UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
Emerging growth company | ¨ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of the registrant’s common units representing limited partner interests outstanding as of October 26, 2018 was 107,748,095.
TABLE OF CONTENTS
Page | ||
Item 1. | ||
Unaudited Condensed Consolidated Financial Statements – September 30, 2018 and 2017: | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
1
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. These statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, contingencies, our distribution policy, and other non-historical statements. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements including, but not limited to, those described under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the United States Securities and Exchange Commission (“SEC”) on February 15, 2018, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.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 our other periodic filings with the SEC. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by applicable law.
Website and Social Media Disclosure
We use our website (www.carlyle.com), our corporate Facebook page (https://www.facebook.com/onecarlyle/) and our corporate Twitter account (@OneCarlyle) as channels of distribution of material company information. For example, financial and other material information regarding our company is routinely posted on and accessible at www.carlyle.com. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about Carlyle when you enroll your email address by visiting the “Email Alert Subscription” section at http://ir.carlyle.com/alerts.cfm. The contents of our website and social media channels are not, however, a part of this Quarterly Report on Form 10-Q and are not incorporated by reference herein.
Unless the context suggests otherwise, references in this report to “Carlyle,” the “Company,” “we,” “us” and “our” refer to The Carlyle Group L.P. and its consolidated subsidiaries. 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 partner-level personnel of our firm. References in this report to the ownership of the senior Carlyle professionals include the ownership of personal planning vehicles of these individuals. When we refer to the “Carlyle Holdings partnerships” or “Carlyle Holdings”, we are referring to Carlyle Holdings I L.P., Carlyle Holdings II L.P., and Carlyle Holdings III L.P.
“Carlyle funds,” “our funds” and “our investment funds” refer to the investment funds and vehicles advised by Carlyle.
“Carry funds” generally refers to closed-end investment vehicles, in which commitments are drawn down over a specified investment period, and in which the general partner receives a special residual allocation of income from limited partners, which we refer to as carried interest, in the event that specified investment returns are achieved by the fund. Disclosures referring to carry funds will also include the impact of certain commitments which do not earn carried interest, but are either part of, or associated with our carry funds. The rate of carried interest, as well as the share of carried interest allocated to Carlyle, may vary across the carry fund platform. Carry funds generally include the following investment vehicles across our four business segments:
• | Corporate Private Equity (all): buyout & growth funds advised by Carlyle |
• | Real Assets: Real estate, power, infrastructure and energy funds advised by Carlyle, as well as those energy funds advised by NGP Energy Capital Management in which Carlyle is entitled to receive a share of carried interest |
• | Global Credit: Structured credit, direct lending, distressed credit, energy credit, opportunistic credit and corporate mezzanine funds, and other closed-end credit funds advised by Carlyle |
• | Investment Solutions: Funds and vehicles advised by AlpInvest Partners B.V. (“AlpInvest”) and Metropolitan Real Estate Equity Management, LLC (“Metropolitan), which include primary fund, secondary and co-investment strategies |
Carry funds specifically exclude those funds advised by NGP Energy Capital Management in which Carlyle is not entitled to receive a share of carried interest (or “NGP management fee funds”), collateralized loan obligation vehicles (“CLOs”), business development companies, and our former hedge fund platform.
2
For an explanation of the fund acronyms used throughout this Quarterly Report, refer to “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - Our Family of Funds.”
“Fee-earning assets under management” or “Fee-earning AUM” refers to the assets we manage or advise from which we derive recurring fund management fees. Our Fee-earning AUM is generally based on one of the following, once fees have been activated:
(a) | the amount of limited partner capital commitments, generally for carry funds where the original investment period has not expired, for AlpInvest carry funds during the commitment fee period and for Metropolitan carry funds during the weighted-average investment period of the underlying funds; |
(b) | the remaining amount of limited partner invested capital at cost, generally for carry funds and certain co-investment vehicles where the original investment period has expired, Metropolitan carry funds after the expiration of the weighted-average investment period of the underlying funds, and one of our business development companies; |
(c) | the amount of aggregate fee-earning collateral balance at par of our CLOs, as defined in the fund indentures (typically exclusive of equities and defaulted positions) as of the quarterly cut-off date for each CLO; |
(d) | the external investor portion of the net asset value of our hedge fund and fund of hedge funds vehicles (pre redemptions and subscriptions), as well as certain carry funds; |
(e) | the gross assets (including assets acquired with leverage), excluding cash and cash equivalents, of one of our business development companies and certain carry funds; or |
(f) | the lower of cost or fair value of invested capital, generally for AlpInvest carry funds where the commitment fee period has expired and certain carry funds where the investment period has expired. |
“Assets under management” or “AUM” refers to the assets we manage or advise. Our AUM equals the sum of the following:
(a) the aggregate fair value of our carry funds and related co-investment vehicles, NGP management fee funds and separately managed accounts, plus the capital that Carlyle is entitled to call from investors in those funds and vehicles (including Carlyle 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 and principal cash at par or aggregate principal amount of the notes of our CLOs and other structured products (inclusive of all positions); |
(c) | the net asset value (pre-redemptions and subscriptions) of our long/short credit, emerging markets, multi-product macroeconomic, fund of hedge funds vehicles, mutual fund and other hedge funds; and |
(d) | the gross assets (including assets acquired with leverage) of our business development companies, plus the capital that Carlyle is entitled to call from investors in those vehicles pursuant to the terms of their capital commitments to those vehicles. |
We include in our calculation of AUM and Fee-earning AUM certain NGP management fee funds and carry funds that are advised by NGP and certain energy and renewable resources funds that we jointly advise with Riverstone Holdings L.L.C. (“Riverstone”). Energy II, Energy III, Energy IV, and Renew II (collectively, the “Legacy Energy Funds”), are managed with Riverstone Holdings LLC and its affiliates. Affiliates of both Carlyle and Riverstone act as investment advisers to each of the Legacy Energy Funds. Carlyle has a minority representation on the management committees of Energy IV and Renew II. Carlyle and Riverstone each hold half of the seats on the management committees of Energy II and Energy III, but the investment period for these funds has expired and the remaining investments in such funds are being disposed of in the ordinary course of business.
For most of our carry funds, 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, depending on whether the original 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.
3
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 management fees, incentive fees or performance allocations. Our calculations 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 manage or advise.
4
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
The Carlyle Group L.P.
Condensed Consolidated Balance Sheets
(Dollars in millions)
September 30, 2018 | December 31, 2017 | ||||||
(Unaudited) | (As Adjusted) | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 1,238.2 | $ | 1,000.1 | |||
Cash and cash equivalents held at Consolidated Funds | 241.8 | 377.6 | |||||
Restricted cash | 1.4 | 28.7 | |||||
Corporate treasury investments | 224.0 | 376.3 | |||||
Investments, including accrued performance allocations of $3,952.7 million and $3,664.3 million as of September 30, 2018 and December 31, 2017, respectively | 5,808.3 | 5,288.6 | |||||
Investments of Consolidated Funds | 5,095.4 | 4,534.3 | |||||
Due from affiliates and other receivables, net | 321.8 | 263.4 | |||||
Due from affiliates and other receivables of Consolidated Funds, net | 132.6 | 50.8 | |||||
Fixed assets, net | 93.4 | 100.4 | |||||
Deposits and other | 62.8 | 54.1 | |||||
Intangible assets, net | 27.2 | 35.9 | |||||
Deferred tax assets | 186.8 | 170.4 | |||||
Total assets | $ | 13,433.7 | $ | 12,280.6 | |||
Liabilities and partners’ capital | |||||||
Debt obligations | $ | 1,558.4 | $ | 1,573.6 | |||
Loans payable of Consolidated Funds | 4,774.6 | 4,303.8 | |||||
Accounts payable, accrued expenses and other liabilities | 475.7 | 355.1 | |||||
Accrued compensation and benefits | 2,532.0 | 2,222.6 | |||||
Due to affiliates | 160.7 | 229.9 | |||||
Deferred revenue | 266.5 | 82.1 | |||||
Deferred tax liabilities | 78.0 | 75.6 | |||||
Other liabilities of Consolidated Funds | 445.4 | 422.1 | |||||
Accrued giveback obligations | 63.2 | 66.8 | |||||
Total liabilities | 10,354.5 | 9,331.6 | |||||
Commitments and contingencies | |||||||
Series A preferred units (16,000,000 units issued and outstanding as of September 30, 2018 and December 31, 2017, respectively) | 387.5 | 387.5 | |||||
Partners’ capital (common units 107,748,095 and 100,100,650 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively) | 741.0 | 701.8 | |||||
Accumulated other comprehensive loss | (83.8 | ) | (72.7 | ) | |||
Non-controlling interests in consolidated entities | 378.3 | 404.7 | |||||
Non-controlling interests in Carlyle Holdings | 1,656.2 | 1,527.7 | |||||
Total partners’ capital | 3,079.2 | 2,949.0 | |||||
Total liabilities and partners’ capital | $ | 13,433.7 | $ | 12,280.6 | |||
See accompanying notes.
