.7        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance post-reorganization

    —          —          —          —          1,266.8        7,930.8        841.7        10,039.3        2,506.9   

Issuance of common units in initial public offering, net of issuance costs (see Note 1)

    30.5        —          615.8        —          —          —          —          615.8        —     

Deferred tax effects resulting from acquisition and exchange of interests in Carlyle Holdings (see Note 1)

    —          —          (9.4     —          —          —          —          (9.4     —     

Dilution assumed with IPO

    —          —          (469.8     —          —          —          469.8        —          —     

CalPERS equity exchange

    12.7        —          66.4        (2.3     —          —          (60.9     3.2     

Contributions

    —          —          —          —          —          120.5        —          120.5        105.0   

Distributions

    —          —          —          —          —          (192.4     —          (192.4     (89.3

Net income (loss)

    —          —          (10.3     —          (115.3     344.3        (75.6     143.1        11.6   

Equity-based compensation

    —          —          4.9        —          —          —          29.7        34.6        —     

Currency translation adjustments

    —          —          —          (1.7     (29.3     22.6        (10.2     (18.6     —     

Change in fair value of cash flow hedge instruments

    —            —          (0.2     —          —          (0.8     (1.0     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

    43.2      $ —        $ 197.6      $ (4.2   $ 1,122.2      $ 8,225.8      $ 1,193.7      $ 10,735.1      $ 2,534.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

6


Table of Contents

The Carlyle Group L.P.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in millions)

 

     Six Months Ended June 30,  
     2012     2011  

Cash flows from operating activities

    

Net income

   $ 1,669.6      $ 1,076.8   

Adjustments to reconcile net income to net cash flows from operating activities:

    

Depreciation and amortization

     48.2        37.2   

Amortization of deferred financing fees

     0.8        0.5   

Equity-based compensation

     94.2        —     

Non-cash performance fees

     (55.9     (737.7

Other non-cash amounts

     (3.4     (4.2

Consolidated Funds related:

    

Realized/unrealized gain on investments of Consolidated Funds

     (1,553.5     (417.5

Realized/unrealized loss from loans payable of Consolidated Funds

     351.9        696.1   

Purchases of investments by Consolidated Funds

     (3,821.1     (3,761.6

Proceeds from sale and settlements of investments by Consolidated Funds

     4,309.5        4,246.5   

Non-cash interest income, net

     (31.3     (54.0

Change in cash and cash equivalents held at Consolidated Funds

     153.6        64.6   

Change in other receivables held at Consolidated Funds

     28.7        12.5   

Change in other liabilities held at Consolidated Funds

     (211.2     182.0   

Investment income

     (25.7     (54.0

Purchases of investments

     (20.3     (84.5

Proceeds from the sale of investments

     149.8        263.6   

Purchases of trading securities

     (10.1     —     

Change in deferred taxes

     0.1        2.1   

Change in due from affiliates and other receivables

     (1.8     (11.9

Change in deposits and other

     2.3        (3.3

Change in accounts payable, accrued expenses and other liabilities

     (7.2     (45.7

Change in accrued compensation and benefits

     (127.0     (41.2

Change in due to affiliates

     (3.8     1.1   

Change in deferred revenue

     (28.4     (56.9
  

 

 

   

 

 

 

Net cash provided by operating activities

     908.0        1,310.5   

Cash flows from investing activities

    

Change in restricted cash

     (5.1     (15.4

Purchases of fixed assets, net

     (18.3     (17.8

Purchases of intangible assets

     (41.0     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (64.4     (33.2

 

7


Table of Contents

The Carlyle Group L.P.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in millions)

 

     Six Months Ended June 30,  
     2012     2011  

Cash flows from financing activities

    

Borrowings under credit facility

     433.7        —     

Repayments under credit facility

     (744.6     —     

Payments on loans payable

     (310.0     (17.0

Net payments on loans payable of Consolidated Funds

     (507.0     (983.4

Net proceeds from issuance of Units in Initial Public Offering

     615.8        —     

Contributions from predecessor owners

     9.3        6.0   

Distributions to predecessor owners

     (452.3     (657.0

Contributions from non-controlling interest holders

     1,227.8        354.5   

Distributions to non-controlling interest holders

     (1,198.2     (189.8

Change in due to/from affiliates financing activities

     14.6        48.7   

Change in due to/from affiliates and other receivables of Consolidated Funds

     18.9        —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (892.0     (1,438.0

Effect of foreign exchange rate changes

     (11.7     29.1   

Decrease in cash and cash equivalents

     (60.1     (131.6

Cash and cash equivalents, beginning of period

     509.6        616.9   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 449.5      $ 485.3   
  

 

 

   

 

 

 

Supplemental non-cash disclosures

    

Net assets related to consolidation of the CLOs

   $ 357.3      $ —     
  

 

 

   

 

 

 

Non-cash distributions to predecessor owners

   $ 402.5      $ 304.7   
  

 

 

   

 

 

 

Non-cash contributions from non-controlling interest holders

   $ 69.9      $ 87.6   
  

 

 

   

 

 

 

Non-cash distributions to non-controlling interest holders

   $ 12.2      $ 73.3   
  

 

 

   

 

 

 

Reorganization:

    

Transfer of Partners Capital to non-controlling interests in consolidated entities

   $ 120.3      $ —     
  

 

 

   

 

 

 

Deferred taxes from transfer of ownership interests

   $ 9.4      $ —     
  

 

 

   

 

 

 

Exchange of CalPERS equity interests:

    

Deferred tax asset

   $ 21.5      $ —     
  

 

 

   

 

 

 

Tax receivable agreement liability

   $ 18.3      $ —     
  

 

 

   

 

 

 

Partners’ capital

   $ 3.2      $ —     
  

 

 

   

 

 

 

See accompanying notes.

 

8


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

The Carlyle Group L.P., together with its consolidated subsidiaries, (the “Partnership” or “Carlyle”) is one of the world’s largest global alternative asset management firms that originates, structures and acts as lead equity investor in management-led buyouts, strategic minority equity investments, equity private placements, consolidations and buildups, growth capital financings, real estate opportunities, bank loans, high-yield debt, distressed assets, mezzanine debt and other investment opportunities.

Carlyle provides investment management services to, and has transactions with, various private equity funds, real estate funds, collateralized loan obligations (“CLOs”), hedge funds and other investment products sponsored by the Partnership for the investment of client assets in the normal course of business. Carlyle serves as the general partner, investment manager or collateral manager, making day-to-day investment decisions concerning the assets of these products. Carlyle operates its business through four reportable segments: Corporate Private Equity, Global Market Strategies, Real Assets, and Fund of Funds Solutions (see Note 17).

Basis of Presentation

The accompanying financial statements include (1) subsequent to the reorganization as described below, the accounts of the Partnership and (2) prior to the reorganization, the combined accounts of TC Group, L.L.C., TC Group Cayman, L.P., TC Group Investment Holdings, L.P. and TC Group Cayman Investment Holdings, L.P. as well as their majority-owned subsidiaries (collectively, “Carlyle Group”), which were engaged in the above businesses under common ownership and control by Carlyle’s individual partners (“senior Carlyle professionals”), the California Employees Public Retirement System (“CalPERS”), and Mubadala Development Company (“Mubadala”). In addition, certain Carlyle-affiliated funds, related co-investment entities, and certain CLOs managed by the Partnership (collectively the “Consolidated Funds”) have been consolidated in the accompanying financial statements pursuant to accounting principles generally accepted in the United States (“U.S. GAAP”), as described in Note 2. This consolidation generally has a gross-up effect on assets, liabilities and cash flows, and has no effect on the net income attributable to the Partnership. The majority economic ownership interests of the investors in the Consolidated Funds are reflected as non-controlling interests in consolidated entities, partners’ capital appropriated for Consolidated Funds, and redeemable non-controlling interests in consolidated entities in the accompanying condensed consolidated financial statements.

Prior to the reorganization and initial public offering in May 2012, all compensation for services rendered by senior Carlyle professionals were reflected as distributions from partners’ capital rather than compensation expense. Subsequent to the reorganization and initial public offering, all compensation attributable to senior Carlyle professionals is recognized as compensation expense, consistent with all other Carlyle employees.

The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. These statements, including notes, have not been audited, exclude some of the disclosures required for annual financial statements, and should be read in conjunction with the audited combined and consolidated financial statements and notes of Carlyle Group for the year ended December 31, 2011, included in the Partnership’s final prospectus dated May 2, 2012 as part of its Registration Statement on Form S-1, as amended (SEC File No. 333-176685). The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Reorganization

The Partnership is a Delaware limited partnership formed on July 18, 2011. The Partnership is managed and operated by its general partner, Carlyle Group Management L.L.C., which is in turn wholly-owned and controlled by Carlyle’s founders and other senior Carlyle professionals.

On May 2, 2012, a series of reorganization transactions were executed to facilitate the acquisition by the Partnership of an indirect equity interest in Carlyle Group. The primary impact of the reorganization transactions was as follows:

 

   

The senior Carlyle professionals (excluding retired senior Carlyle professionals), CalPERS, and Mubadala contributed all of their interests in TC Group, L.L.C., TC Group Cayman, L.P., TC Group Investment Holdings, L.P. and TC Group Cayman Investment Holdings, L.P. (the “Former Parent Entities”) and senior Carlyle professionals and other individuals engaged in Carlyle’s business contributed a portion of the equity interests they owned in the general partners of Carlyle’s existing carry funds, to Carlyle Holdings I L.P., Carlyle Holdings II L.P. and Carlyle Holdings III L.P. (collectively, “Carlyle Holdings”) in exchange for an aggregate of 274,000,000 Carlyle Holdings partnership units. The exchange was structured as a fair value exchange where the contributors exchanged their interests in the Former Parent Entities and/or the general partners of Carlyle’s existing carry funds for an equivalent fair value of Carlyle Holdings partnership units. As the Partnership consolidates the financial position and results of operations of Carlyle Holdings, the ownership interests of these individuals in Carlyle Holdings are reflected as non-controlling interests in Carlyle Holdings in the accompanying condensed consolidated financial statements.

Because the historical owners of the Former Parent Entities control the entities that comprise Carlyle Group before and after the reorganization, the exchange transaction among these owners’ interests has been accounted for as a transfer of interests under common control. Accordingly, the accompanying condensed consolidated financial statements reflect a reclassification of members’ equity to non-controlling interests in Carlyle Holdings of $841.7 million. This amount represents the carrying value in Carlyle Group of the historical owners of Carlyle Group that has been exchanged in this transaction for Carlyle Holdings partnership units.