5
The Carlyle Group L.P.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in millions, except unit and per unit data)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(As Adjusted) | (As Adjusted) | ||||||||||||||
Revenues | |||||||||||||||
Fund management fees | $ | 328.8 | $ | 262.5 | $ | 894.6 | $ | 747.6 | |||||||
Incentive fees | 6.8 | 10.4 | 20.5 | 27.1 | |||||||||||
Investment income (loss) | |||||||||||||||
Performance allocations | |||||||||||||||
Realized | 266.6 | 401.4 | 584.6 | 825.6 | |||||||||||
Unrealized | (52.4 | ) | (126.2 | ) | 362.8 | 658.1 | |||||||||
Principal investment income (loss) | |||||||||||||||
Realized | 30.7 | 15.5 | 94.5 | 42.0 | |||||||||||
Unrealized | 13.7 | 21.7 | 82.2 | 100.5 | |||||||||||
Total investment income | 258.6 | 312.4 | 1,124.1 | 1,626.2 | |||||||||||
Interest and other income | 24.4 | 9.9 | 74.9 | 25.9 | |||||||||||
Interest and other income of Consolidated Funds | 60.5 | 44.7 | 161.4 | 132.6 | |||||||||||
Revenue of a real estate VIE | — | — | — | 109.0 | |||||||||||
Total revenues | 679.1 | 639.9 | 2,275.5 | 2,668.4 | |||||||||||
Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | 186.6 | 174.1 | 549.9 | 471.1 | |||||||||||
Equity-based compensation | 49.7 | 81.0 | 199.5 | 241.8 | |||||||||||
Performance allocations and incentive fee related compensation | |||||||||||||||
Realized | 134.5 | 189.4 | 294.6 | 401.9 | |||||||||||
Unrealized | 11.5 | (51.8 | ) | 231.4 | 309.9 | ||||||||||
Total compensation and benefits | 382.3 | 392.7 | 1,275.4 | 1,424.7 | |||||||||||
General, administrative and other expenses | 166.2 | (18.7 | ) | 388.0 | 170.9 | ||||||||||
Interest | 26.3 | 16.9 | 62.6 | 48.4 | |||||||||||
Interest and other expenses of Consolidated Funds | 40.5 | 37.2 | 121.7 | 160.9 | |||||||||||
Interest and other expenses of a real estate VIE and loss on deconsolidation | — | 64.5 | — | 202.5 | |||||||||||
Other non-operating expenses | 0.3 | — | 0.9 | 0.1 | |||||||||||
Total expenses | 615.6 | 492.6 | 1,848.6 | 2,007.5 | |||||||||||
Other income | |||||||||||||||
Net investment gains (losses) of Consolidated Funds | (2.9 | ) | 18.6 | 12.0 | 76.4 | ||||||||||
Income before provision for income taxes | 60.6 | 165.9 | 438.9 | 737.3 | |||||||||||
Provision (benefit) for income taxes | 17.4 | (1.3 | ) | 36.8 | 17.7 | ||||||||||
Net income | 43.2 | 167.2 | 402.1 | 719.6 | |||||||||||
Net income attributable to non-controlling interests in consolidated entities | 14.5 | 27.6 | 42.2 | 47.4 | |||||||||||
Net income attributable to Carlyle Holdings | 28.7 | 139.6 | 359.9 | 672.2 | |||||||||||
Net income attributable to non-controlling interests in Carlyle Holdings | 11.2 | 95.0 | 233.3 | 487.0 | |||||||||||
Net income attributable to The Carlyle Group L.P. | 17.5 | 44.6 | 126.6 | 185.2 | |||||||||||
Net income attributable to Series A Preferred Unitholders | 5.9 | — | 17.7 | — | |||||||||||
Net income attributable to The Carlyle Group L.P. Common Unitholders | $ | 11.6 | $ | 44.6 | $ | 108.9 | $ | 185.2 | |||||||
Net income attributable to The Carlyle Group L.P. per common unit (see Note 11) | |||||||||||||||
Basic | $ | 0.11 | $ | 0.47 | $ | 1.06 | $ | 2.06 | |||||||
Diluted | $ | 0.10 | $ | 0.43 | $ | 0.96 | $ | 1.90 | |||||||
Weighted-average common units | |||||||||||||||
Basic | 105,560,193 | 95,198,102 | 102,936,949 | 89,815,112 | |||||||||||
Diluted | 346,930,017 | 334,392,424 | 112,851,327 | 97,538,190 | |||||||||||
Distributions declared per common unit | $ | 0.22 | $ | 0.42 | $ | 0.82 | $ | 0.68 | |||||||
Substantially all revenue is earned from affiliates of the Partnership. See accompanying notes.
6
The Carlyle Group L.P.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in millions)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income | $ | 43.2 | $ | 167.2 | $ | 402.1 | $ | 719.6 | |||||||
Other comprehensive income | |||||||||||||||
Foreign currency translation adjustments | (9.0 | ) | 38.4 | (34.7 | ) | 87.8 | |||||||||
Defined benefit plans | |||||||||||||||
Unrealized loss for the period | (0.1 | ) | (0.3 | ) | (0.4 | ) | (1.3 | ) | |||||||
Less: reclassification adjustment for gain during the period, included in cash-based compensation and benefits expense | 0.2 | 0.3 | 0.7 | 0.9 | |||||||||||
Other comprehensive income (loss) | (8.9 | ) | 38.4 | (34.4 | ) | 87.4 | |||||||||
Comprehensive income | 34.3 | 205.6 | 367.7 | 807.0 | |||||||||||
Comprehensive income attributable to non-controlling interests in consolidated entities | (8.2 | ) | (38.6 | ) | (28.7 | ) | (68.5 | ) | |||||||
Comprehensive income attributable to Carlyle Holdings | 26.1 | 167.0 | 339.0 | 738.5 | |||||||||||
Comprehensive income attributable to non-controlling interests in Carlyle Holdings | (9.5 | ) | (114.3 | ) | (218.8 | ) | (534.5 | ) | |||||||
Comprehensive income attributable to The Carlyle Group L.P. | $ | 16.6 | $ | 52.7 | $ | 120.2 | $ | 204.0 | |||||||
See accompanying notes.
7
The Carlyle Group L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 402.1 | $ | 719.6 | |||
Adjustments to reconcile net income to net cash flows from operating activities: | |||||||
Depreciation and amortization | 34.3 | 30.9 | |||||
Equity-based compensation | 199.5 | 241.8 | |||||
Non-cash net performance allocations and incentive fees | (225.9 | ) | (561.5 | ) | |||
Other non-cash amounts | 3.7 | (4.2 | ) | ||||
Consolidated Funds related: | |||||||
Realized/unrealized (gain) loss on investments of Consolidated Funds | 52.1 | (27.1 | ) | ||||
Realized/unrealized gain from loans payable of Consolidated Funds | (64.1 | ) | (49.3 | ) | |||
Purchases of investments by Consolidated Funds | (2,914.4 | ) | (2,129.7 | ) | |||
Proceeds from sale and settlements of investments by Consolidated Funds | 2,159.8 | 2,135.6 | |||||
Non-cash interest income, net | (3.0 | ) | (4.3 | ) | |||
Change in cash and cash equivalents held at Consolidated Funds | 408.9 | 566.1 | |||||
Change in other receivables held at Consolidated Funds | (90.5 | ) | (30.9 | ) | |||
Change in other liabilities held at Consolidated Funds | (231.1 | ) | (208.5 | ) | |||
Principal investment income | (175.2 | ) | (138.9 | ) | |||
Purchases of investments | (371.8 | ) | (412.4 | ) | |||
Proceeds from the sale of investments | 571.9 | 297.7 | |||||
Payments of contingent consideration | (37.5 | ) | (22.5 | ) | |||
Deconsolidation of Claren Road | — | (23.3 | ) | ||||
Deconsolidation of Urbplan | — | 14.0 | |||||
Changes in deferred taxes, net | 1.4 | (8.7 | ) | ||||
Change in due from affiliates and other receivables | (1.8 | ) | (78.2 | ) | |||
Change in receivables and inventory of a real estate VIE | — | (14.5 | ) | ||||
Change in deposits and other | (17.9 | ) | (7.1 | ) | |||
Change in other assets of a real estate VIE | — | 1.6 | |||||
Change in accounts payable, accrued expenses and other liabilities | 115.3 | 1.9 | |||||
Change in accrued compensation and benefits | 132.8 | 42.2 | |||||
Change in due to affiliates | (39.3 | ) | 15.0 | ||||
Change in other liabilities of a real estate VIE | — | 47.9 | |||||
Change in deferred revenue | 185.7 | 178.6 | |||||
Net cash provided by operating activities | 95.0 | 571.8 | |||||
Cash flows from investing activities | |||||||
Purchases of fixed assets, net | (20.1 | ) | (26.0 | ) | |||
Net cash used in investing activities | (20.1 | ) | (26.0 | ) | |||
Cash flows from financing activities | |||||||
Proceeds from issuance of preferred units, net of offering costs and expenses | — | 387.6 | |||||
Borrowings under credit facility | — | 250.0 | |||||
Repayments under credit facility | — | (250.0 | ) | ||||
Issuance of 5.650% senior notes due 2048, net of financing costs | 346.6 | — | |||||
Repurchase of 3.875% senior notes due 2023 | (254.8 | ) | — | ||||
Payments on debt obligations | (149.8 | ) | (15.0 | ) | |||
Proceeds from debt obligations | 40.8 | 202.6 | |||||
Net payments on loans payable of a real estate VIE | — | (14.3 | ) | ||||
Net borrowings (payments) on loans payable of Consolidated Funds | 662.3 | (312.7 | ) | ||||
Payments of contingent consideration | — | (0.4 | ) | ||||
Distributions to common unitholders | (84.3 | ) | (63.0 | ) | |||
Distributions to preferred unitholders | (17.7 | ) | — | ||||
Distributions to non-controlling interest holders in Carlyle Holdings | (191.7 | ) | (163.1 | ) | |||
Contributions from non-controlling interest holders | 17.6 | 87.7 | |||||
Distributions to non-controlling interest holders | (72.7 | ) | (74.0 | ) | |||
Common units repurchased | (87.5 | ) | (0.2 | ) | |||
Change in due to/from affiliates financing activities | (58.5 | ) | 38.5 | ||||
Net cash provided by financing activities | 150.3 | 73.7 | |||||
Effect of foreign exchange rate changes | (14.4 | ) | 61.8 | ||||
Increase in cash, cash equivalents and restricted cash | 210.8 | 681.3 | |||||
Cash, cash equivalents and restricted cash, beginning of period | 1,028.8 | 684.0 | |||||
Cash, cash equivalents and restricted cash, end of period | $ | 1,239.6 | $ | 1,365.3 | |||
Supplemental non-cash disclosures | |||||||
Net increase in partners’ capital and accumulated other comprehensive income related to reallocation of ownership interest in Carlyle Holdings | $ | 19.9 | $ | 23.8 | |||
Tax effect from acquisition of Carlyle Holdings partnership units: | |||||||
Deferred tax asset | $ | 10.8 | $ | 24.3 | |||
Tax receivable agreement liability | $ | 9.0 | $ | 21.1 | |||
Total partners’ capital | $ | 1.8 | $ | 3.2 | |||
Reconciliation of cash, cash equivalents and restricted cash, end of period: | |||||||
Cash and cash equivalents | $ | 1,238.2 | $ | 1,355.7 | |||
Restricted cash | 1.4 | 9.6 | |||||
Total cash, cash equivalents and restricted cash, end of period | $ | 1,239.6 | $ | 1,365.3 | |||
Cash and cash equivalents held at Consolidated Funds | $ | 241.8 | $ | 195.4 | |||
See accompanying notes.
8
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, 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. The Carlyle Group L.P. is a Delaware limited partnership formed on July 18, 2011, which 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. Except as otherwise indicated by the context, references to the “Partnership” or “Carlyle” refer to The Carlyle Group L.P., together with its consolidated subsidiaries.
Carlyle provides investment management services to, and has transactions with, various private equity funds, real estate funds, private credit funds, collateralized loan obligations (“CLOs”), and other investment products sponsored by the Partnership for the investment of client assets in the normal course of business. Carlyle typically 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, Real Assets, Global Credit, and Investment Solutions (see Note 13).
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Partnership and its consolidated subsidiaries. In addition, certain Carlyle-affiliated funds, related co-investment entities, certain CLOs managed by the Partnership (collectively the “Consolidated Funds”), and a real estate development company (until its deconsolidation in the third quarter of 2017) have been consolidated in the accompanying condensed consolidated financial statements pursuant to accounting principles generally accepted in the United States (“U.S. GAAP”), as described in Note 2. The consolidation of the Consolidated Funds generally has a gross-up effect on assets, liabilities and cash flows, and generally has no effect on the net income attributable to the Partnership. The economic ownership interests of the other investors in the Consolidated Funds are reflected as non-controlling interests in consolidated entities in the accompanying condensed consolidated financial statements (see Note 2).
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP 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 consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (“SEC”). 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. Certain amounts within the financial statements of each individual prior period presented have been adjusted to reflect the Partnership's change in accounting principle for performance-based capital allocations (see Note 2). Accordingly, the applicable prior period column headings are labeled “As Adjusted.”
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Partnership consolidates all entities that it controls either through a majority voting interest or as the primary beneficiary of variable interest entities (“VIEs”).
The Partnership evaluates (1) whether it holds a variable interest in an entity, (2) whether the entity is a VIE, and (3) whether the Partnership's involvement would make it the primary beneficiary. In evaluating whether the Partnership holds a variable interest, fees (including management fees, incentive fees and performance allocations) that are customary and commensurate with the level of services provided, and where the Partnership does not hold other economic interests in the entity that would absorb more than an insignificant amount of the expected losses or returns of the entity, are not considered variable interests. The Partnership considers all economic interests, including indirect interests, to determine if a fee is considered a variable interest.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
For those entities where the Partnership holds a variable interest, the Partnership determines whether each of these entities qualifies as a VIE and, if so, whether or not the Partnership is the primary beneficiary. The assessment of whether the entity is a VIE is generally performed qualitatively, which requires judgment. These judgments include: (a) determining whether the equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) evaluating whether the equity holders, as a group, can make decisions that have a significant effect on the economic performance of the entity, (c) determining whether two or more parties' equity interests should be aggregated, and (d) determining whether the equity investors have proportionate voting rights to their obligations to absorb losses or rights to receive returns from an entity.
For entities that are determined to be VIEs, the Partnership consolidates those entities where it has concluded it is the primary beneficiary. The primary beneficiary is defined as the variable interest holder with (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance 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. 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.
As of September 30, 2018, assets and liabilities of the consolidated VIEs reflected in the unaudited condensed consolidated balance sheets were $5.5 billion and $5.3 billion, respectively. Except to the extent of the consolidated assets of the VIEs, the holders of the consolidated VIEs’ liabilities generally do not have recourse to the Partnership.
Substantially all of our Consolidated Funds are CLOs, which are VIEs that issue loans payable that 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. In cases where the Partnership consolidates the CLOs (primarily because of a retained interest that is significant to the CLO), those management fees have been eliminated as intercompany transactions. As of September 30, 2018, the Partnership held $240.3 million of investments in these consolidated 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.
Entities that do not qualify as VIEs are generally assessed for consolidation as voting interest entities. Under the voting interest entity model, the Partnership consolidates those entities it controls through a majority voting interest.
All significant inter-entity transactions and balances of entities consolidated have been eliminated.
Investments in Unconsolidated Variable Interest Entities
The Partnership holds variable interests in certain VIEs that are not consolidated because the Partnership is not the primary beneficiary, including its investments in certain CLOs and strategic investment in NGP Management Company, L.L.C. (“NGP Management” and, together with its affiliates, “NGP”). Refer to Note 4 for information on the strategic investment in NGP. 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 its variable interests in these unconsolidated entities. The Partnership’s maximum exposure to loss relates to the Partnership's investments in the unconsolidated VIEs and was $1,199.2 million as of September 30, 2018 and $1,066.3 million as of December 31, 2017.
Additionally, as of September 30, 2018, the Partnership had $81.5 million and $11.3 million recognized in the condensed consolidated balance sheet related to accrued performance allocations and management fee receivables, respectively, related to the unconsolidated VIEs.
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
10
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
consolidate their majority-owned and controlled investments (the “Portfolio Companies”). In the preparation of these unaudited condensed consolidated financial statements, the Partnership has retained the specialized accounting for the Funds.
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 and other income of the Consolidated Funds as well as interest expense and other expenses of the Consolidated Funds are included in the Partnership’s unaudited condensed consolidated statements of operations.
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 allocations and incentive fees involve a higher degree of judgment and complexity and these assumptions and estimates may be significant to the consolidated financial statements and the resulting impact on performance allocations and incentive fees. Actual results could differ from these estimates and such differences could be material.
Revenue Recognition
On January 1, 2018, the Partnership adopted ASU 2014-9, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-9”) under the modified retrospective method. ASU 2014-9, and related amendments, provide comprehensive guidance for recognizing revenue from contracts with customers. Revenue is recognized when the entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The guidance includes a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocated the transaction price to the performance obligations in the contract, and (v) recognize revenue when the entity satisfies a performance obligation.
Upon adoption of ASU 2014-9, performance allocations that represent a performance-based capital allocation from fund limited partners to the Partnership (commonly known as “carried interest”, which comprises substantially all of the Partnership's previously reported performance fee revenues) are accounted for as earnings from financial assets within the scope of ASC 323, Investments - Equity Method and Joint Ventures, and therefore are not in the scope of ASU 2014-9. In accordance with ASC 323, the Partnership records equity method income (losses) as a component of investment income based on the change in our proportionate claim on net assets of the investment fund, including performance allocations, assuming the investment fund was liquidated as of each reporting date pursuant to each fund's governing agreements. The Partnership applied this change in accounting principle on a full retrospective basis, which resulted in a reclassification of amounts previously reported as accrued performance fees to investments in the accompanying consolidated balance sheets and amounts previously reported as performance fees to performance allocations within investment income (loss) in the accompanying consolidated statements of operations. See Note 4 for additional information on the components of investments and investment income following this change in accounting principle. Amounts previously reported as performance fees that do not meet the definition of performance-based capital allocations are in the scope of ASU 2014-9 and are included in incentive fees in the consolidated statements of operations.
11
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table shows the impact of this reclassification to our previously reported amounts in the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2017:
Three Months Ended September 30, 2017 | |||||||||||
As Previously Reported | Reclassifications | As Adjusted | |||||||||
(Dollars in millions) | |||||||||||
Performance fees1 | |||||||||||
Realized | $ | 411.8 | $ | (401.4 | ) | $ | 10.4 | ||||
Unrealized | (126.2 | ) | 126.2 | — | |||||||
Total performance fees1 | $ | 285.6 | $ | (275.2 | ) | $ | 10.4 | ||||
Investment income (loss)2 | |||||||||||
Realized | $ | 15.5 | $ | 401.4 | $ | 416.9 | |||||
Unrealized | 21.7 | (126.2 | ) | (104.5 | ) | ||||||
Total investment income2 | $ | 37.2 | $ | 275.2 | $ | 312.4 | |||||
Nine Months Ended September 30, 2017 | |||||||||||
As Previously Reported | Reclassifications | As Adjusted | |||||||||
(Dollars in millions) | |||||||||||
Performance fees1 | |||||||||||
Realized | $ | 852.7 | $ | (825.6 | ) | $ | 27.1 | ||||
Unrealized | 658.1 | (658.1 | ) | — | |||||||
Total performance fees1 | $ | 1,510.8 | $ | (1,483.7 | ) | $ | 27.1 | ||||
Investment income (loss)2 | |||||||||||
Realized | $ | 42.0 | $ | 825.6 | $ | 867.6 | |||||
Unrealized | 100.5 | 658.1 | 758.6 | ||||||||
Total investment income2 | $ | 142.5 | $ | 1,483.7 | $ | 1,626.2 | |||||
(1) | As adjusted, amounts now labeled as incentive fees in the unaudited condensed consolidated statements of operations. |
(2) | As adjusted, amounts now labeled as performance allocations and principal investment income within investment income (loss) in the unaudited condensed consolidated statements of operations. |
The adoption of ASU 2014-9 did not materially change our historical pattern of recognizing revenue for management fees, incentive fees, and performance allocations (for arrangements within the scope of ASC 323). The Partnership has applied the guidance in ASU 2014-9 only to contracts that are not completed as of January 1, 2018. The Partnership recorded an adjustment of $0.8 million for the cumulative effect of adoption in partners' capital on January 1, 2018, which reduced total partners' capital. Additionally, while the determination of who is the customer in a contractual arrangement will be made on a contract-by-contract basis, the customer will generally be the investment fund for our significant management and advisory contracts. The customer determination impacts the Partnership's analysis of the accounting for contract costs. Also, the recovery of certain costs incurred on behalf of Carlyle funds, primarily travel and entertainment costs, that were previously presented net in our unaudited condensed consolidated statements of operations are presented gross beginning on January 1, 2018 as the Partnership controls the inputs to its investment management performance obligation. For the three and nine months ended September 30, 2018, these costs were approximately $6.7 million and $21.0 million, respectively, and are presented in interest and other income and general, administrative and other expenses in our unaudited condensed consolidated statements of operations.
12
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Fund Management Fees
The Partnership provides management services to funds in which it holds a general partner interest or has a management agreement. The Partnership considers the performance obligations in its contracts with its funds to be the promise to provide (or to arrange for third parties to provide) investment management services related to the management, policies and operations of the funds.
As it relates to the Partnership’s performance obligation to provide investment management services, the Partnership typically satisfies this performance obligation over time as the services are rendered (under the output method described in ASC 606), since the funds simultaneously receive and consume the benefits provided as the Partnership performs the service. The transaction price is the amount of consideration to which the Partnership expects to be entitled in exchange for transferring the promised services to the funds. Management fees earned from each investment management contract over the contract life represent variable consideration because the consideration the Partnership is entitled to varies based on fluctuations in the basis for the management fee, for example fund net asset value ("NAV") or AUM. Given that the management fee basis is susceptible to market factors outside of the Partnership’s influence, management fees are constrained. Accordingly, estimates of future period management fees are generally not included in the transaction price because these estimates are constrained. The transaction price for the investment management services provided is generally the amount determined at the end of the period because that is when the uncertainty for that period is resolved.
For closed-end carry funds in the Corporate Private Equity, Real Assets and Global Credit segments, management fees generally range from 1.0% to 2.0% of commitments during the fund's investment period based on limited partners' capital commitments to the funds. Following the expiration or termination of the investment period, management fees generally are based on the lower of cost or fair value of invested capital and the rate charged may also be reduced to between 0.6% and 2.0%. For certain separately managed accounts and longer-dated carry funds, with expected terms greater than ten years, management fees generally range from 0.2% to 1.0% based on contributions for unrealized investments or the current value of the investment. The Partnership will receive management fees 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 generally called semi-annually in advance and are recognized as earned over the subsequent six month period. For certain longer-dated carry funds, management fees are called quarterly over the life of the funds.
Within the Global Credit segment, for CLOs and other structured products, management fees generally range from 0.3% to 0.6% based on the total par amounts of assets or the aggregate principal amount of the notes in the CLO and are due quarterly or semi-annually based on the terms and recognized over the respective period. Management fees for the CLOs and other structured products 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. Management fees for the business development companies are due quarterly in arrears at annual rates that range from 1.25% of invested capital to 1.5% of gross assets, excluding cash and cash equivalents.
Management fees for the Partnership's private equity and real estate carry fund vehicles in the Investment Solutions segment generally range from 0.25% to 1.0% of the vehicle’s capital commitments during the commitment fee period of the relevant fund or the weighted-average investment period of the underlying funds. Following the expiration of the commitment fee period or weighted-average investment period of such funds, the management fees generally range from 0.25% to 1.0% on (i) the lower of cost or fair value of the capital invested, (ii) the net asset value for unrealized investments, or (iii) the contributions for unrealized investments; however, certain separately managed accounts earn management fees at all times on contributions for unrealized investments or on the initial commitment amount. Management fees for the Investment Solutions carry fund vehicles are generally due quarterly and recognized over the related quarter.