The equity interests held by Carlyle professionals other than partners in the consolidated general partners of the Carlyle funds were reflected as a compensation liability in the historical financial statements. These equity interests generally entitled the Carlyle professionals to participate in performance fees. In this exchange, the fair value of the Carlyle Holdings partnership units issued in this transaction of $261.1 million exceeded the carrying value of the related compensation liability of $202.1 million. The excess of the fair value over the carrying value of $59.0 million has been recorded as an equity compensation expense in the accompanying condensed consolidated financial statements.

 

   

Certain beneficial interests in investments in or alongside Carlyle funds that were funded by certain historical owners of Carlyle Group indirectly through Carlyle Group were restructured so that they are interests directly in consolidated subsidiaries of Carlyle Group. Accordingly, the carrying value of these beneficial interests as of the date of the reorganization of $64.1 million has been reclassified from members’ equity to non-controlling interests in consolidated entities in the accompanying condensed consolidated financial statements.

 

   

Certain carried interest rights allocated to retired senior Carlyle professionals which were held through their ownership in Carlyle Group were restructured such that they exchanged their existing carried interest rights (through their ownership interests in Carlyle Group) for an equivalent amount of carried interest rights in the consolidated general partners of the Carlyle funds. Accordingly, these carried interest rights are classified as non-controlling interests after the reorganization. The carrying value of these carried interest rights as of the date of the reorganization of $56.2 million has been reclassified from members’ equity to non-controlling interests in consolidated entities in the accompanying condensed consolidated financial statements.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

After the completion of the reorganization transactions, Carlyle Group is a consolidated subsidiary of Carlyle Holdings. Carlyle Group is considered the predecessor of the Partnership for accounting purposes, and accordingly, Carlyle Group’s combined and consolidated financial statements are the Partnership’s historical financial statements. The historical condensed combined and consolidated financial statements of Carlyle Group are reflected herein based on the historical ownership interests of the senior Carlyle professionals, CalPERS, and Mubadala in Carlyle Group.

Initial Public Offering

On May 8, 2012, the Partnership completed an initial public offering of 30,500,000 common units priced at $22.00 per unit. The common units are listed on the NASDAQ Global Select Market under the symbol “CG”. The net proceeds to the Partnership from the initial public offering were approximately $615.8 million, after deducting underwriting discounts and offering expenses. The offering expenses associated with the initial public offering were borne by Carlyle Holdings.

The Partnership used all of these proceeds to purchase an equivalent number of newly issued Carlyle Holdings partnership units from Carlyle Holdings. After completion of the initial public offering, Carlyle Holdings used the proceeds from the initial public offering and existing cash to repay all outstanding indebtedness under the revolving credit facility of its senior secured credit facility totaling $618.1 million and approximately $40.0 million of outstanding indebtedness under a loan agreement Carlyle Group entered into in connection with the acquisition of Claren Road Asset Management LLC, its subsidiaries, and Claren Road Capital, LLC (collectively, “Claren Road”).

As the sole general partner of Carlyle Holdings, the Partnership consolidates the financial position and results of operations of Carlyle Holdings into its financial statements, and the other ownership interests in Carlyle Holdings are reflected as non-controlling interests in the Partnership’s financial statements. Because the Partnership purchased the interests in Carlyle Holdings at a valuation in excess of the proportion of the book value of net assets acquired, the Partnership incurred an immediate dilution of approximately $469.8 million, which is calculated as the net proceeds used by the Partnership to purchase the newly issued Carlyle Holdings partnership units of $615.8 million less the book value of such interests of $146.0 million. This dilution is reflected within partners’ capital as a reallocation from partners’ capital to non-controlling interests in Carlyle Holdings.

In conjunction with the initial public offering, the Partnership recorded a deferred tax liability related to outside tax basis difference as a result of the Partnership’s investment in Carlyle Holdings (see Note 14). Accordingly, the Partnership recorded a deferred tax liability of $9.4 million with a corresponding decrease to partners’ capital.

CalPERS Exchange

On May 17, 2012, CalPERS notified Carlyle that it was making an election to exchange 12,721,452 Carlyle Holdings partnership units for an equivalent number of common units in the Partnership pursuant to the exchange agreement entered into with CalPERS and the other limited partners of the Carlyle Holdings partnerships at the time of the initial public offering. The exchange was consummated on May 21, 2012. As a result of the exchange, wholly-owned subsidiaries of the Partnership acquired all 12,721,452 of the Carlyle Holdings partnership units formerly owned by CalPERS, and CalPERS received an equivalent number of common units in the Partnership. The common units were issued in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. As such, the common units issued to CalPERS are “restricted securities” within the meaning of Rule 144 promulgated under the Securities Act. In addition, CalPERS remains subject to the lock-up agreement entered into by it and the underwriters of the initial public offering which lasts until October 30, 2012.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Following the exchange, the total number of common units outstanding (assuming all outstanding Carlyle Holdings partnership units held by the limited partners of the Carlyle Holdings partnerships were exchanged for newly-issued common units on a one-for-one basis) remains unchanged at 304,500,000 common units, while the number of common units presently outstanding of the Partnership has increased from 30,500,000 to 43,221,452, and the number of outstanding Carlyle Holdings partnership units has decreased from 274,000,000 to 261,278,548. Following the CalPERS exchange, the Partnership’s ownership interest in Carlyle Holdings has increased from approximately 10% to approximately 14%.

The exchange transaction has been accounted for as an increase in ownership of a subsidiary from a non-controlling interest without a loss in control. Accordingly, the Partnership has recorded a decrease to non-controlling interests in Carlyle Holdings of $60.9 million, representing the carrying value of CalPERS interest in Carlyle Holdings that was exchanged, and a corresponding increase to partners’ capital and accumulated other comprehensive income. The exchange is also subject to the terms of the tax receivable agreement. Accordingly, the Partnership has also recorded a deferred tax asset of $21.5 million, a liability to CalPERS of $18.3 million included in due to affiliates, and an increase in partners’ capital of $3.2 million. The liability is expected to be paid as the deferred tax asset is realized as a reduction in taxes payable over approximately the next 15 years.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The Partnership consolidates all entities that it controls through a majority voting interest or otherwise. In addition, the accompanying condensed consolidated financial statements consolidate: 1) Carlyle-affiliated funds and co-investment entities, for which the Partnership is the sole general partner and the presumption of control by the general partner has not been overcome and 2) variable interest entities (VIEs), including certain CLOs, for which the Partnership is deemed to be the primary beneficiary; consolidation of these entities is a requirement under U.S. GAAP. All significant inter-entity transactions and balances have been eliminated.

For entities that are determined to be VIEs, the Partnership consolidates those entities where it is deemed to be the primary beneficiary. An entity is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The revised consolidation rules require an analysis to (a) determine whether an entity in which the Partnership holds a variable interest is a VIE and (b) whether the Partnership’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related fees), would give it a controlling financial interest. In evaluating whether the Partnership is the primary beneficiary, the Partnership evaluates its economic interests in the entity held either directly or indirectly by the Partnership. The consolidation analysis is generally performed qualitatively. This analysis, which requires judgment, is performed at each reporting date.

In February 2010, Accounting Standards Update (ASU) No. 2010-10, “Amendments for Certain Investment Funds,” was issued. This ASU defers the application of the revised consolidation rules for a reporting enterprise’s interest in an entity if certain conditions are met, including if the entity has the attributes of an investment company and is not a securitization or asset-backed financing entity. An entity that qualifies for the deferral will continue to be assessed for consolidation under the overall guidance on VIEs, before its amendment, and other applicable consolidation guidance.

As of June 30, 2012, assets and liabilities of consolidated VIEs reflected in the condensed consolidated balance sheets were $22.9 billion and $13.8 billion, respectively. Except to the extent of the assets of the VIEs which are consolidated, the holders of the consolidated VIEs’ liabilities do not have recourse to the Partnership. The assets and liabilities of the consolidated VIEs are comprised primarily of investments and loans payable, respectively.

The loans payable issued by the CLOs are backed by diversified collateral asset portfolios consisting primarily of loans or structured debt. In exchange for managing the collateral for the CLOs, the Partnership earns investment management fees, including in some cases subordinated management fees and contingent incentive fees.

 

12


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

In cases where the Partnership consolidates the CLOs, those management fees have been eliminated as intercompany transactions. As of June 30, 2012, the Partnership held $40.5 million of investments in these CLOs which represents its maximum risk of loss. The Partnership’s investments in these CLOs are generally subordinated to other interests in the entities and entitle the Partnership to receive a pro rata portion of the residual cash flows, if any, from the entities. Investors in the CLOs have no recourse against the Partnership for any losses sustained in the CLO structure.

For all Carlyle-affiliated funds and co-investment entities (collectively “the Funds”) that are not determined to be VIEs, the Partnership consolidates those funds where, as the sole general partner, it has not overcome the presumption of control pursuant to U.S. GAAP. Most Carlyle funds provide a dissolution right upon a simple majority vote of the non-Carlyle affiliated limited partners such that the presumption of control by Carlyle is overcome. Accordingly, these funds are not consolidated in the Partnership’s condensed consolidated financial statements.

Investments in Unconsolidated Variable Interest Entities

The Partnership holds variable interests in certain VIEs which are not consolidated because the Partnership is not the primary beneficiary. The Partnership’s involvement with such entities is in the form of direct equity interests and fee arrangements. The maximum exposure to loss represents the loss of assets recognized by the Partnership relating to these unconsolidated entities. The assets recognized in the Partnership’s condensed consolidated balance sheets related to the Partnership’s interests in these non-consolidated VIEs and the Partnership’s maximum exposure to loss relating to non-consolidated VIEs were as follows:

 

     As of  
     June 30,      December 31,  
     2012      2011  
     (Dollars in millions)  

Investments

   $ 2.8       $ 2.3   

Receivables

     14.1         100.0   
  

 

 

    

 

 

 

Maximum Exposure to Loss

   $ 16.9       $ 102.3   
  

 

 

    

 

 

 

Basis of Accounting

The accompanying financial statements are prepared in accordance with U.S. GAAP. Management has determined that the Partnership’s Funds are investment companies under U.S. GAAP for the purposes of financial reporting. U.S. GAAP for an investment company requires investments to be recorded at estimated fair value and the unrealized gains and/or losses in an investment’s fair value are recognized on a current basis in the statements of operations. Additionally, the Funds do not consolidate their majority-owned and controlled investments (the Portfolio Companies). In the preparation of these condensed consolidated financial statements, the Partnership has retained the specialized accounting for the Funds, pursuant to U.S. GAAP.