As of September 30, 2018 and December 31, 2017, management fee receivables were $56.3 million and $47.7 million, respectively, and are included in due from affiliates and other receivables, net, in our unaudited condensed consolidated balance sheets.
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 performance obligation has been satisfied and collection is reasonably assured. Fund management fees includes transaction and portfolio advisory fees of $7.7
13
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
million and $10.2 million for the three months ended September 30, 2018 and 2017, respectively, and $21.3 million and $28.0 million for the nine months ended September 30, 2018 and 2017, respectively, net of any offsets as defined in the respective partnership agreements. Fund management fees generally exclude the reimbursement of any partnership expenses paid by the Partnership on behalf of the Carlyle funds pursuant to the limited partnership agreements, including amounts related to the pursuit of actual, proposed, or unconsummated investments, professional fees, expenses associated with the acquisition, holding and disposition of investments, and other fund administrative expenses. For the professional fees that the Partnership arranges for the investment funds, the Partnership concluded that the nature of its promise is to arrange for the services to be provided and it does not control the services provided by third parties before they are transferred to the customer. Therefore, the Partnership concluded it is acting in the capacity of an agent. Accordingly, the reimbursement for these professional fees paid on behalf of the investment funds is presented on a net basis in general, administrative and other expenses in our unaudited condensed consolidated statements of operations.
The Partnership also incurs certain costs, primarily employee travel and entertainment costs, employee compensation and systems costs, for which it receives reimbursement from the investment funds in connection with its performance obligation to provide investment and management services. For reimbursable travel, compensation and systems costs, the Partnership concluded it controls the services provided by its employees and the resources used to develop applicable systems before they are transferred to the customer and therefore is a principal. Accordingly, the reimbursement for these costs incurred by the Partnership to manage the fund limited partnerships are presented on a gross basis in interest and other income in our unaudited condensed consolidated statements of operations and the expense in general, administrative and other expenses or cash-based compensation and benefits expenses in our unaudited condensed consolidated statements of operations.
Incentive Fees
In connection with management contracts from certain of its Global Credit funds, the Partnership is also entitled to receive performance-based incentive fees when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, incentive fees are recognized when the performance benchmark has been achieved. Incentive fees are variable consideration because they are contingent upon the investment vehicle achieving stipulated investment return hurdles. Investment returns are highly susceptible to market factors outside of the Partnership’s influence. Accordingly, incentive fees are constrained until all uncertainty is resolved. Estimates of future period incentive fees are generally not included in the transaction price because these estimates are constrained. The transaction price for incentive fees is generally the amount determined at the end of each accounting period to which they relate because that is when the uncertainty for that period is resolved, as these fees are not subject to clawback.
Investment Income (Loss), including Performance Allocations
Investment income (loss) represents the unrealized and realized gains and losses resulting from the Partnership's equity method investments, including any associated general partner performance allocations, and other principal investments, including CLOs.
General partner performance allocations consist of the allocation of profits from certain of the funds to which the Partnership is entitled (commonly known as carried interest).
For closed-end carry funds in the Corporate Private Equity, Real Assets and Global Credit segments, the Partnership is generally entitled to a 20% allocation (or 10% to 20% on certain longer-dated carry funds, certain credit funds, and external co-investment vehicles, or approximately 2% to 10% for most of the Investment Solutions segment carry fund vehicles) of the net realized income or gain as a carried interest after returning the invested capital, the allocation of preferred returns of generally 7% to 9% (or 4% to 7% for certain longer-dated carry funds) and return of certain fund costs (generally subject to catch-up provisions as set forth in the fund limited partnership agreement). 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 allocations 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 investment income for performance allocations reflects the Partnership’s share of the gains and losses of the associated funds’ underlying investments measured at their then-current fair values relative to the fair values as of the end of the prior period. 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.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Carried interest is ultimately realized when: (i) an underlying investment is profitably disposed of, (ii) certain costs borne by the limited partner investors have been reimbursed, (iii) the fund’s cumulative returns are in excess of the preferred return and (iv) the Partnership has decided to collect carry rather than return additional capital to limited partner investors. Realized carried interest 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 allocations are reversed. In all cases, each fund is considered separately in this regard, and for a given fund, performance allocations 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.
Principal investment income (loss) includes the related amortization of the basis difference between the Partnership’s carrying value of its investment and the Partnership’s share of underlying net assets of the investee, as well as the compensation expense associated with compensatory arrangements provided by the Partnership to employees of its equity method investee, as it relates to its investments in NGP (see Note 4). Principal investment income (loss) is realized when the Partnership redeems all or a portion of its investment or when the Partnership receives or is due cash income, such as dividends or distributions. Unrealized principal 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.
Interest Income
Interest income is recognized when earned. For debt securities representing non-investment grade beneficial interests in securitizations, the effective yield is determined based on the estimated cash flows of the security. Changes in the effective yield of these securities due to changes in estimated cash flows are recognized on a prospective basis as adjustments to interest income in future periods. Interest income earned by the Partnership is included in interest and other income in the accompanying unaudited condensed consolidated statements of operations. Interest income of the Consolidated Funds was $57.9 million and $41.8 million for the three months ended September 30, 2018 and 2017, respectively, $155.9 million and $124.1 million for the nine months ended September 30, 2018 and 2017, respectively, and is included in interest and other income of Consolidated Funds in the accompanying unaudited condensed consolidated statements of operations.
Compensation and Benefits
Cash-based Compensation and Benefits – Cash-based compensation and benefits 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 and non-employees is measured at fair value on the grant date. In June 2018, the Partnership adopted ASU 2018-7, which aligned the accounting for non-employee equity-based awards with the accounting for employee equity-based awards, retroactive to January 1, 2018. The compensation expense for awards that vest over a future service period is recognized over the relevant service period on a straight-line basis. 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. The compensation expense for awards that contain performance conditions is recognized when it is probable that the performance conditions will be achieved; in certain instances, such compensation expense may be recognized prior to the grant date of the award.
Equity-based awards issued to non-employees are generally recognized as general, administrative and other expenses, except to the extent they are recognized as part of our equity method earnings because they are issued to employees of our equity method investees.
The Partnership recognizes equity-based award forfeitures in the period they occur as a reversal of previously recognized compensation expense. The reduction in compensation expense is determined based on the specific awards forfeited during that period. Furthermore, the Partnership recognizes all excess tax benefits and deficiencies as income tax benefit or expense in the unaudited condensed consolidated statement of operations.
Performance Allocations and Incentive Fee Related Compensation – A portion of the performance allocations and incentive 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 allocations and incentive fee revenue and, until paid, are
15
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
recognized as a component of the accrued compensation and benefits liability. Accordingly, upon a reversal of performance allocations or incentive fee revenue, the related compensation expense, if any, is also reversed. As of September 30, 2018 and December 31, 2017, the Partnership had recorded a liability of $2.1 billion and $1.9 billion, respectively, related to the portion of accrued performance allocations and incentive fees due to employees and advisors, respectively, which was included in accrued compensation and benefits in the accompanying unaudited condensed consolidated balance sheets.
Income Taxes
Certain of the wholly-owned subsidiaries of the Partnership and the Carlyle Holdings partnerships are subject to federal, state, local and foreign 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 unaudited condensed consolidated financial statements. Based on applicable federal, foreign, state and local tax laws, the Partnership records a provision for income taxes for certain entities. Tax positions taken by the Partnership are subject to periodic audit by U.S. federal, state, local and foreign taxing authorities.
The Partnership accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement reporting and the tax basis of assets and liabilities using enacted tax rates in effect for the period in which the difference is expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change in the provision for income taxes. Further, deferred tax assets are recognized for the expected realization of available net operating loss and tax credit carry forwards. A valuation allowance is recorded on the Partnership’s gross deferred tax assets when it is “more likely than not” that such asset 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 unaudited 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
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
allowance and will assess the probability that the related liability owed under the tax receivable agreement will be paid. 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 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 to the deferred tax asset of changes in any of the Partnership’s estimates after the tax year 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
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 which occur during the reporting period. Any change in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between the controlling and non-controlling interests. Transaction costs incurred in connection with such changes in ownership of a subsidiary are recorded as a direct charge to partners’ capital.
Non-controlling interests in Carlyle Holdings relate to the ownership interests of the other limited partners of the Carlyle Holdings partnerships. The Partnership, through wholly-owned subsidiaries, is the sole general partner of Carlyle Holdings. Accordingly, the Partnership consolidates Carlyle Holdings into its consolidated financial statements, and the other ownership interests in Carlyle Holdings are reflected as non-controlling interests in the Partnership’s unaudited condensed consolidated financial statements. Any change to the Partnership’s ownership interest in Carlyle Holdings while it retains the controlling financial interest in Carlyle Holdings is accounted for as a transaction within partners’ capital as a reallocation of ownership interests in Carlyle Holdings.
Earnings Per Common Unit
The Partnership computes earnings per common unit in accordance with ASC 260, Earnings Per Share (“ASC 260”). Basic earnings per common unit is calculated by dividing net income (loss) attributable to the common units of 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. Net income (loss) attributable to the common units excludes net income (loss) and dividends attributable to any participating securities under the two-class method of ASC 260.
Investments
Investments include (i) the Partnership’s ownership interests (typically general partner interests) in the Funds, including any associated general partner accrued performance allocations in the Funds, (ii) strategic investments made by the Partnership (both of which are accounted for as equity method investments), (iii) the investments held by the Consolidated Funds (which are presented at fair value in the Partnership’s unaudited condensed consolidated financial statements), and (iv) investments in the CLOs and certain credit-oriented investments (which are accounted for as trading securities).
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.
The fair value of non-equity securities or other investments, 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.
17
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Upon the sale of a security or other investment, the realized net gain or loss is computed on a weighted average cost basis, with the exception of the investments held by 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.
Principal Equity Method Investments
The Partnership accounts for all investments in which it has or is otherwise presumed to have significant influence, including investments in the unconsolidated Funds and strategic investments, 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 investee (including performance allocations) allocated based on the respective 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 investments with original maturities of less than three months when purchased.
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
Restricted cash primarily represents cash held by the Partnership’s foreign subsidiaries due to certain government regulatory capital requirements as well as certain amounts held on behalf of Carlyle funds.
Corporate Treasury Investments
Corporate treasury investments represent investments in U.S. Treasury and government agency obligations, commercial paper, certificates of deposit, other investment grade securities and other investments with original maturities of greater than three months when purchased. These investments are accounted for as trading securities in which changes in the fair value of each investment are recorded through investment income (loss). Any interest earned on debt investments is recorded through interest and other income.
Derivative Instruments
The Partnership uses derivative instruments primarily to reduce its exposure to changes in foreign currency exchange rates. Derivative instruments are recognized at fair value in the unaudited condensed consolidated balance sheets with changes in fair value recognized in the unaudited condensed consolidated statements of operations for all derivatives not designated as hedging instruments.
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 five 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. Intangible asset amortization expense was $2.6 million during both the three months ended September 30, 2018 and 2017, and $7.9 million and $7.6 million during the
18
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
nine months ended September 30, 2018 and 2017, respectively, and is included in general, administrative, and other expenses in the unaudited condensed consolidated statements of operations.
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.
Deferred Revenue
Deferred revenue represents management fees and other revenue received prior to the balance sheet date, which has not yet been earned. The increase in the deferred revenue balance for the nine months ended September 30, 2018 was primarily driven by cash payments received in advance of satisfying our performance obligations, partially offset by revenues recognized that were included in the deferred revenue balance at the beginning of the period.
Accumulated Other Comprehensive Loss
The Partnership’s accumulated other comprehensive loss is comprised of foreign currency translation adjustments and gains and losses on defined benefit plans sponsored by AlpInvest. The components of accumulated other comprehensive loss as of September 30, 2018 and December 31, 2017 were as follows:
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(Dollars in millions) | |||||||
Currency translation adjustments | $ | (79.8 | ) | $ | (68.8 | ) | |
Unrealized losses on defined benefit plans | (4.0 | ) | (3.9 | ) | |||
Total | $ | (83.8 | ) | $ | (72.7 | ) | |
Foreign Currency Translation
Non-U.S. dollar denominated assets and liabilities are translated at period-end rates of exchange, and the unaudited condensed consolidated statements of operations are translated at rates of exchange in effect throughout the period. Foreign currency gains resulting from transactions outside of the functional currency of an entity of $3.2 million and $0.7 million for the three months ended September 30, 2018 and 2017, respectively, and $1.6 million and $2.2 million for the nine months ended September 30, 2018 and 2017, respectively, are included in general, administrative and other expenses in the unaudited condensed consolidated statements of operations.
Recent Accounting Pronouncements
In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments will become effective on November 5, 2018. Among the amendments is the requirement to present the changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. In light of the timing of effectiveness of the amendments and proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC Staff have indicated that they would not object if a filer’s first presentation of the changes in shareholders’ equity is included in Form 10-Q for the quarter that begins after the effective date of the amendments. The Partnership will include disclosure of the changes in partners’ capital in its quarterly reports on Form 10-Q beginning in 2019. The Partnership is currently assessing the impacts of other areas amended by the disclosure update and simplification.
Recently Issued Accounting Standards Adopted as of January 1, 2018
In June 2018, the FASB issued ASU 2018-7, Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-7 aligns the measurement and classification for share-based payments to non-employees with the accounting guidance for share-based payments to employees. Among other requirements, the measurement of non-employee awards will now be fixed at the grant date, rather than remeasured at every reporting date. The guidance is effective for the Partnership on January 1,
19
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
2019, however early adoption is permitted. The Partnership adopted this standard retroactive to January 1, 2018 and the impact of this guidance was not material to the unaudited condensed consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash. ASU 2016-18 clarifies the presentation of restricted cash in the statement of cash flows by requiring the amounts described as restricted cash be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. If cash and cash equivalents and restricted cash are presented separately on the statement of financial position, a reconciliation of these separate line items to the total cash amount included in the statement of cash flows will be required either in the footnotes or on the face of the statement of cash flows. The guidance was effective for the Partnership on January 1, 2018, and ASU 2016-18 required the guidance to be applied using a retrospective transition method. The Partnership reflected this change in presentation of restricted cash in the unaudited condensed consolidated statement of cash flows included in these financial statements.
Recently Issued Accounting Standards Effective on January 1, 2019
In February 2018, the FASB issued ASU 2018-2, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-2 allows a reclassification from accumulated other comprehensive income to partners’ capital for stranded effects resulting from the Tax Cuts and Jobs Act. The guidance is effective for the Partnership on January 1, 2019, however early adoption is permitted. The Partnership does not expect the impact of this guidance to be material.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12, among other things, permits hedge accounting for risk components in hedging relationships to now involve nonfinancial risk components and requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedge item is reported. The guidance is effective for the Partnership on January 1, 2019 and requires cash flow hedges and net investment hedges existing at the date of adoption to apply a cumulative effect adjustment to eliminate the measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of partners’ capital as of the beginning of the fiscal year that an entity adopts the guidance. The amended presentation and disclosure guidance is required only prospectively. Early adoption is permitted. While the Partnership is still assessing the guidance in ASU 2017-12, it does not expect the impact of this guidance to be material.
In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842). ASU 2016-2 requires lessees to recognize virtually all of their leases on the balance sheet by recording a right-of-use asset and a lease liability. The lease liability will be measured at the present value of lease payments and the right-of-use asset will be based on the lease liability value, subject to adjustments. Leases can be classified as either operating leases or finance leases. Operating leases will result in straight-line lease expense, while finance leases will result in front-loaded expense. This guidance is effective for the Partnership on January 1, 2019 and ASU 2016-2 requires the guidance to be applied using a modified retrospective method. The Partnership is continuing to assess the impact of this guidance, and the Partnership's total assets and total liabilities on its consolidated balance sheet will increase upon adoption of this guidance. The Partnership does not expect the adoption of this guidance to have a material impact on operating results. The Partnership expects to elect to use the practical expedients available under the transition provisions under which we would not need to reassess whether an arrangement is or contains a lease, lease classification, and the accounting for initial direct costs. The Partnership also expects to elect the recent transition option provided by the FASB, which allows entities to not apply ASC 842 in the comparative periods presented in the financial statements in the year of adoption.
Recently Issued Accounting Standards Effective on January 1, 2020
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. This guidance is effective for the Partnership on January 1, 2020 and early adoption is permitted. The Partnership is currently assessing the potential impact of this guidance to the fair value disclosures.
In January 2017, the FASB issued ASU 2017-4, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies an entity’s annual goodwill test for impairment by eliminating the requirement to calculate the implied fair value of goodwill, and instead an entity should compare the fair value of a reporting unit with its carrying amount. The impairment charge will then be the amount by which the carrying amount exceeds the reporting unit’s
20
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
fair value. An entity would still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for the Partnership on January 1, 2020 and requires the guidance to be applied using a prospective transition method. Early adoption is permitted. The Partnership does not expect the impact of this guidance to be material.
In June 2016, the FASB issued ASU 2016-13, Accounting for Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Currently, GAAP requires an "incurred loss" methodology that delays recognition until it is probable a loss has been incurred. Under the new standard, the allowance for credit losses must be deducted from the amortized cost of the financial asset to present the net amount expected to be collected. The income statement will reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This provision of the guidance requires a modified retrospective transition method and will result in a cumulative-effect adjustment in retained earnings upon adoption. This guidance is effective for the Partnership on January 1, 2020 and early adoption is permitted. The Partnership is currently assessing the potential impact of this guidance.
3. Fair Value Measurement
The fair value measurement accounting guidance establishes a hierarchical 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 types of financial instruments in this category include unrestricted securities, such as 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 types of financial instruments in this category include 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.
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. The types of financial instruments 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 fair value is based on unobservable inputs.
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.
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.
21
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 September 30, 2018:
(Dollars in millions) | Level I | Level II | Level III | Total | |||||||||||
Assets | |||||||||||||||
Investments of Consolidated Funds: | |||||||||||||||
Equity securities | $ | — | $ | — | $ | 6.5 | $ | 6.5 | |||||||
Bonds | — | — | 620.9 | 620.9 | |||||||||||
Loans | — | — | 4,468.0 | 4,468.0 | |||||||||||
— | — | 5,095.4 | 5,095.4 | ||||||||||||
Investments in CLOs and other | — | — | 451.8 | 451.8 | |||||||||||
Corporate treasury investments | |||||||||||||||
Bonds | — | 82.5 | — | 82.5 | |||||||||||
Commercial paper and other | — | 141.5 | — | 141.5 | |||||||||||
— | 224.0 | — | 224.0 | ||||||||||||
Foreign currency forward contracts | — | 1.6 | — | 1.6 | |||||||||||
Total | $ | — | $ | 225.6 | $ | 5,547.2 | $ | 5,772.8 | |||||||
Liabilities | |||||||||||||||
Loans payable of Consolidated Funds(1) | $ | — | $ | — | $ | 4,774.6 | $ | 4,774.6 | |||||||
Contingent consideration | — | — | 1.0 | 1.0 | |||||||||||
Foreign currency forward contracts | — | 2.0 | — | 2.0 | |||||||||||
Total | $ | — | $ | 2.0 | $ | 4,775.6 | $ | 4,777.6 | |||||||
(1) | Senior and subordinated notes issued by CLO vehicles are classified based on the more observable fair value of the CLO financial assets, less (i) the fair value of any beneficial interests held by the Partnership and (ii) the carrying value of any beneficial interests that represent compensation for services. |
22
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, 2017:
(Dollars in millions) | Level I | Level II | Level III | Total | |||||||||||
Assets | |||||||||||||||
Investments of Consolidated Funds: | |||||||||||||||
Equity securities | $ | — | $ | — | $ | 7.9 | $ | 7.9 | |||||||
Bonds | — | — | 413.4 | 413.4 | |||||||||||
Loans | — | — | 4,112.7 | 4,112.7 | |||||||||||
Other | — | — | 0.3 | 0.3 | |||||||||||
— | — | 4,534.3 | 4,534.3 | ||||||||||||
Investments in CLOs and other | — | — | 405.4 | 405.4 | |||||||||||
Corporate treasury investments | |||||||||||||||
Bonds | — | 194.1 | — | 194.1 | |||||||||||
Commercial paper and other | — | 182.2 | — | 182.2 | |||||||||||
— | 376.3 | — | 376.3 | ||||||||||||
Foreign currency forward contracts | — | 0.4 | — | 0.4 | |||||||||||
Total | $ | — | $ | 376.7 | $ | 4,939.7 | $ | 5,316.4 | |||||||
Liabilities | |||||||||||||||
Loans payable of Consolidated Funds(1) | $ | — | $ | — | $ | 4,303.8 | $ | 4,303.8 | |||||||
Contingent consideration | — | — | 1.0 | 1.0 | |||||||||||
Foreign currency forward contracts | — | 1.2 | — | 1.2 | |||||||||||
Total | $ | — | $ | 1.2 | $ | 4,304.8 | $ | 4,306.0 | |||||||
(1) | Senior and subordinated notes issued by CLO vehicles are classified based on the more observable fair value of the CLO financial assets, less (i) the fair value of any beneficial interests held by the Partnership and (ii) the carrying value of any beneficial interests that represent compensation for services. |
There were no transfers from Level II to Level I during the nine months ended September 30, 2018 and 2017.
Investment professionals with responsibility for the underlying investments are responsible for preparing the investment valuations pursuant to the policies, methodologies and templates prepared by the Partnership’s valuation group, which is a team made up of dedicated valuation professionals reporting to the Partnership’s chief accounting officer. The valuation group is responsible for maintaining the Partnership’s valuation policy and related guidance, templates and systems that are designed to be consistent with the guidance found in ASC 820, Fair Value Measurement. These valuations, inputs and preliminary conclusions are reviewed by the fund accounting teams. The valuations are then reviewed and approved by the respective fund valuation subcommittees, which include the respective fund head(s), segment head, chief financial officer and chief accounting officer, as well as members of the valuation group. The valuation group compiles the aggregate results and significant matters and presents them for review and approval by the global valuation committee, which includes the Partnership’s co-executive chairmen of the board, chairman emeritus, co-chief executive officers, chief risk officer, chief financial officer, chief accounting officer, co-chief investment officer and the business segment heads, and observed by the chief compliance officer, the director of internal audit, the Partnership’s audit committee and others. Additionally, each quarter a sample of valuations is reviewed by external valuation firms.