All of the investments held and notes issued by the Consolidated Funds are presented at their estimated fair values in the Partnership’s condensed consolidated balance sheets. Interest income and other income of the Consolidated Funds is included in interest and other income of Consolidated Funds and interest expense and other expenses of the Consolidated Funds is included in interest and other expenses of Consolidated Funds in the Partnership’s condensed consolidated statements of operations. The excess of the CLO assets over the CLO liabilities upon consolidation is reflected in the Partnership’s condensed consolidated balance sheets as partners’ capital appropriated for Consolidated Funds. Net income attributable to the investors in the CLOs is included in net income (loss) attributable to non-controlling interests in consolidated entities in the condensed consolidated statements of operations and partners’ capital appropriated for Consolidated Funds in the condensed consolidated balance sheets.

 

13


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates are based on historical experiences and other factors, including expectations of future events that management believes to be reasonable under the circumstances. It also requires management to exercise judgment in the process of applying the Partnership’s accounting policies. Assumptions and estimates regarding the valuation of investments and their resulting impact on performance fees involve a higher degree of judgment and complexity and these assumptions and estimates may be significant to the condensed consolidated financial statements and the resulting impact on performance fees. Actual results could differ from these estimates and such differences could be material.

Business Combinations

The Partnership accounts for business combinations using the acquisition method of accounting, under which the purchase price of the acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Contingent consideration obligations that are elements of consideration transferred are recognized as of the acquisition date as part of the fair value transferred in exchange for the acquired business. Acquisition-related costs incurred in connection with a business combination are expensed.

Revenue Recognition

Fund Management Fees

The Partnership provides management services to funds in which it holds a general partner interest or has a management agreement. For corporate private equity, certain global market strategies funds and real assets funds, management fees are calculated based on (a) limited partners’ capital commitments to the funds, (b) limited partners’ remaining capital invested in the funds at cost or (c) the net asset value (“NAV”) of certain of the funds, less offsets for the non-affiliated limited partners’ share of transaction advisory and portfolio fees earned, as defined in the respective partnership agreements.

Management fees for corporate private equity, closed-end carry funds in the global market strategies segment and real assets funds generally range from 1% to 2% of commitments during the investment period of the relevant fund. Following the expiration or termination of the investment period of such funds, the management fees generally step-down to between 0.6% and 2.0% of contributions for unrealized investments. The Partnership will receive management fees for corporate private equity and real assets funds during a specified period of time, which is generally ten years from the initial closing date, or in some instances, from the final closing date, but such termination date may be earlier in certain limited circumstances or later if extended for successive one-year periods, typically up to a maximum of two years. Depending upon the contracted terms of investment advisory or investment management and related agreements, these fees are called semi-annually in advance and are recognized as earned over the subsequent six month period.

For certain global market strategies funds, management fees are calculated based on assets under management of the funds with generally lower fee rates. Hedge funds generally pay management fees quarterly that range from 1.5% to 2.0% of NAV per year. Management fees for the CLOs typically range from 0.4% to 0.6% on the total par amount of assets in the fund and are due quarterly or semi-annually based on the terms and recognized over the respective period. Management fees for the CLOs and credit opportunities funds are governed by indentures and collateral management agreements. The Partnership will receive management fees for the CLOs until redemption of the securities issued by the CLOs, which is generally five to ten years after issuance. Open-ended funds typically do not have stated termination dates.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Management fees from fund of funds vehicles generally range from 0.3% to 1.0% on the vehicle’s capital commitments during the first two to five years of the investment period and 0.3% to 1.0% on the lower of cost of capital invested or fair value of the capital invested thereafter.

The Partnership also provides transaction advisory and portfolio advisory services to the Portfolio Companies, and where covered by separate contractual agreements, recognizes fees for these services when the service has been provided and collection is reasonably assured. Fund management fees includes transaction and portfolio advisory fees of $10.7 million and $16.1 million for the three months ended June 30, 2012 and 2011, respectively, and $21.4 million and $47.2 million for the six months ended June 30, 2012 and 2011, respectively, net of any offsets as defined in the respective partnership agreements.

Performance Fees

Performance fees consist principally of the allocation of profits from certain of the funds to which the Partnership is entitled (commonly known as carried interest). The Partnership is generally entitled to a 20% allocation (or approximately 2% to 10% in the case of most of the Partnership’s fund of funds vehicles) of the net realized income or gain as a carried interest after returning the invested capital, the allocation of preferred returns and return of certain fund costs (subject to catch-up provisions) from its corporate private equity and real assets funds. Carried interest is recognized upon appreciation of the funds’ investment values above certain return hurdles set forth in each respective partnership agreement. The Partnership recognizes revenues attributable to performance fees based upon the amount that would be due pursuant to the fund partnership agreement at each period end as if the funds were terminated at that date. Accordingly, the amount recognized as unrealized performance fees reflects the Partnership’s share of the gains and losses of the associated funds’ underlying investments measured at their then-current fair values. Because of the inherent uncertainty, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is reasonably possible that the difference could be material.

Carried interest is ultimately realized when: (i) an underlying investment is profitably disposed of, (ii) the fund’s cumulative returns are in excess of the preferred return and (iii) the Partnership has decided to collect carry rather than return additional capital to limited partner investors. Realized carried interests may be required to be returned by the Partnership in future periods if the funds’ investment values decline below certain levels. When the fair value of a fund’s investments remains constant or falls below certain return hurdles, previously recognized performance fees are reversed. In all cases, each fund is considered separately in this regard, and for a given fund, performance fees can never be negative over the life of a fund. If upon a hypothetical liquidation of a fund’s investments at their then current fair values, previously recognized and distributed carried interest would be required to be returned, a liability is established for the potential giveback obligation. As of June 30, 2012 and December 31, 2011, the Partnership has recognized $133.4 million and $136.5 million, respectively, for giveback obligations.

In addition to its performance fees from its corporate private equity and real assets funds, the Partnership is also entitled to receive performance fees from certain of its global market strategies funds and fund of funds vehicles when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fees are recognized when the performance benchmark has been achieved, and are included in performance fees in the accompanying condensed consolidated statements of operations.

Investment Income (Loss)

Investment income (loss) represents the unrealized and realized gains and losses resulting from the Partnership’s equity method investments and other principal investments. Investment income (loss) is realized when the Partnership redeems all or a portion of its investment or when the Partnership receives cash income, such as dividends or distributions. Unrealized investment income (loss) results from changes in the fair value of the underlying investment as well as the reversal of unrealized gain (loss) at the time an investment is realized.

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Interest Income

Interest income is recognized when earned. Interest income earned by the Partnership was $1.3 million and $3.2 million for the three months ended June 30, 2012 and 2011, respectively, and $2.7 million and $7.0 million for the six months ended June 30, 2012 and 2011, respectively, and is included in interest and other income in the accompanying condensed consolidated statements of operations. Interest income of the Consolidated Funds was $185.9 million and $134.9 million for the three months ended June 30, 2012 and 2011, respectively, and $369.9 million and $272.7 million for the six months ended June 30, 2012 and 2011, respectively, and is included in interest and other income of Consolidated Funds in the accompanying condensed consolidated statements of operations.

Compensation and Benefits

Base Compensation – Base compensation includes salaries, bonuses (discretionary awards and guaranteed amounts), performance payment arrangements and benefits paid and payable to Carlyle employees. Bonuses are accrued over the service period to which they relate.

Equity-Based Compensation – Compensation expense relating to the issuance of equity-based awards to Carlyle employees is measured at fair value on the grant date. The compensation expense for awards that vest over a future service period is recognized over the relevant service period on a straight-line basis, adjusted for estimated forfeitures of awards not expected to vest. The compensation expense for awards that do not require future service is recognized immediately. Cash settled equity-based awards are classified as liabilities and are re-measured at the end of each reporting period.

Equity-based awards issued to non-employees are recognized as general, administrative and other expenses. The grant-date fair value of equity-based awards granted to Carlyle’s non-employee directors are charged to expense on a straight-line basis over the vesting period. The cost of services received in exchange for an equity-based award issued to consultants is measured at each vesting date, and is not measured based on the grant-date fair value of the award unless the award is vested at the grant date. Equity-based awards that require the satisfaction of future service criteria are recognized over the relevant service period, adjusted for estimated forfeitures of awards not expected to vest, based on the fair value of the award on each reporting date and adjusted for the actual fair value of the award at each vesting date. Accordingly, the measured value of the award will not be finalized until the vesting date.

Performance Fee Related Compensation – A portion of the performance fees earned is due to employees and advisors of the Partnership. These amounts are accounted for as compensation expense in conjunction with the recognition of the related performance fee revenue and, until paid, are recognized as a component of the accrued compensation and benefits liability. Accordingly, upon any reversal of performance fee revenue, the related compensation expense is also reversed. As of June 30, 2012, the Partnership had recorded a liability of $844.2 million in accrued compensation related to the portion of accrued performance fees due to employees and advisors, which was included in accrued compensation and benefits in the accompanying condensed consolidated financial statements. As of December 31, 2011, the Partnership had recorded a liability of $1.1 billion in accrued compensation related to the portion of accrued performance fees due to employees and advisors, of which $314.1 million was included in accrued compensation and benefits and $760.8 million was included in due to Carlyle partners in the accompanying condensed consolidated financial statements.

Income Taxes

For periods prior to the reorganization and initial public offering in May 2012, no provision was made for U.S. federal income taxes in the condensed consolidated financial statements since the profits and losses were allocated to the senior Carlyle professionals who were individually responsible for reporting such amounts. During those periods, based on applicable foreign, state and local tax laws, a provision for income taxes was recorded for certain entities.

 

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The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

For periods subsequent to the reorganization and initial public offering in May 2012, certain of the wholly-owned subsidiaries of the Partnership and the Carlyle Holdings partnerships are subject to federal, state and local corporate income taxes at the entity level and the related tax provision attributable to the Partnership’s share of this income is reflected in the condensed consolidated financial statements. Based on applicable foreign, state and local tax laws, the Partnership records a provision for income taxes for certain entities. The Partnership’s AlpInvest subsidiary is subject to entity level income taxes in the Netherlands. Tax positions taken by the Partnership are subject to periodic audit by U.S. federal, state, local and foreign taxing authorities.

The Partnership uses the liability method of accounting for deferred income taxes pursuant to U.S. GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the statutory tax rates expected to be applied in the periods in which those temporary differences are settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. A valuation allowance is recorded on the Partnership’s net deferred tax assets when it is more likely than not that such assets will not be realized. When evaluating the realizability of the Partnership’s deferred tax assets, all evidence, both positive and negative is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies, and expectations of future earnings.

Under U.S. GAAP for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is “more likely than not” to be sustained upon examination. The Partnership analyzes its tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Partnership determines that uncertainties in tax positions exist, a liability is established, which is included in accounts payable, accrued expenses and other liabilities in the condensed consolidated financial statements. The Partnership recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes. If recognized, the entire amount of unrecognized tax positions would be recorded as a reduction in the provision for income taxes.

Tax Receivable Agreement

Exchanges of Carlyle Holdings partnership units for the Partnership’s common units that are executed by the limited partners of the Carlyle Holdings partnerships result in transfers of and increases in the tax basis of the tangible and intangible assets of Carlyle Holdings, primarily attributable to a portion of the goodwill inherent in the business. These transfers and increases in tax basis will increase (for tax purposes) depreciation and amortization and therefore reduce the amount of tax that certain of the Partnership’s subsidiaries, including Carlyle Holdings I GP Inc., which are referred to as the “corporate taxpayers,” would otherwise be required to pay in the future. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. The Partnership has entered into a tax receivable agreement with the limited partners of the Carlyle Holdings partnerships whereby the corporate taxpayers have agreed to pay to the limited partners of the Carlyle Holdings partnerships involved in any exchange transaction 85% of the amount of cash tax savings, if any, in U.S. federal, state and local income tax or foreign or franchise tax that the corporate taxpayers realize as a result of these increases in tax basis and, in limited cases, transfers or prior increases in tax basis. The corporate taxpayers expect to benefit from the remaining 15% of cash tax savings, if any, in income tax they realize. Payments under the tax receivable agreement will be based on the tax reporting positions that the Partnership will determine. The corporate taxpayers will not be reimbursed for any payments previously made under the tax receivable agreement if a tax basis increase is successfully challenged by the Internal Revenue Service.

The Partnership records an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the exchange. To the extent that the Partnership estimates that the corporate taxpayers will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, its expectation of future earnings, the Partnership will reduce the deferred tax asset with a valuation allowance. The Partnership records 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the tax receivable agreement, which is included in due to affiliates in the accompanying

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

condensed consolidated financial statements. The remaining 15% of the estimated realizable tax benefit is initially recorded as an increase to the Partnership’s partners’ capital. All of the effects of changes in any of the Partnership’s estimates after the date of the exchange will be reflected in the provision for income taxes. Similarly, the effect of subsequent changes in the enacted tax rates will be reflected in the provision for income taxes.

Non-controlling Interests in Consolidated Entities

Non-controlling interests in consolidated entities represent the component of equity in consolidated entities held by third party investors. These interests are adjusted for general partner allocations and by subscriptions and redemptions in hedge funds which occur during the reporting period. Non-controlling interests related to hedge funds are subject to quarterly or monthly redemption by investors in these funds following the expiration of a specified period of time (typically one year), or may be withdrawn subject to a redemption fee during the period when capital may not be withdrawn. As limited partners in these types of funds have been granted redemption rights, amounts relating to third-party interests in such consolidated funds are presented as redeemable non-controlling interests in consolidated entities within the condensed consolidated balance sheets. When redeemable amounts become contractually payable to investors, they are classified as a liability and included in other liabilities of Consolidated Funds in the condensed consolidated balance sheets.

Earnings Per Common Unit

The Partnership computes earnings per common unit in accordance with Accounting Standards Codification (“ASC”) 260, “Earnings Per Share.” Basic earnings per common unit is calculated by dividing net income (loss) attributable to the Partnership by the weighted-average number of common units outstanding for the period. Diluted earnings per common unit reflects the assumed conversion of all dilutive securities.

Prior to the reorganization and the initial public offering in May 2012, Carlyle’s business was conducted through a large number of entities as to which there was no single holding entity, but which were separately owned by senior Carlyle professionals, CalPERS, and Mubadala. There was no single capital structure upon which to calculate historical earnings per common unit information. Accordingly, earnings per common unit information has not been presented for historical periods prior to the reorganization and initial public offering.

Investments

Investments include (i) the Partnership’s ownership interests (typically general partner interests) in the Funds, (ii) the investments held by the Consolidated Funds (all of which are presented at fair value in the Partnership’s condensed consolidated financial statements) and (iii) certain credit-oriented investments. The valuation procedures utilized for investments of the Funds vary depending on the nature of the investment. The fair value of investments in publicly-traded securities is based on the closing price of the security with adjustments to reflect appropriate discounts if the securities are subject to restrictions. Upon the sale of a security, the realized net gain or loss is computed on a weighted average cost basis, with the exception of the CLOs, which compute the realized net gain or loss on a first in, first out basis. Securities transactions are recorded on a trade date basis.

The fair value of non-equity securities, which may include instruments that are not listed on an exchange, considers, among other factors, external pricing sources, such as dealer quotes or independent pricing services, recent trading activity or other information that, in the opinion of the Partnership, may not have been reflected in pricing obtained from external sources.

When valuing private securities or assets without readily determinable market prices, the Partnership gives consideration to operating results, financial condition, economic and/or market events, recent sales prices and other pertinent information. These valuation procedures may vary by investment but include such techniques as comparable public market valuation, comparable acquisition valuation and discounted cash flow analysis. Because of the inherent uncertainty, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is reasonably possible that the difference could be material. Furthermore, there is no assurance that, upon liquidation, the Partnership will realize the values presented herein.

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Equity-Method Investments

The Partnership accounts for all investments in the unconsolidated Funds in which it has significant influence using the equity method of accounting. The carrying value of equity-method investments is determined based on amounts invested by the Partnership, adjusted for the equity in earnings or losses of the Funds allocated based on the respective Fund partnership agreement, less distributions received. The Partnership evaluates its equity-method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.

Cash and Cash Equivalents

Cash and cash equivalents include cash held at banks and cash held for distributions, including temporary investments with original maturities of less than three months when purchased. Included in cash and cash equivalents is cash withheld from carried interest distributions for potential giveback obligations of $56.4 million and $76.6 million at June 30, 2012 and December 31, 2011, respectively.

Cash and Cash Equivalents Held at Consolidated Funds

Cash and cash equivalents held at Consolidated Funds consists of cash and cash equivalents held by the Consolidated Funds, which, although not legally restricted, is not available to fund the general liquidity needs of the Partnership.

Restricted Cash

In addition to the unrestricted cash held for potential giveback obligations discussed above, the Partnership is required to withhold a certain portion of the carried interest proceeds from one of its corporate private equity funds to provide a reserve for potential giveback obligations. In connection with this agreement, cash and cash equivalents of $14.2 million and $13.6 million is included in restricted cash at June 30, 2012 and December 31, 2011, respectively. The remaining balance in restricted cash at June 30, 2012 and December 31, 2011 primarily represents cash held by the Partnership’s foreign subsidiaries due to certain government regulatory capital requirements.

Restricted Cash and Securities of Consolidated Funds

Certain CLOs receive cash from various counterparties to satisfy collateral requirements on derivative transactions. Cash received to satisfy these collateral requirements of $37.2 million and $31.7 million is included in restricted cash and securities of Consolidated Funds at June 30, 2012 and December 31, 2011, respectively.

Certain CLOs hold U.S. Treasury notes, Obligation Assimilable du Tresor Securities (“OATS”) Strips, French government securities, guaranteed investment contracts and other highly liquid asset-backed securities as collateral for specific classes of loans payable in the CLOs. As of June 30, 2012 and December 31, 2011, securities of $43.5 million and $57.5 million, respectively, are included in restricted cash and securities of Consolidated Funds.

Derivative Instruments

Derivative instruments are recognized at fair value in the condensed consolidated balance sheets with changes in fair value recognized in the condensed consolidated statements of operations for all derivatives not designated as hedging instruments. For all derivatives where hedge accounting is applied, effectiveness testing and other procedures to assess the ongoing validity of the hedges are performed at least quarterly. For instruments designated as cash flow hedges, the Partnership records changes in the estimated fair value of the derivative, to the

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

extent that the hedging relationship is effective, in other comprehensive income (loss). If the hedging relationship for a derivative is determined to be ineffective, due to changes in the hedging instrument or the hedged items, the fair value of the portion of the hedging relationship determined to be ineffective will be recognized as a gain or loss in the condensed consolidated statements of operations.

Fixed Assets

Fixed assets consist of furniture, fixtures and equipment, leasehold improvements, and computer hardware and software and are stated at cost, less accumulated depreciation and amortization. Depreciation is recognized on a straight-line method over the assets’ estimated useful lives, which for leasehold improvements are the lesser of the lease terms or the life of the asset, and three to seven years for other fixed assets. Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Intangible Assets and Goodwill

The Partnership’s intangible assets consist of acquired contractual rights to earn future fee income, including management and advisory fees, customer relationships, and acquired trademarks. Finite-lived intangible assets are amortized over their estimated useful lives, which range from three to ten years, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Goodwill represents the excess of cost over the identifiable net assets of businesses acquired and is recorded in the functional currency of the acquired entity. Goodwill is recognized as an asset and is reviewed for impairment annually as of October 1st and between annual tests when events and circumstances indicate that impairment may have occurred.

Due to Carlyle Partners

For periods prior to the reorganization and initial public offering in May 2012, the Partnership recognized a distribution from members’ equity and distribution payable to the senior Carlyle professionals when services were rendered and performance fee allocations were earned. Also included were certain amounts due to senior Carlyle professionals related to business acquisitions in 2011 and 2010. Any unpaid distributions, which reflected the Partnership’s obligation to those partners, was presented as due to Carlyle partners in the accompanying condensed consolidated balance sheets.

Subsequent to the reorganization and initial public offering, the liability for all compensatory amounts owed to these Carlyle individuals has been reclassified to accrued compensation and benefits in the accompanying condensed consolidated financial statements. The liability for non-compensatory amounts owed to these Carlyle individuals related to business acquisitions in 2011 and 2010 has been reclassified to due to affiliates in the accompanying condensed consolidated financial statements.

Deferred Revenue

Deferred revenue represents management fees and other revenue received prior to the balance sheet date, which has not yet been earned.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. The Partnership’s other comprehensive income is comprised of unrealized gains and losses on cash flow hedges and foreign currency translation adjustments.

 

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The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Foreign Currency Translation

Non-U.S. dollar denominated assets and liabilities are translated at period-end rates of exchange, and the condensed consolidated statements of operations are translated at rates of exchange in effect throughout the period. Foreign currency gains (losses) resulting from transactions outside of the functional currency of an entity of $0.2 million for the three months ended June 30, 2012 and 2011, and $(3.5) million and $(0.9) million for the six months ended June 30, 2012 and 2011, respectively, are included in general, administrative and other expenses in the condensed consolidated statements of operations.