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 involve 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 and real estate properties, and certain debt positions. The valuation technique for each of these investments is described below:
23
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Private Equity and Real Estate Investments – The fair values of 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 or sales of comparable assets, and other measures which, in many cases, are unaudited at the time received. The methods used to estimate the fair value of real estate investments include the discounted cash flow method and/or capitalization rate (“cap rate”) analysis. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (e.g., applying a key performance metric of the investment such as EBITDA or net operating income to a relevant valuation multiple or cap rate 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. Adjustments to observable valuation measures are frequently made upon the initial investment to calibrate the initial investment valuation to industry observable inputs. Such adjustments are made to align the investment to observable industry inputs for differences in size, profitability, projected growth rates, geography and capital structure if applicable. The adjustments are reviewed with each subsequent valuation to assess how the investment has evolved relative to the observable inputs. Additionally, the investment may be subject to certain specific risks and/or development milestones which are also taken into account in the valuation assessment. Option pricing models and similar tools do not currently drive a significant portion of private equity or real estate valuations and are used primarily to value warrants, derivatives, certain restrictions and other atypical investment instruments.
Credit-Oriented Investments – The fair values of credit-oriented investments (including corporate treasury investments) are generally determined on the basis of prices 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. 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 measures the financial liabilities of its consolidated CLOs based on the fair value of the financial assets of its consolidated CLOs, as the Partnership believes the fair value of the financial assets are more observable. 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 loan and bond assets of the CLOs are not publicly traded and are classified as Level III. The fair values of 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.
The Partnership measures the CLO loans payable held by third party beneficial interest holders on the basis of the fair value of the financial assets of the CLO and the beneficial interests held by the Partnership. The Partnership continues to measure the CLO loans payable that it holds at fair value based on both discounted cash flow analyses and third-party quotes, as described above.
Loans Payable of a Real Estate VIE – Prior to its deconsolidation in 2017, the Partnership elected the fair value option to measure the loans payable of a real estate VIE at fair value. The fair values of the loans were primarily based on discounted cash flows analyses, which considered the liquidity and current financial condition of the real estate VIE. These loans were classified as Level III.
Fund Investments – The Partnership’s investments in external 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 typically has 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.
24
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 September 30, 2018 | |||||||||||||||||||||||
Investments of Consolidated Funds | |||||||||||||||||||||||
Equity securities | Bonds | Loans | Other | Investments in CLOs and other | Total | ||||||||||||||||||
Balance, beginning of period | $ | 11.1 | $ | 640.1 | $ | 4,597.1 | $ | — | $ | 446.7 | $ | 5,695.0 | |||||||||||
Purchases | — | 149.8 | 627.6 | — | 31.7 | 809.1 | |||||||||||||||||
Sales and distributions | (7.0 | ) | (170.3 | ) | (474.1 | ) | — | (27.6 | ) | (679.0 | ) | ||||||||||||
Settlements | — | — | (247.2 | ) | — | — | (247.2 | ) | |||||||||||||||
Realized and unrealized gains (losses), net | |||||||||||||||||||||||
Included in earnings | 2.4 | 4.6 | (16.2 | ) | — | 2.9 | (6.3 | ) | |||||||||||||||
Included in other comprehensive income | — | (3.3 | ) | (19.2 | ) | — | (1.9 | ) | (24.4 | ) | |||||||||||||
Balance, end of period | $ | 6.5 | $ | 620.9 | $ | 4,468.0 | $ | — | $ | 451.8 | $ | 5,547.2 | |||||||||||
Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date | $ | 0.9 | $ | 2.6 | $ | (18.6 | ) | $ | — | $ | 2.9 | $ | (12.2 | ) | |||||||||
Financial Assets | |||||||||||||||||||||||
Nine Months Ended September 30, 2018 | |||||||||||||||||||||||
Investments of Consolidated Funds | |||||||||||||||||||||||
Equity securities | Bonds | Loans | Other | Investments in CLOs and other | Total | ||||||||||||||||||
Balance, beginning of period | $ | 7.9 | $ | 413.4 | $ | 4,112.7 | $ | 0.3 | $ | 405.4 | $ | 4,939.7 | |||||||||||
Purchases | — | 536.8 | 2,377.6 | — | 76.7 | 2,991.1 | |||||||||||||||||
Sales and distributions | (7.0 | ) | (297.7 | ) | (1,171.7 | ) | (0.4 | ) | (34.1 | ) | (1,510.9 | ) | |||||||||||
Settlements | — | — | (683.0 | ) | — | — | (683.0 | ) | |||||||||||||||
Realized and unrealized gains (losses), net | |||||||||||||||||||||||
Included in earnings | 5.8 | (13.2 | ) | (40.4 | ) | 0.1 | 8.7 | (39.0 | ) | ||||||||||||||
Included in other comprehensive income | (0.2 | ) | (18.4 | ) | (127.2 | ) | — | (4.9 | ) | (150.7 | ) | ||||||||||||
Balance, end of period | $ | 6.5 | $ | 620.9 | $ | 4,468.0 | $ | — | $ | 451.8 | $ | 5,547.2 | |||||||||||
Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date | $ | 4.3 | $ | (11.8 | ) | $ | (27.2 | ) | $ | — | $ | 8.7 | $ | (26.0 | ) | ||||||||
25
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Financial Assets | |||||||||||||||||||||||
Three Months Ended September 30, 2017 | |||||||||||||||||||||||
Investments of Consolidated Funds | |||||||||||||||||||||||
Equity securities | Bonds | Loans | Other | Investments in CLOs and other | Total | ||||||||||||||||||
Balance, beginning of period | $ | 9.7 | $ | 395.9 | $ | 3,500.1 | $ | 2.0 | $ | 222.9 | $ | 4,130.6 | |||||||||||
Purchases | 0.1 | 15.5 | 599.3 | — | 114.0 | 728.9 | |||||||||||||||||
Sales and distributions | — | (71.2 | ) | (98.3 | ) | (3.1 | ) | (20.5 | ) | (193.1 | ) | ||||||||||||
Settlements | — | — | (216.3 | ) | — | — | (216.3 | ) | |||||||||||||||
Realized and unrealized gains (losses), net | |||||||||||||||||||||||
Included in earnings | 16.8 | (7.4 | ) | (9.6 | ) | 1.3 | 0.4 | 1.5 | |||||||||||||||
Included in other comprehensive income | 0.2 | 14.2 | 86.5 | 0.1 | 5.9 | 106.9 | |||||||||||||||||
Balance, end of period | $ | 26.8 | $ | 347.0 | $ | 3,861.7 | $ | 0.3 | $ | 322.7 | $ | 4,558.5 | |||||||||||
Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date | $ | 16.8 | $ | (5.6 | ) | $ | 0.8 | $ | 0.1 | $ | 1.3 | $ | 13.4 | ||||||||||
Financial Assets | |||||||||||||||||||||||
Nine Months Ended September 30, 2017 | |||||||||||||||||||||||
Investments of Consolidated Funds | |||||||||||||||||||||||
Equity securities | Bonds | Loans | Other | Investments in CLOs and other | Total | ||||||||||||||||||
Balance, beginning of period | $ | 10.3 | $ | 396.4 | $ | 3,485.6 | $ | 1.4 | $ | 152.6 | $ | 4,046.3 | |||||||||||
Purchases | 0.1 | 132.3 | 1,997.4 | — | 174.8 | 2,304.6 | |||||||||||||||||
Sales and distributions | (1.6 | ) | (227.5 | ) | (1,101.8 | ) | (3.0 | ) | (23.6 | ) | (1,357.5 | ) | |||||||||||
Settlements | — | — | (801.7 | ) | — | — | (801.7 | ) | |||||||||||||||
Realized and unrealized gains (losses), net | |||||||||||||||||||||||
Included in earnings | 17.1 | (1.7 | ) | 16.3 | 1.7 | 6.5 | 39.9 | ||||||||||||||||
Included in other comprehensive income | 0.9 | 47.5 | 265.9 | 0.2 | 12.4 | 326.9 | |||||||||||||||||
Balance, end of period | $ | 26.8 | $ | 347.0 | $ | 3,861.7 | $ | 0.3 | $ | 322.7 | $ | 4,558.5 | |||||||||||
Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date | $ | 22.1 | $ | 0.8 | $ | 22.5 | $ | 0.1 | $ | 7.4 | $ | 52.9 | |||||||||||
26
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Financial Liabilities | |||||||||||
Three Months Ended September 30, 2018 | |||||||||||
Loans Payable of Consolidated Funds | Contingent Consideration | Total | |||||||||
Balance, beginning of period | $ | 4,835.1 | $ | 1.0 | $ | 4,836.1 | |||||
Borrowings | 671.2 | — | 671.2 | ||||||||
Paydowns | (703.4 | ) | — | (703.4 | ) | ||||||
Realized and unrealized (gains) losses, net | |||||||||||
Included in earnings | (7.7 | ) | — | (7.7 | ) | ||||||
Included in other comprehensive income | (20.6 | ) | — | (20.6 | ) | ||||||
Balance, end of period | $ | 4,774.6 | $ | 1.0 | $ | 4,775.6 | |||||
Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date | $ | (6.8 | ) | $ | — | $ | (6.8 | ) | |||
Financial Liabilities | |||||||||||
Nine Months Ended September 30, 2018 | |||||||||||
Loans Payable of Consolidated Funds | Contingent Consideration | Total | |||||||||
Balance, beginning of period | $ | 4,303.8 | $ | 1.0 | $ | 4,304.8 | |||||
Borrowings | 2,686.7 | — | 2,686.7 | ||||||||
Paydowns | (2,024.4 | ) | — | (2,024.4 | ) | ||||||
Realized and unrealized (gains) losses, net | |||||||||||
Included in earnings | (64.1 | ) | — | (64.1 | ) | ||||||
Included in other comprehensive income | (127.4 | ) | — | (127.4 | ) | ||||||
Balance, end of period | $ | 4,774.6 | $ | 1.0 | $ | 4,775.6 | |||||
Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date | $ | (67.4 | ) | $ | — | $ | (67.4 | ) | |||
27
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Financial Liabilities | |||||||||||||||
Three Months Ended September 30, 2017 | |||||||||||||||
Loans Payable of Consolidated Funds | Contingent Consideration | Loans Payable of a real estate VIE | Total | ||||||||||||
Balance, beginning of period | $ | 3,721.2 | $ | 1.3 | $ | 72.6 | $ | 3,795.1 | |||||||
Paydowns | (2.3 | ) | — | — | (2.3 | ) | |||||||||
Deconsolidation of a real estate VIE | — | — | (72.6 | ) | (72.6 | ) | |||||||||
Realized and unrealized (gains) losses, net | |||||||||||||||
Included in earnings | (21.1 | ) | — | — | (21.1 | ) | |||||||||
Included in other comprehensive income | 97.0 | — | — | 97.0 | |||||||||||
Balance, end of period | $ | 3,794.8 | $ | 1.3 | $ | — | $ | 3,796.1 | |||||||
Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date | $ | (24.1 | ) | $ | — | $ | — | $ | (24.1 | ) | |||||
Financial Liabilities | |||||||||||||||
Nine Months Ended September 30, 2017 | |||||||||||||||
Loans Payable of Consolidated Funds | Contingent Consideration | Loans Payable of a real estate VIE | Total | ||||||||||||
Balance, beginning of period | $ | 3,866.3 | $ | 1.5 | $ | 79.4 | $ | 3,947.2 | |||||||
Borrowings | 1,569.0 | — | — | 1,569.0 | |||||||||||
Paydowns | (1,881.7 | ) | (0.4 | ) | (14.3 | ) | (1,896.4 | ) | |||||||
Deconsolidation of a real estate VIE | — | — | (72.6 | ) | (72.6 | ) | |||||||||
Realized and unrealized (gains) losses, net | |||||||||||||||
Included in earnings | (49.4 | ) | 0.1 | 3.3 | (46.0 | ) | |||||||||
Included in other comprehensive income | 290.6 | 0.1 | 4.2 | 294.9 | |||||||||||
Balance, end of period | $ | 3,794.8 | $ | 1.3 | $ | — | $ | 3,796.1 | |||||||
Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date | $ | (53.6 | ) | $ | 0.1 | $ | — | $ | (53.5 | ) | |||||
Realized and unrealized gains and losses included in earnings for Level III investments for investments in CLOs and other investments are included in investment income (loss), and such gains and losses for investments of Consolidated Funds and loans payable of Consolidated Funds are included in net investment gains (losses) of Consolidated Funds in the condensed consolidated statements of operations.