Recent Accounting Pronouncements

In May 2011, the FASB amended its guidance for fair value measurements and disclosures to converge U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amended guidance, included in ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP,” is generally clarifying in nature, but does change certain existing measurement principles in ASC 820 and requires additional disclosure about fair value measurements and unobservable inputs. The Partnership adopted this guidance as of January 1, 2012, and the adoption did not have a material impact on the Partnership’s financial statements. The Partnership has included the additional disclosures required by this guidance in Note 4.

In June 2011, the FASB amended its guidance on the presentation of comprehensive income. This guidance eliminates the option to report other comprehensive income and its components in the consolidated statement of changes in equity. An entity may elect to present items of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements. Each component of net income and of other comprehensive income needs to be displayed under either alternative. In December 2011, the FASB issued a final standard to defer the new requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The Partnership adopted this guidance as of January 1, 2012, and has included a separate statement of comprehensive income for the periods ended June 30, 2012 and 2011 in the accompanying condensed consolidated financial statements.

In September 2011, the FASB amended its guidance for testing goodwill for impairment by allowing an entity to use a qualitative approach to test goodwill for impairment. The amended guidance, included in ASU 2011-08, “Testing Goodwill for Impairment” is effective for the Partnership for its annual reporting period beginning after December 15, 2011. The amended guidance is intended to reduce complexity by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The Partnership does not expect the adoption to have a material impact on the Partnership’s financial statements.

In December 2011, the FASB amended its guidance for offsetting financial instruments. The amended guidance, included in ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” is effective for the Partnership for its annual reporting period beginning on or after January 1, 2013. The amended guidance requires additional disclosure about netting arrangements to enable financial statement users to evaluate the effect or potential effect of such arrangements on an entity’s financial position. The Partnership does not expect the adoption to have a material impact on the Partnership’s financial statements.

3. Acquisitions and Acquired Intangible Assets

Acquisition of CLO Management Contracts

On February 28, 2012, the Partnership purchased four European CLO management contracts from Highland Capital Management L.P. for approximately €32.4 million in cash. In August 2011, the Partnership purchased a management contract relating to a CLO managed by The Foothill Group, Inc. for approximately $8.6 million in cash. The acquired contractual rights are finite-lived intangible assets. Pursuant to the accounting guidance for consolidation, these CLOs are required to be consolidated and the results of the acquired CLOs have been included in the condensed consolidated statements of operations since their acquisition. These transactions were accounted for as asset acquisitions.

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Acquisition of AlpInvest

On July 1, 2011, the Partnership completed the acquisition of a 60% equity interest in AlpInvest Partners N.V. (“AlpInvest”). The Partnership consolidated the financial position and results of operations of AlpInvest effective July 1, 2011 and accounted for this transaction as a business combination. The Partnership also consolidated certain AlpInvest-managed funds effective July 1, 2011. For a complete description of this acquisition, please refer to Note 3 of the Partnership’s combined and consolidated financial statements for the year ended December 31, 2011.

As of June 30, 2012 and December 31, 2011, the fair value of contingent consideration payable to non-Carlyle personnel was $6.4 million and $7.1 million, respectively, and has been included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. Changes in the fair value of the contingent consideration payable to non-Carlyle personnel of $(0.1) million and $0.5 million for the three and six months ended June 30, 2012, respectively, are recorded in other non-operating expenses in the condensed consolidated statements of operations. Refer to Note 4 for additional disclosures related to the fair value of these instruments as of June 30, 2012 and December 31, 2011.

Acquisition of ESG

On July 1, 2011, the Partnership acquired 55% of Emerging Sovereign Group LLC, its subsidiaries, and Emerging Sovereign Partners LLC (collectively, “ESG”), an emerging markets equities and macroeconomic strategies investment manager. The Partnership consolidated the financial position and results of operations of ESG effective July 1, 2011 and accounted for this transaction as a business combination. The Partnership also consolidated four ESG-managed funds effective July 1, 2011 and one additional ESG-managed fund for which it obtained control during the third quarter of 2011. For a complete description of this acquisition, please refer to Note 3 of the Partnership’s combined and consolidated financial statements for the year ended December 31, 2011.

The fair value of the contingent consideration included in this acquisition was based on probability-weighted discounted cash flow models. These fair value measurements are based on significant inputs not observable in the market and thus represent Level III measurements as defined in the accounting guidance for fair value measurement.

As of June 30, 2012 and December 31, 2011, the fair value of the performance-based contingent cash and equity consideration payable to the ESG sellers who are senior Carlyle professionals was $68.4 million and $67.4 million and has been included in due to affiliates and due to Carlyle partners, respectively, in the accompanying condensed consolidated balance sheets. These payments are not contingent upon the senior Carlyle professional being employed by Carlyle at the time that the performance conditions are met. Changes in the fair value of these amounts were $2.3 million and $1.0 million for the three and six months ended June 30, 2012, respectively. For periods prior to the reorganization and initial public offering in May 2012, the change in the fair value of this contingent consideration was recorded directly in partners’ capital in the condensed consolidated balance sheets. For periods subsequent to the reorganization and initial public offering, changes in the fair value of these amounts are recorded in other non-operating expenses in the condensed consolidated statements of operations.

As of June 30, 2012 and December 31, 2011, the amount of employment-based contingent cash consideration payable to the ESG sellers who are senior Carlyle professionals was $4.7 million and $2.3 million and has been included in accrued compensation and benefits and due to Carlyle partners, respectively, in the accompanying condensed consolidated balance sheets. Changes in the value of these amounts were $1.2 million and $2.4 million for the three and six months ended June 30, 2012, respectively. For periods prior to the reorganization and initial public offering in May 2012, the change in the value of this contingent consideration was recorded in partners’ capital in the condensed consolidated balance sheets. For periods subsequent to the reorganization and initial public offering, changes in the value of these amounts are recorded as compensation expense in the condensed consolidated statements of operations.

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

As of June 30, 2012 and December 31, 2011, the fair value of contingent consideration payable to non-Carlyle personnel was $5.1 million and $5.0 million, respectively, and has been included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. Changes in the fair value of the contingent consideration payable to non-Carlyle personnel are recorded in other non-operating expenses in the condensed consolidated statements of operations.

Refer to Note 4 for additional disclosures related to the fair value of these instruments as of June 30, 2012 and December 31, 2011.

Acquisition of Claren Road

On December 31, 2010, the Partnership acquired 55% of Claren Road, a credit hedge fund manager. The Partnership consolidated the financial position and results of operations of Claren Road effective December 31, 2010, and has accounted for this transaction as a business combination in the accompanying condensed consolidated financial statements. The Partnership also consolidated two Claren Road-managed hedge funds effective December 31, 2010. For a complete description of this acquisition, please refer to Note 3 of the Partnership’s combined and consolidated financial statements for the year ended December 31, 2011.

The fair value of the contingent consideration included in this acquisition was based on probability-weighted discounted cash flow models. These fair value measurements are based on significant inputs not observable in the market and thus represent Level III measurements as defined in the accounting guidance for fair value measurement.

At June 30, 2012 and December 31, 2011, the fair value of the performance-based contingent cash and equity consideration payable to the Claren Road sellers who are senior Carlyle professionals of $69.9 million and $68.4 million, respectively, has been recorded in due to affiliates and due to Carlyle partners, respectively, in the accompanying condensed consolidated balance sheets. These payments are not contingent upon the senior Carlyle professional being employed by Carlyle at the time that the performance conditions are met. Changes in the fair value of these amounts were ($2.5) million and $4.4 million for the three months ended June 30, 2012 and 2011, respectively, and $1.5 million and $5.4 million for the six months ended June 30, 2012 and 2011, respectively. For periods prior to the reorganization and initial public offering in May 2012, the change in the fair value of this contingent consideration was recorded directly in partners’ capital in the condensed consolidated balance sheets. For periods subsequent to the reorganization and initial public offering, changes in the fair value of these amounts are recorded in other non-operating expenses in the condensed consolidated statements of operations.

At June 30, 2012 and December 31, 2011, the amount of employment-based contingent cash consideration payable to the Claren Road sellers who are senior Carlyle professionals of $60.0 million has been recorded as accrued compensation and benefits and due to Carlyle partners, respectively, in the accompanying condensed consolidated balance sheets.

At June 30, 2012 and December 31, 2011, the fair value of contingent consideration payable to non-Carlyle personnel of $20.8 million and $21.5 million, respectively, is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. Changes in the fair value of the contingent consideration payable to non-Carlyle personnel of $0.7 million and $2.2 million for the three months ended June 30, 2012 and 2011, respectively, and ($0.7) million and $2.9 million for the six months ended June 30, 2012 and 2011, respectively, are recorded in other non-operating expenses in the condensed consolidated statements of operations.

Refer to Note 4 for additional disclosures related to the fair value of these instruments as of June 30, 2012 and December 31, 2011.

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Intangible Assets

The following table summarizes the carrying amount of intangible assets as of June 30, 2012 and December 31, 2011:

 

     June 30,     December 31,  
     2012     2011  
     (Dollars in millions)  

Acquired contractual rights

   $ 654.2      $ 615.8   

Acquired trademarks

     6.8        6.8   

Accumulated amortization

     (102.7     (64.5
  

 

 

   

 

 

 

Finite-lived intangible assets, net

     558.3        558.1   

Goodwill

     36.6        36.8   
  

 

 

   

 

 

 

Intangible assets, net

   $ 594.9      $ 594.9   
  

 

 

   

 

 

 

The following table summarizes the changes in the carrying amount of goodwill, by segment as of June 30, 2012. There was no goodwill associated with the Partnership’s Corporate Private Equity and Real Assets segments.

 

     Global
Market
Strategies
     Fund of
Funds
Solutions
    Total  
     (Dollars in millions)  

Balance as of December 31, 2011

   $ 28.0       $ 8.8      $ 36.8   

Foreign currency translation

     —           (0.2     (0.2
  

 

 

    

 

 

   

 

 

 

Balance as of June 30, 2012

   $ 28.0       $ 8.6      $ 36.6   
  

 

 

    

 

 

   

 

 

 

Intangible asset amortization expense was $19.7 million and $12.9 million for the three months ended June 30, 2012 and 2011, respectively, and $38.4 million and $25.2 million for the six months ended June 30, 2012 and 2011, respectively, and is included in general, administrative, and other expenses in the condensed consolidated statements of operations.