Realized and unrealized gains and losses included in earnings for Level III contingent consideration liabilities are included in other non-operating expense (income), and such gains and losses for loans payable of a real estate VIE (for periods prior to September 30, 2017) are included in interest and other expenses of a real estate VIE and loss on deconsolidation in the unaudited condensed consolidated statement of operations.
Gains and losses included in other comprehensive income for all Level III financial asset and liabilities are included in accumulated other comprehensive loss, non-controlling interests in consolidated entities and non-controlling interests in Carlyle Holdings in the unaudited condensed consolidated balance sheets.
28
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 September 30, 2018:
Fair Value at | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | ||||||
(Dollars in millions) | September 30, 2018 | ||||||||
Assets | |||||||||
Investments of Consolidated Funds: | |||||||||
Equity securities | $ | 6.5 | Consensus Pricing | Indicative Quotes ($ per share) | 0 - 97 (87) | ||||
Bonds | 620.9 | Consensus Pricing | Indicative Quotes (% of Par) | 60 - 107 (96) | |||||
Loans | 4,468.0 | Consensus Pricing | Indicative Quotes (% of Par) | 74 - 103 (99) | |||||
5,095.4 | |||||||||
Investments in CLOs and other: | |||||||||
Senior secured notes | 397.2 | Discounted Cash Flow with Consensus Pricing | Discount Margins (% of Par) | 85 - 870 (162) | |||||
Default Rates | 1% - 3% (2%) | ||||||||
Recovery Rates | 45% - 73% (57%) | ||||||||
Indicative Quotes (% of Par) | 91 - 102 (100) | ||||||||
Subordinated notes and preferred shares | 54.6 | Discounted Cash Flow with Consensus Pricing | Discount Rates | 9% - 12% (11%) | |||||
Default Rates | 1% - 3% (2%) | ||||||||
Recovery Rates | 45% - 73% (57%) | ||||||||
Indicative Quotes (% of Par) | 52 - 108 (79) | ||||||||
Total | $ | 5,547.2 | |||||||
Liabilities | |||||||||
Loans payable of Consolidated Funds: | |||||||||
Senior secured notes | $ | 4,556.8 | Other | N/A | N/A | ||||
Subordinated notes and preferred shares | 5.4 | Other | N/A | N/A | |||||
212.4 | Discounted Cash Flow with Consensus Pricing | Discount Rates | 9% - 12% (10%) | ||||||
Default Rates | 1% - 3% (2%) | ||||||||
Recovery Rates | 45% - 73% (60%) | ||||||||
Indicative Quotes (% of Par) | 74 - 97 (87) | ||||||||
Contingent consideration | 1.0 | Other | N/A | N/A | |||||
Total | $ | 4,775.6 | |||||||
29
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 December 31, 2017:
Fair Value at | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | ||||||
(Dollars in millions) | December 31, 2017 | ||||||||
Assets | |||||||||
Investments of Consolidated Funds: | |||||||||
Equity securities | $ | 5.7 | Discounted Cash Flow | Discount Rates | 10% - 10% (10%) | ||||
2.2 | Consensus Pricing | Indicative Quotes ($ per share) | 0 - 33 (30) | ||||||
Bonds | 413.4 | Consensus Pricing | Indicative Quotes (% of Par) | 44 - 107 (98) | |||||
Loans | 4,112.7 | Consensus Pricing | Indicative Quotes (% of Par) | 64 - 103 (100) | |||||
Other | 0.3 | Counterparty Pricing | Indicative Quotes (% of Notional Amount) | 9 - 9 (9) | |||||
4,534.3 | |||||||||
Investments in CLOs and other | |||||||||
Senior secured notes | 357.2 | Discounted Cash Flow with Consensus Pricing | Discount Rate | 1% - 9% (3%) | |||||
Default Rates | 1% - 3% (2%) | ||||||||
Recovery Rates | 50% - 70% (60%) | ||||||||
Indicative Quotes (% of Par) | 98 - 104 (101) | ||||||||
Subordinated notes and preferred shares | 48.2 | Discounted Cash Flow with Consensus Pricing | Discount Rate | 8% - 11% (9%) | |||||
Default Rates | 1% - 3% (2%) | ||||||||
Recovery Rates | 50% - 70% (60%) | ||||||||
Indicative Quotes (% of Par) | 63 - 97 (81) | ||||||||
Total | $ | 4,939.7 | |||||||
Liabilities | |||||||||
Loans payable of Consolidated Funds: | |||||||||
Senior secured notes | $ | 4,100.5 | Other | N/A | N/A | ||||
Subordinated notes and preferred shares | 26.9 | Other | N/A | N/A | |||||
176.4 | Discounted Cash Flow with Consensus Pricing | Discount Rates | 8% - 11% (10%) | ||||||
Default Rates | 1% - 3% (2%) | ||||||||
Recovery Rates | 50% - 70% (60%) | ||||||||
Indicative Quotes (% of Par) | 79 - 93 (86) | ||||||||
Contingent consideration | 1.0 | Other | N/A | N/A | |||||
Total | $ | 4,304.8 | |||||||
The significant unobservable inputs used in the fair value measurement of the Partnership’s investments in equity securities include indicative quotes and discount rates. Significant decreases in indicative quotes in isolation would result in a significantly lower fair value measurement. Significant increases in discount rates 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 investments in bonds and loans are indicative quotes. 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 investments in CLOs and other investments include discount margins, discount rates, default rates, recovery rates and indicative quotes. Significant decreases in recovery rates or indicative quotes in isolation would result in a significantly lower fair value measurement. Significant increases in discount margins, discount rates or default rates in isolation would result in a significantly lower fair value measurement.
30
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 loans payable of Consolidated Funds are discount rates, default rates, recovery rates and indicative quotes. Significant increases in discount rates or default rates in isolation would result in a significantly lower fair value measurement. Significant decreases in recovery rates or indicative quotes in isolation would result in a significantly lower fair value measurement.
4. Investments
Investments consist of the following:
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(Dollars in millions) | |||||||
Accrued performance allocations | $ | 3,952.7 | $ | 3,664.3 | |||
Principal equity method investments, excluding performance allocations | 1,402.1 | 1,218.4 | |||||
Principal investments in CLOs and other | 453.5 | 405.9 | |||||
Total investments | $ | 5,808.3 | $ | 5,288.6 | |||
Accrued Performance Allocations
The components of accrued performance allocations are as follows:
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(Dollars in millions) | |||||||
Corporate Private Equity | $ | 2,289.9 | $ | 2,272.4 | |||
Real Assets | 768.1 | 656.7 | |||||
Global Credit | 58.7 | 50.6 | |||||
Investment Solutions | 836.0 | 684.6 | |||||
Total | $ | 3,952.7 | $ | 3,664.3 | |||
Approximately 23% and 19% of accrued performance allocations at September 30, 2018 and December 31, 2017, respectively, are related to Carlyle Partners VI, L.P., one of the Partnership's Corporate Private Equity funds.
Accrued performance allocations are shown gross of the Partnership’s accrued performance allocations and incentive fee-related compensation (see Note 6), and accrued giveback obligations, which are separately presented in the unaudited condensed consolidated balance sheets. The components of the accrued giveback obligations are as follows:
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(Dollars in millions) | |||||||
Corporate Private Equity | $ | (5.0 | ) | $ | (8.7 | ) | |
Real Assets | (58.2 | ) | (58.1 | ) | |||
Total | $ | (63.2 | ) | $ | (66.8 | ) | |
31
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Principal Equity Method Investments, Excluding Performance Allocations
The Partnership’s principal equity method investments (excluding performance allocations) include its fund investments in Corporate Private Equity, Real Assets, Global Credit, and Investment Solutions, typically as general partner interests, and its strategic investments in NGP (included within Real Assets), which are not consolidated. Principal investments are related to the following segments:
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(Dollars in millions) | |||||||
Corporate Private Equity | $ | 435.3 | $ | 369.5 | |||
Real Assets | 828.5 | 775.1 | |||||
Global Credit | 72.6 | 23.0 | |||||
Investment Solutions | 65.7 | 50.8 | |||||
Total | $ | 1,402.1 | $ | 1,218.4 | |||
Strategic Investment in Fortitude Re (f/k/a DSA Re)
On July 31, 2018, a subsidiary of the Partnership entered into a membership interest purchase agreement (the “Membership Interest Purchase Agreement”) with American International Group, Inc. (“AIG”) and Fortitude Group Holdings, LLC, a wholly owned subsidiary of AIG (“Fortitude Holdings”), pursuant to which the Partnership agreed to acquire a 19.9% interest in Fortitude Holdings (the “Transaction”). Fortitude Holdings will own 100% of the outstanding common shares of Fortitude Reinsurance Company Ltd., a Bermuda domiciled reinsurer ("Fortitude Re", f/k/a “DSA Re”) established to reinsure a portfolio of AIG’s legacy life, annuity and property and casualty liabilities. Fortitude Re has approximately $36 billion in reserves as of March 31, 2018. The transaction is expected to close in Q4 2018.
Pursuant to the Membership Interest Purchase Agreement, the Partnership will enter into a strategic asset management relationship with Fortitude Re pursuant to which Fortitude Re, together with certain AIG-affiliated ceding companies it has reinsured, will commit to allocate assets in asset management strategies and vehicles of the Partnership and its affiliates. If Fortitude Re, together with AIG and its affiliates, fails to allocate an agreed upon amount of assets to the Partnership's asset management strategies and vehicles within 30 to 36 months of the closing of the transaction, the Partnership may be entitled to certain payments from AIG based on the commitment shortfall and assumed customary fee rates.