The following table summarizes the estimated amortization expense for 2012 through 2016 and thereafter (Dollars in millions):

 

2012

   $ 77.9   

2013

     79.0   

2014

     78.6   

2015

     76.2   

2016

     69.9   

Thereafter

     216.9   
  

 

 

 
   $ 598.5   
  

 

 

 

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

4. Fair Value Measurement

The fair value measurement accounting guidance establishes a hierarchal disclosure framework which ranks the observability of market price inputs used in measuring financial instruments at fair value. The observability of inputs is impacted by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices, or for which fair value can be measured from quoted prices in active markets, will generally have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value.

Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:

Level I – inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date. The type of financial instruments included in Level I include unrestricted securities, including equities and derivatives, listed in active markets. The Partnership does not adjust the quoted price for these instruments, even in situations where the Partnership holds a large position and a sale could reasonably impact the quoted price.

Level II – inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. The type of financial instruments in this category includes less liquid and restricted securities listed in active markets, securities traded in other than active markets, government and agency securities, and certain over-the-counter derivatives where the fair value is based on observable inputs. Investments in hedge funds are classified in this category when their net asset value is redeemable without significant restriction.

Level III – inputs to the valuation methodology are unobservable and significant to overall fair value measurement. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category include investments in privately-held entities, non-investment grade residual interests in securitizations, collateralized loan obligations, and certain over-the-counter derivatives where the fair value is based on unobservable inputs. Investments in fund of funds are generally included in this category.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

 

25


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Partnership’s assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of June 30, 2012:

 

(Dollars in millions)

   Level I      Level II      Level III      Total  

Assets

           

Investments of Consolidated Funds:

           

Equity securities

   $ 344.4       $ 556.6       $ 2,140.0       $ 3,041.0   

Bonds

     —           —           891.0         891.0   

Loans

     —           —           12,643.1         12,643.1   

Partnership and LLC interests(1)

     —           —           4,467.1         4,467.1   

Hedge funds

     —           2,531.7         —           2,531.7   

Other

     —           —           11.4         11.4   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 344.4       $ 3,088.3       $ 20,152.6       $ 23,585.3   

Trading securities and other

     —           —           35.5         35.5   

Restricted securities of Consolidated Funds

     43.5         —           —           43.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 387.9       $ 3,088.3       $ 20,188.1       $ 23,664.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Loans payable of Consolidated Funds

   $ —         $ —         $ 12,565.0       $ 12,565.0   

Interest rate swaps

     —           10.5         —           10.5   

Derivative instruments of the CLOs

     —           —           16.7         16.7   

Contingent consideration(2)

     —           —           170.6         170.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 10.5       $ 12,752.3       $ 12,762.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Balance represents Fund Investments that the Partnership consolidates one fiscal quarter in arrears.
  (2) Related to contingent cash and equity consideration associated with the acquisitions of Claren Road, AlpInvest and ESG (see Note 3).

 

26


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Partnership’s assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of December 31, 2011:

 

(Dollars in millions)

   Level I      Level II      Level III      Total  

Assets

           

Investments of Consolidated Funds:

           

Equity securities

   $ 61.9       $ 718.4       $ 1,868.9       $ 2,649.2   

Bonds

     —           —           557.0         557.0   

Loans

     —           —           10,152.6         10,152.6   

Partnership and LLC interests(1)

     —           —           4,198.6         4,198.6   

Hedge funds

     —           1,929.1         —           1,929.1   

Other

     —           —           20.8         20.8   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 61.9       $ 2,647.5       $ 16,797.9       $ 19,507.3   

Trading securities and other

     —           —           30.6         30.6   

Restricted securities of Consolidated Funds

     57.5         —           —           57.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 119.4       $ 2,647.5       $ 16,828.5       $ 19,595.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Loans payable of Consolidated Funds

   $ —         $ —         $ 9,689.9       $ 9,689.9   

Interest rate swaps

     —           7.3         —           7.3   

Subordinated loan payable to affiliate

     —           —           262.5         262.5   

Contingent consideration(2)

     —           —           169.2         169.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 7.3       $ 10,121.6       $ 10,128.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Balance represents Fund Investments that the Partnership consolidates one fiscal quarter in arrears.
  (2) Related to contingent cash and equity consideration associated with the acquisitions of Claren Road, AlpInvest and ESG (see Note 3).

In certain cases, debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments and various relationships between investments.

In the absence of observable market prices, the Partnership values its investments using valuation methodologies applied on a consistent basis. For some investments little market activity may exist. Management’s determination of fair value is then based on the best information available in the circumstances and may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks. Investments for which market prices are not observable include private investments in the equity of operating companies, real estate properties, and certain debt positions. The valuation technique for each of these investments is described below:

Corporate Private Equity Investments – The fair values of corporate private equity investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), the discounted cash flow method, public market or private transactions, valuations for comparable companies and other measures which, in many cases, are unaudited at the time received. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (e.g., multiplying a key performance metric of the investee company such as EBITDA by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar models. Certain fund investments in the Partnership’s Global Market Strategies, Real Assets and Fund of Funds solutions segments are comparable to corporate private equity investments and are valued in accordance with these policies.

 

27


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Real Estate Investments – The fair values of real estate investments are determined by considering projected operating cash flows, sales of comparable assets, if any, and replacement costs, among other measures. The methods used to estimate the fair value of real estate investments include the discounted cash flow method and/or capitalization rates (“cap rates”) analysis. Valuations may be derived by reference to observable valuation measures for comparable assets (e.g., multiplying a key performance metric of the investee asset, such as net operating income, by a relevant cap rate observed in the range of comparable transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to pricing models or other similar methods. Additionally, where applicable, projected distributable cash flow through debt maturity will also be considered in support of the investment’s carrying value.

Credit-Oriented Investments – The fair values of credit-oriented investments are generally determined on the basis of prices between market participants provided by reputable dealers or pricing services. Specifically, for investments in distressed debt and corporate loans and bonds, the fair values are generally determined by valuations of comparable investments. In some instances, the Partnership may utilize other valuation techniques, including the discounted cash flow method.

CLO Investments and CLO Loans Payable – The Partnership has elected the fair value option to measure the loans payable of the CLOs at fair value, as the Partnership has determined that measurement of the loans payable and preferred shares issued by the CLOs at fair value better correlates with the value of the assets held by the CLOs, which are held to provide the cash flows for the note obligations. The investments of the CLOs are also carried at fair value.

The fair values of the CLO loan and bond assets are primarily based on quotations from reputable dealers or relevant pricing services. In situations where valuation quotations are unavailable, the assets are valued based on similar securities, market index changes, and other factors. The Partnership corroborates quotations from pricing services either with other available pricing data or with its own models. Generally, the bonds and loans in the CLOs are not actively traded and are classified as Level III.

The fair values of the CLO loans payable and the CLO structured asset positions are determined based on both discounted cash flow analyses and third-party quotes. Those analyses consider the position size, liquidity, current financial condition of the CLOs, the third-party financing environment, reinvestment rates, recovery lags, discount rates, and default forecasts and are compared to broker quotations from market makers and third party dealers.

Fund Investments – The Partnership’s investments in funds are valued based on its proportionate share of the net assets provided by the third party general partners of the underlying fund partnerships based on the most recent available information which is typically a lag of up to 90 days. The terms of the investments generally preclude the ability to redeem the investment. Distributions from these investments will be received as the underlying assets in the funds are liquidated, the timing of which cannot be readily determined.

 

28


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

The changes in financial instruments measured at fair value for which the Partnership has used Level III inputs to determine fair value are as follows (Dollars in millions):

 

     Financial Assets
Three Months Ended June 30, 2012
 
     Investments of Consolidated Funds               
     Equity
securities
    Bonds     Loans     Partnership
and LLC
interests
    Other     Trading
securities and
other
     Total  

Balance, beginning of period

   $ 1,861.6      $ 876.7      $ 12,750.3      $ 4,149.1      $ 11.6      $ 32.4         19,681.7   

Initial consolidation of the CLOs

     —          13.0        382.7        —          —          —           395.7   

Transfers out (1)

     (20.2     —          —          —          —          —           (20.2

Purchases

     19.1        114.0        1,579.0        148.8        —          —           1,860.9   

Sales

     (16.2     (80.3     (655.8     (77.8     (0.3     —           (830.4

Settlements

     —          —          (1,151.8     —          —          —           (1,151.8

Realized and unrealized gains (losses), net

     295.7        (32.4     (261.3     247.0        0.1        3.1         252.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 2,140.0      $ 891.0      $ 12,643.1      $ 4,467.1      $ 11.4      $ 35.5       $ 20,188.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date

   $ 306.8      $ (1.8   $ (9.6   $ 283.4      $ 2.8      $ 3.1       $ 584.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Financial Assets  
     Six Months Ended June 30, 2012  
     Investments of Consolidated Funds               
     Equity
securities
    Bonds     Loans     Partnership
and LLC
interests
    Other     Trading
securities and
other
     Total  

Balance, beginning of period

   $ 1,868.9      $ 557.0      $ 10,152.6      $ 4,198.6      $ 20.8      $ 30.6         16,828.5   

Initial consolidation of the CLOs

     25.2        287.7        3,024.2        —          —          —           3,337.1   

Transfers out (1)

     (145.6     —          —          —          —          —           (145.6

Purchases

     41.0        174.4        2,543.0        309.8        —          —           3,068.2   

Sales

     (110.5     (140.7     (1,251.1     (167.4     (2.0     —           (1,671.7

Settlements

     —          —          (1,862.8     —          —          —           (1,862.8

Realized and unrealized gains (losses), net

     461.0        12.6        37.2        126.1        (7.4     4.9         634.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 2,140.0      $ 891.0      $ 12,643.1      $ 4,467.1      $ 11.4      $ 35.5       $ 20,188.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date

   $ 687.9      $ 25.2      $ 150.6      $ 458.0      $ 1.5      $ 4.9       $ 1,328.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Financial Assets  
     Three Months Ended June 30, 2011  
     Investments of Consolidated Funds              
     Equity
securities
    Bonds     Loans     Partnership
and LLC
interests
    Other     Trading
securities and
other
    Total  

Balance, beginning of period

   $ 46.5      $ 466.9      $ 10,517.7      $ 13.2      $ 32.7      $ 27.1      $ 11,104.1   

Purchases

     —          193.5        1,732.2        —          —          —          1,925.7   

Sales

     (10.9     (99.5     (466.0     —          (9.9     —          (586.3

Settlements

     —          (2.8     (1,505.3     —          —          —          (1,508.1

Realized and unrealized gains (losses), net

     (0.9     10.0        79.2        (0.1     12.3        (2.2     98.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 34.7      $ 568.1      $ 10,357.8      $ 13.1      $ 35.1      $ 24.9      $ 11,033.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date

   $ (0.4   $ 4.1      $ (14.9   $ —        $ 11.6      $ (2.2   $ (1.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

     Financial Assets  
     Six Months Ended June 30, 2011  
     Investments of Consolidated Funds              
     Equity
securities
    Bonds     Loans     Partnership
and LLC
interests
    Other     Trading
securities and
other
    Total  

Balance, beginning of period

   $ 36.8      $ 460.3      $ 10,433.5      $ 14.8      $ 33.9      $ 21.8      $ 11,001.1   

Transfers out (1)

     (4.4     —          —          —          —          —          (4.4

Purchases

     4.8        278.1        3,149.0        —          —          2.5        3,434.4   

Sales

     (21.2     (221.7     (1,016.7     (0.2     (12.9     (0.2     (1,272.9

Settlements

     —          (2.8     (2,761.6     —          —          —          (2,764.4

Realized and unrealized gains (losses), net

     18.7        54.2        553.6        (1.5     14.1        0.8        639.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 34.7      $ 568.1      $ 10,357.8      $ 13.1      $ 35.1      $ 24.9      $ 11,033.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date

   $ 15.4      $ 29.5      $ 203.5      $ (1.4   $ 11.3      $ 0.8      $ 259.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) Transfers out of Level III financial assets were due to changes in the observability of market inputs used in the valuation of such assets. Transfers are measured as of the beginning of the quarter in which the transfer occurs.

 

     Financial Liabilities  
     Three Months Ended June 30, 2012  
     Loans Payable
of Consolidated
Funds
    Derivative
Instruments of
Consolidated
Funds
    Subordinated
Loan
Payable to
Affiliate
     Contingent
Consideration
    Total  

Balance, beginning of period

   $ 12,454.6      $ 4.8      $ —         $ 170.5      $ 12,629.9   

Initial consolidation of the CLOs

     497.4        —          —           —          497.4   

Borrowings

     1.5        —          —           —          1.5   

Paydowns

     (324.4     —          —           (0.5     (324.9

Sales

     —          (0.3     —           —          (0.3

Realized and unrealized (gains) losses, net

     (64.1     12.2        —           0.6        (51.3
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 12,565.0      $ 16.7      $ —         $ 170.6      $ 12,752.3   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date

   $ 179.4      $ (8.5   $ —         $ 0.6      $ 171.5   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

30


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

     Financial Liabilities  
     Six Months Ended June 30, 2012  
     Loans Payable
of Consolidated
Funds
    Derivative
Instruments of
Consolidated
Funds
    Subordinated
Loan Payable
to Affiliate
    Contingent
Consideration
    Total  

Balance, beginning of period

   $ 9,689.9      $ —        $ 262.5      $ 169.2      $ 10,121.6   

Initial consolidation of the CLOs

     3,203.3        4.6        —          —          3,207.9   

Borrowings

     1.5        —          —          —          1.5   

Paydowns

     (507.3     —          (260.0     (1.2     (768.5

Sales

     —          (0.3     —          —          (0.3

Realized and unrealized (gains) losses, net

     177.6        12.4        (2.5     2.6        190.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 12,565.0      $ 16.7      $ —        $ 170.6      $ 12,752.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date

   $ 329.2      $ (19.2   $ —        $ (0.2   $ 309.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Financial Liabilities  
     Three Months Ended June 30, 2011  
     Loans Payable
of Consolidated
Funds
    Derivative
Instruments of
Consolidated
Funds
     Subordinated
Loan Payable
to Affiliate
     Contingent
Consideration
     Total  

Balance, beginning of period

   $ 10,734.6      $ 2.9       $ 508.7       $ 96.7         11,342.9   

Borrowings

     8.5        —           —           —           8.5   

Paydowns

     (561.0     —           —           —           (561.0

Realized and unrealized losses, net

     243.2        0.3         3.0         6.6         253.1   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 10,425.3      $ 3.2       $ 511.7       $ 103.3       $ 11,043.5   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Changes in unrealized losses included in earnings related to financial liabilities still held at the reporting date

   $ 100.0      $ 0.3       $ 3.0       $ 2.2       $ 105.5   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     Financial Liabilities  
     Six Months Ended June 30, 2011  
     Loans Payable
of Consolidated
Funds
    Derivative
Instruments of
Consolidated
Funds
    Subordinated
Loan Payable
to Affiliate
     Contingent
Consideration
     Total  

Balance, beginning of period

   $ 10,418.5      $ 1.9      $ 494.0       $ 95.0       $ 11,009.4   

Borrowings

     9.2        —          —           —           9.2   

Paydowns

     (978.4     (0.1     —           —           (978.5

Realized and unrealized losses, net

     976.0        1.4        17.7         8.3         1,003.4   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 10,425.3      $ 3.2      $ 511.7       $ 103.3       $ 11,043.5   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Changes in unrealized losses included in earnings related to financial liabilities still held at the reporting date

   $ 621.5      $ 1.2      $ 17.7       $ 2.9       $ 643.3   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total realized and unrealized gains and losses included in earnings for Level III investments for trading securities are included in investment income (loss), and such gains and losses for investments of Consolidated Funds and loans payable and derivative instruments of the CLOs are included in net investment gains (losses) of Consolidated Funds in the condensed consolidated statements of operations.

 

31


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes quantitative information about the Partnership’s Level III inputs as of June 30, 2012:

 

(Dollars in millions)

   Fair Value
at
June 30,
2012
    

Valuation Technique(s)

  

Unobservable Input(s)

   Range
(Weighted Average)
 

Assets

           

Investments of Consolidated Funds:

           

Equity securities

   $ 2,018.0       Comparable Multiple    LTM EBITDA Multiple      5.3x - 13.8x (9.0x)   
     46.2       Comparable Multiple    Price Earnings Multiple      (10.6x)   
     16.0       Comparable Multiple    Book Value Multiple      (1.0x)   
     59.8       Consensus Pricing    Indicative Quotes ($ per Share)      ($15)   

Bonds

     891.0       Consensus Pricing    Indicative Quotes (% of Par)      (89)   

Loans

     12,286.4       Consensus Pricing    Indicative Quotes (% of Par)      (93)   
     356.7       Discounted Cash Flow    Discount Rate      8% - 24% (11%)   

Partnership and LLC interests

     4,467.1       NAV of Underlying  Fund(1)    N/A      N/A   

Other

     11.4       Counterparty Pricing    Indicative Quotes (% of Notional Amount)      (5)   
  

 

 

          
   $ 20,152.6            

Trading securities and other

     35.5       Dealer Pricing    Indicative Quotes (% of Par)      80 - 98 (90)   
  

 

 

          

Total

   $ 20,188.1            
  

 

 

          

Liabilities

           

Loans payable of Consolidated Funds

           

Senior secured notes

   $ 11,746.7       Discounted Cash Flow with Consensus Pricing    Discount Rates      (5%)   
         Default Rates      (3%)   
         Recovery Rates      (66%)   
         Indicative Quotes (% of Par)      (88)   

Subordinated notes and preferred shares

     812.8       Discounted Cash Flow with Consensus Pricing    Discount Rates      (27%)   
         Default Rates      (3%)   
         Recovery Rates      (67%)   
         Indicative Quotes (% of Par)      (42)   

Combination notes

     5.5       Consensus Pricing    Indicative Quotes (% of Par)      (92)   

Derivative instruments of Consolidated Funds

     16.7       Counterparty Pricing    Indicative Quotes (% of Notional Amount)      (6)   

Contingent consideration(2)

     170.6       Discounted Cash Flow    Assumed % of Total Potential Contingent Payments      37% - 100% (84%)   
         Discount Rate      5% - 25% (21%)   
  

 

 

          

Total

   $ 12,752.3            
  

 

 

          

 

(1) Represents the Partnership’s investments in funds that are valued using the NAV of the underlying fund.
(2) Related to contingent cash and equity consideration associated with the acquisitions of Claren Road, AlpInvest and ESG (see Note 3).

 

32


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

The significant unobservable inputs used in the fair value measurement of the Partnership’s investments in equity securities include EBITDA, price-earnings and book value multiples, as well as indicative quotes. Significant decreases in any of those inputs in isolation would result in a lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s investments in bonds and loans are discount rates and indicative quotes. Significant increases in discount rates would result in a significantly lower fair value measurement. Significant decreases in indicative quotes in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s other investments of Consolidated Funds, trading securities and other investments, and derivative instruments of Consolidated Funds are primarily indicative quotes. A significant decrease in this input in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s loans payable of Consolidated Funds are discount rates, default rates and recovery rates. Significant increases in discount rates or default rates in isolation would result in a significantly lower fair value measurement, while a significant increase in recovery rates in isolation would result in a significantly higher fair value.

The significant unobservable inputs used in the fair value measurement of the Partnership’s contingent consideration are assumed percentage of total potential contingent payments and discount rates. A significant decrease in the assumed percentage of total potential contingent payments or increase in discount rates in isolation would result in a significantly lower fair value measurement.

5. Accrued Performance Fees

The components of accrued performance fees are as follows:

 

     As of  
     June 30,      December 31,  
     2012      2011  
     (Dollars in millions)  

Corporate Private Equity

   $ 1,574.5       $ 1,599.2   

Global Market Strategies

     65.3         170.0   

Real Assets

     294.1         270.9   

Fund of Funds Solutions

     185.9         149.0   
  

 

 

    

 

 

 

Total

   $ 2,119.8       $ 2,189.1   
  

 

 

    

 

 

 

Accrued performance fees are shown gross of the Partnership’s accrued giveback obligations, which are separately presented in the condensed consolidated balance sheets. The components of the accrued giveback obligations are as follows:

 

     As of  
     June 30,     December 31,  
     2012     2011  
     (Dollars in millions)  

Corporate Private Equity

   $ (74.9   $ (77.8

Global Market Strategies

     (1.2     (1.2

Real Assets

     (57.3     (57.5
  

 

 

   

 

 

 

Total

   $ (133.4   $ (136.5
  

 

 

   

 

 

 

 

33


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Performance Fees

The performance fees included in revenues are derived from the following segments:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012     2011      2012      2011  
     (Dollars in millions)  

Corporate Private Equity

   $ (217.6   $ 270.1       $ 246.9       $ 963.8   

Global Market Strategies

     6.9        44.5         52.4         124.5   

Real Assets

     (30.4     31.1         75.1         132.1   

Fund of Funds Solutions

     20.7        —           46.0         —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ (220.4   $ 345.7       $ 420.4       $ 1,220.4   
  

 

 

   

 

 

    

 

 

    

 

 

 

Approximately 56% and 55% of accrued performance fees at June 30, 2012 and December 31, 2011, respectively, are related to Carlyle Partners IV, L.P. and Carlyle Partners V, L.P., two of the Partnership’s Corporate Private Equity funds. Performance fees from these funds were losses of $133.0 million and gains of $265.0 million of total performance fees for the three months ended June 30, 2012 and 2011, respectively, and gains of $189.0 million and $864.1 million of total performance fees for the six months ended June 30, 2012 and 2011, respectively. Total revenues recognized from Carlyle Partners IV, L.P. and Carlyle Partners V, L.P. were ($149.5) million and $66.2 million, respectively, for the three months ended June 30, 2012, and $137.6 million and $159.4 million, respectively, for the six months ended June 30, 2012.