The Partnership will pay $381 million in cash at closing (the “Initial Purchase Price”) and will pay up to $95 million in additional deferred consideration following December 31, 2023. If Fortitude Holdings is unable to distribute a planned non-pro rata dividend to AIG within 18 months following closing, then the Initial Purchase Price may be adjusted upward by up to $100 million to account for the increased value of Fortitude Holdings’ equity. AIG has also agreed to a post-closing purchase price adjustment pursuant to which AIG will pay affiliates of the Partnership in respect of certain adverse reserve development in Fortitude Re’s property and casualty insurance business, based on an agreed methodology, that occur on or prior to December 31, 2023, up to the value of the Partnership’s investment.
In connection with the Transaction, the Partnership also will enter into an operating agreement (an “Operating Agreement”) that will govern its rights and obligations as an equity holder of Fortitude Holdings and entitles the Partnership to customary minority protections contingent upon the Partnership maintaining agreed ownership percentages of Fortitude Holdings.
The Partnership’s investment will be accounted for under the equity method of accounting and the investment will be included in the Global Credit segment. Separately, income from the assets to be managed by the Partnership will be included in the segment of the relevant investment fund.
Strategic Investment in NGP
The Partnership has equity interests in NGP Management Company, L.L.C. (“NGP Management”), the general partners of certain carry funds advised by NGP, and principal investments in certain NGP funds (collectively with NGP Management and its affiliates, “NGP”). These interests entitle the Partnership to an allocation of income equal to 55.0% of the management
32
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
fee-related revenues of NGP Management which serves as the investment advisor to certain NGP funds as well as 47.5% of the performance allocations received by certain current and future NGP fund general partners.
The Partnership accounts for its investments in NGP under the equity method of accounting. The Partnership's investments in NGP as of September 30, 2018 and December 31, 2017 are as follows:
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(Dollars in millions) | |||||||
Investment in NGP Management | $ | 390.0 | $ | 397.7 | |||
Investments in NGP general partners - accrued performance allocations | 205.3 | 143.2 | |||||
Principal investments in NGP funds | 81.7 | 67.9 | |||||
Total investments in NGP | $ | 677.0 | $ | 608.8 | |||
The Partnership records investment income (loss) for its equity income allocation from NGP management fee-related revenues and performance allocations, and also records its share of any allocated expenses from NGP Management, expenses associated with the compensatory elements of the strategic investment, and the amortization of the basis differences related to the definitive-lived identifiable intangible assets of NGP Management. The net investment income (loss) recognized in the Partnership’s condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Management fee-related revenues from NGP Management | $ | 22.7 | $ | 21.3 | $ | 66.3 | $ | 58.9 | |||||||
Performance allocations from interests in general partners of NGP funds | 10.2 | 7.4 | 62.1 | 62.7 | |||||||||||
Principal investment income from NGP funds | 1.4 | 1.6 | 7.6 | 7.8 | |||||||||||
Expenses related to the investment in NGP Management | (3.0 | ) | (10.6 | ) | (9.0 | ) | (46.2 | ) | |||||||
Amortization of basis differences from the investment in NGP Management | (1.7 | ) | (2.1 | ) | (5.3 | ) | (6.4 | ) | |||||||
Net investment income | $ | 29.6 | $ | 17.6 | $ | 121.7 | $ | 76.8 | |||||||
The difference between the Partnership’s remaining carrying value of its investment and its share of the underlying net assets of the investee was $16.0 million and $21.3 million as of September 30, 2018 and December 31, 2017, respectively; these differences are amortized over a period of 10 years ending in 2022.
Principal Investments in CLOs and Other Investments
Principal investments in CLOs and other investments as of September 30, 2018 and December 31, 2017 primarily consisted of $453.5 million and $405.9 million, respectively, of investments in CLO senior and subordinated notes and derivative instruments.
33
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Investment Income (Loss)
The components of investment income (loss) are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Performance allocations | $ | 214.2 | $ | 275.2 | $ | 947.4 | $ | 1,483.7 | |||||||
Principal investment income from equity method investments (excluding performance allocations) | 45.1 | 35.9 | 176.6 | 140.2 | |||||||||||
Principal investment income (loss) from investments in CLOs and other investments | (0.7 | ) | 1.3 | 0.1 | 2.3 | ||||||||||
Total | $ | 258.6 | $ | 312.4 | $ | 1,124.1 | $ | 1,626.2 | |||||||
The performance allocations included in revenues are derived from the following segments:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Corporate Private Equity | $ | 52.2 | $ | 159.6 | $ | 520.8 | $ | 1,147.4 | |||||||
Real Assets | 58.2 | 74.5 | 193.3 | 214.0 | |||||||||||
Global Credit | (0.5 | ) | 6.8 | 14.4 | 23.7 | ||||||||||
Investment Solutions | 104.3 | 34.3 | 218.9 | 98.6 | |||||||||||
Total | $ | 214.2 | $ | 275.2 | $ | 947.4 | $ | 1,483.7 | |||||||
Approximately 35%, or $74.9 million, of performance allocations for the three months ended September 30, 2018 are related to the following funds along with total revenue recognized (total revenue includes performance allocations, fund management fees, and principal investment income):
•Carlyle Asia Partners IV, L.P. (Corporate Private Equity segment) - $(84.8) million,
•Carlyle Partners VI, L.P. (Corporate Private Equity segment) - $68.9 million,
•Carlyle Partners V, L.P. (Corporate Private Equity segment) - $46.6 million,
•AlpInvest Co- & Secondary Investments 2006-2008 (Investment Solutions segment) - $46.4 million, and
•Carlyle Realty Partners VII, L.P. (Real Assets segment) - $42.2 million.
Approximately 43%, or $408.9 million, of performance allocations for the nine months ended September 30, 2018 are related to the following funds along with total revenue recognized (total revenue includes performance allocations, fund management fees, and principal investment income):
•Carlyle Partners VI, L.P. (Corporate Private Equity segment) - $307.1 million,
•Carlyle Europe Partners IV, L.P. (Corporate Private Equity segment) - $164.5 million,
•Carlyle Realty Partners VII, L.P. (Real Assets segment) - $143.7 million,
•Carlyle Partners V, L.P. (Corporate Private Equity segment) - $123.4 million, and
•Carlyle Asia Partners IV, L.P. (Corporate Private Equity segment) - $(103.7) million.
Approximately 40%, or $110.4 million, of performance allocations for the three months ended September 30, 2017 are related to the following funds along with total revenue recognized (total revenue includes performance allocations, fund management fees, and principal investment income):
•Carlyle Partners V, L.P. (Corporate Private Equity segment) - $39.7 million,
•Carlyle Partners VI, L.P. (Corporate Private Equity segment) - $120.5 million,
34
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
•Carlyle U.S. Equity Opportunities Fund, L.P. (Corporate Private Equity segment) - $(31.6) million, and
•Carlyle International Energy Partners, L.P. (Real Assets segment) - $47.6 million.
Approximately 66%, or $979.9 million, of performance allocations for the nine months ended September 30, 2017 are related to the following funds along with total revenue recognized (total revenue includes performance allocations, fund management fees, and principal investment income):
•Carlyle Partners V, L.P. (Corporate Private Equity segment) - $301.0 million,
•Carlyle Partners VI, L.P. (Corporate Private Equity segment) - $615.0 million, and
•Carlyle Asia Partners IV, L.P. (Corporate Private Equity segment) - $271.3 million.
Carlyle’s income (loss) from its principal investments consists of:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Corporate Private Equity | $ | 4.7 | $ | 8.8 | $ | 28.7 | $ | 38.4 | |||||||
Real Assets | 34.5 | 24.1 | 139.7 | 95.7 | |||||||||||
Global Credit | 1.7 | — | (2.0 | ) | 0.6 | ||||||||||
Investment Solutions | 4.2 | 3.0 | 10.2 | 5.5 | |||||||||||
Total | $ | 45.1 | $ | 35.9 | $ | 176.6 | $ | 140.2 | |||||||
Investments of Consolidated Funds
The Partnership consolidates the financial positions and results of operations of certain CLOs in which it is the primary beneficiary. During the nine months ended September 30, 2018, the Partnership formed five new CLOs for which the Partnership is the primary beneficiary of one of those CLOs. As of September 30, 2018, the total assets of this CLO included in the Partnership's consolidated financial statements were approximately $531.0 million.
There were no individual investments with a fair value greater than five percent of the Partnership’s total assets for any period presented.
Interest and Other Income of Consolidated Funds
The components of interest and other income of Consolidated Funds are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Interest income from investments | $ | 57.9 | $ | 41.8 | $ | 155.9 | $ | 124.1 | |||||||
Other income | 2.6 | 2.9 | 5.5 | 8.5 | |||||||||||
Total | $ | 60.5 | $ | 44.7 | $ | 161.4 | $ | 132.6 | |||||||
35
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Net Investment Gains (Losses) of Consolidated Funds
Net investment gains (losses) of Consolidated Funds include net realized gains (losses) from sales of investments and unrealized gains (losses) resulting from changes in fair value of the Consolidated Funds’ investments. The components of net investment gains (losses) of Consolidated Funds are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Gains (losses) from investments of Consolidated Funds | $ | (10.6 | ) | $ | (2.5 | ) | $ | (52.1 | ) | $ | 27.1 | ||||
Gains from liabilities of CLOs | 7.7 | 21.1 | 64.1 | 49.3 | |||||||||||
Total | $ | (2.9 | ) | $ | 18.6 | $ | 12.0 | $ | 76.4 | ||||||
The following table presents realized and unrealized gains (losses) earned from investments of the Consolidated Funds:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Realized losses | $ | (2.5 | ) | $ | (3.3 | ) | $ | (6.8 | ) | $ | (9.1 | ) | |||
Net change in unrealized gains (losses) | (8.1 | ) | 0.8 | (45.3 | ) | 36.2 | |||||||||
Total | $ | (10.6 | ) | $ | (2.5 | ) | $ | (52.1 | ) | $ | 27.1 | ||||
5. Borrowings
The Partnership borrows and enters into credit agreements for its general operating and investment purposes. The Partnership’s debt obligations consist of the following (Dollars in millions):
September 30, 2018 | December 31, 2017 | ||||||||||||||
Borrowing Outstanding | Carrying Value | Borrowing Outstanding | Carrying Value | ||||||||||||
Senior Credit Facility Term Loan Due 5/05/2020 | $ | 25.0 | $ | 24.9 | $ | 25.0 | $ | 24.8 | |||||||
CLO Term Loans (See below) | 311.2 | 311.2 | 294.5 | 294.5 | |||||||||||
3.875% Senior Notes Due 2/01/2023 | 250.0 | 249.0 | 500.0 | 497.6 | |||||||||||
5.625% Senior Notes Due 3/30/2043 | 600.0 | 600.7 | 600.0 | 600.7 | |||||||||||
5.650% Senior Notes Due 9/15/2048 | 350.0 | 345.7 | — | — | |||||||||||
Promissory Note Due 1/01/2022 | — | — | 108.8 | 108.8 | |||||||||||
Promissory Notes Due 7/15/2019 | 26.9 | 26.9 | 