6. Investments

Investments consist of the following:

 

     As of  
     June 30,      December 31,  
     2012      2011  
     (Dollars in millions)  

Equity method investments, excluding accrued performance fees

   $ 366.3       $ 419.9   

Trading securities and other investments

     40.3         35.0   
  

 

 

    

 

 

 

Total investments

   $ 406.6       $ 454.9   
  

 

 

    

 

 

 

 

34


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Equity-Method Investments

The Partnership holds investments in its unconsolidated funds, typically as general partner interests, which are accounted for under the equity method. Investments are related to the following segments:

 

     As of  
     June 30,      December 31,  
     2012      2011  
     (Dollars in millions)  

Corporate Private Equity

   $ 175.5       $ 238.5   

Global Market Strategies

     14.6         11.9   

Real Assets

     176.2         169.5   
  

 

 

    

 

 

 

Total

   $ 366.3       $ 419.9   
  

 

 

    

 

 

 

The Partnership’s equity method investments include its fund investments in Corporate Private Equity, Global Market Strategies and Real Assets, which are not consolidated but in which Carlyle exerts significant influence. The summarized financial information of the Partnership’s equity method investees is as follows (Dollars in millions):

 

     Corporate
Private Equity
     Global Market Strategies      Real Assets      Aggregate Totals  
     For the Three Months Ended
June 30,
     For the Three Months
Ended June 30,
     For the Three Months
Ended June 30,
     For the Three Months Ended
June 30,
 
     2012     2011      2012      2011      2012     2011      2012     2011  

Statement of income information

                    

Investment income

   $ 255.4      $ 148.1       $ 38.1       $ 33.7       $ 126.9      $ 203.3       $ 420.4      $ 385.1   

Expenses

     119.9        140.7         17.1         10.7         110.2        99.3         247.2        250.7   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net investment income

     135.5        7.4         21.0         23.0         16.7        104.0         173.2        134.4   

Net realized and unrealized gain (loss)

     (738.2     1,909.5         23.7         58.7         (984.2     155.0         (1,698.7     2,123.2   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ (602.7   $ 1,916.9       $ 44.7       $ 81.7       $ (967.5   $ 259.0       $ (1,525.5   $ 2,257.6   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Corporate
Private Equity
    Global
Market Strategies
     Real Assets      Aggregate Totals  
     For the Six Months Ended
June 30,
    For the Six Months Ended
June 30,
     For the Six Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2012      2011     2012      2011      2012      2011      2012      2011  

Statement of income information

                      

Investment income

   $ 315.9       $ 198.1      $ 73.1       $ 64.4       $ 243.1       $ 311.4       $ 632.1       $ 573.9   

Expenses

     250.4         267.2        27.3         21.4         211.6         192.6         489.3         481.2   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net investment income (loss)

     65.5         (69.1     45.8         43.0         31.5         118.8         142.8         92.7   

Net realized and unrealized gain

     2,194.5         5,095.5        224.9         312.6         1,141.2         1,538.8         3,560.6         6,946.9   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 2,260.0       $ 5,026.4      $ 270.7       $ 355.6       $ 1,172.7       $ 1,657.6       $ 3,703.4       $ 7,039.6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Corporate      Global                
     Private Equity      Market Strategies      Real Assets      Aggregate Totals  
     As of      As of      As of      As of  
     June 30,      December 31,      June 30,      December 31,      June 30,      December 31,      June 30,      December 31,  
     2012      2011      2012      2011      2012      2011      2012      2011  

Balance sheet information

                       

Investments

   $ 36,349.9       $ 36,517.6       $ 1,932.9       $ 1,936.2       $ 22,796.6       $ 20,952.4       $ 61,079.4       $ 59,406.2   

Total assets

   $ 37,511.5       $ 37,729.7       $ 2,088.0       $ 2,224.3       $ 23,557.1       $ 21,860.3       $ 63,156.6       $ 61,814.3   

Debt

   $ 149.8       $ 79.9       $ 32.0       $ 64.0       $ 1,394.2       $ 1,978.1       $ 1,576.0       $ 2,122.0   

Other liabilities

   $ 352.2       $ 278.7       $ 13.7       $ 116.0       $ 301.5       $ 260.9       $ 667.4       $ 655.6   

Total liabilities

   $ 502.0       $ 358.6       $ 45.7       $ 180.0       $ 1,695.7       $ 2,239.0       $ 2,243.4       $ 2,777.6   

Partners' capital

   $ 37,009.5       $ 37,371.1       $ 2,042.3       $ 2,044.3       $ 21,861.4       $ 19,621.3       $ 60,913.2       $ 59,036.7   

 

35


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Investment Income

The components of investment income are as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012      2011     2012     2011  
     (Dollars in millions)     (Dollars in millions)  

Income from equity investments

   $ 4.5       $ 21.0      $ 26.0      $ 60.6   

Income (loss) from trading securities

     2.5         (0.4     4.6        0.9   

Other investment income (loss)

     —           —          (2.1     0.5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 7.0       $ 20.6      $ 28.5      $ 62.0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Carlyle’s income from its equity-method investments is included in investment income in the condensed consolidated statements of operations and consists of:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  
     (Dollars in millions)  

Corporate Private Equity

   $ 2.2       $ 19.6       $ 22.1       $ 52.4   

Global Market Strategies

     0.2         0.3         1.0         0.9   

Real Assets

     2.1         1.1         2.9         7.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4.5       $ 21.0       $ 26.0       $ 60.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading Securities and Other Investments

Trading securities as of June 30, 2012 and December 31, 2011 primarily consisted of $40.3 million and $35.0 million, respectively, of investments in corporate mezzanine securities, bonds and warrants.

Investments of Consolidated Funds

On March 30, 2012 and June 28, 2012, the Partnership formed two new CLOs. The Partnership has concluded that these CLOs are VIEs and the Partnership is the primary beneficiary. As a result, the Partnership consolidated the financial positions and results of operations of the CLOs into its condensed consolidated financial statements beginning on their respective formation dates. As of June 30, 2012, the total assets of these CLOs included in the Partnership’s condensed consolidated financial statements were approximately $1.5 billion.

 

36


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

The following table presents a summary of the investments held by the Consolidated Funds. Investments held by the Consolidated Funds do not represent the investments of all Carlyle sponsored funds. The table below presents investments as a percentage of investments of Consolidated Funds:

 

     Fair Value      Consolidated Funds  

Geographic Region/Instrument Type/ Industry

Description or Investment Strategy

   June 30,
2012
     December 31,
2011
     June 30,
2012
    December 31,
2011
 
     (Dollars in millions)               

United States

          

Equity securities:

          

Accommodation and Food Services

   $ 43.7       $ 106.1         0.19     0.54

Administrative Support, Waste Management, Remediation Services

     294.1         3.7         1.25     0.02

Aerospace and defense

     —           53.2         —          0.27

Finance and Insurance

     45.7         44.3         0.19     0.23

Health Care and Social Assistance

     57.1         31.8         0.24     0.16

Information

     91.3         48.0         0.39     0.25

Manufacturing

     348.5         412.7         1.48     2.12

Professional, Scientific, Technical Services

     547.9         500.0         2.32     2.56

Retail trade

     145.8         147.1         0.62     0.75

Wholesale Trade

     116.1         17.9         0.49     0.09

Other

     80.4         117.5         0.34     0.60
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities (cost of $1,932.2 and $2,160.6 at June 30, 2012 and December 31, 2011, respectively)

     1,770.6         1,482.3         7.51     7.59

Partnership and LLC interests:

          

Fund investments

     2,933.5         2,701.0         12.44     13.85
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Partnership and LLC interests (cost of $2,650.2 and $2,593.5 at June 30, 2012 and December 31, 2011, respectively)

     2,933.5         2,701.0         12.44     13.85

Loans:

          

Administrative Support, Waste Management, Remediation Services

     29.1         60.6         0.12     0.31

Finance and Insurance

     43.3         —           0.18     —     

Manufacturing

     64.6         65.0         0.27     0.33

Professional, Scientific, Technical Services

     107.2         81.1         0.45     0.42

Wholesale Trade

     77.5         48.2         0.33     0.25

Other

     26.3         81.7         0.11     0.42
  

 

 

    

 

 

    

 

 

   

 

 

 

Total loans (cost of $419.1 and $361.4 at June 30, 2012 and December 31, 2011, respectively)

     348.0         336.6         1.46     1.73

Total investment in hedge funds

     2,531.7         1,929.1         10.73     9.89

Assets of the CLOs

          

Bonds

     289.0         247.7         1.23     1.27

Equity

     56.6         25.3         0.24     0.13

Loans

     7,763.5         6,911.6         32.93     35.43

Other

     —           0.1         —          0.00
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets of the CLOs (cost of $8,235.1 and $7,446.8 at June 30, 2012 and December 31, 2011, respectively)

     8,109.1         7,184.7         34.40     36.83
  

 

 

    

 

 

    

 

 

   

 

 

 

Total United States

   $ 15,692.9       $ 13,633.7         66.54     69.89
  

 

 

    

 

 

    

 

 

   

 

 

 

 

37


Table of Contents

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

 

     Fair Value      Percentage of Investments  of
Consolidated Funds
 

Geographic Region/Instrument Type/ Industry

Description or Investment Strategy

   June 30,
2012
     December 31,
2011
     June 30,
2012
    December 31,
2011
 
     (Dollars in millions)               

Canada

          

Equity securities:

          

Manufacturing

   $ 2.1       $ 2.9         0.01     0.01

Other

     —           2.9         —          0.02
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities (cost of $0 and $6.1 at June 30, 2012 and December 31, 2011, respectively)

     2.1         5.8         0.01     0.03

Partnership and LLC interests: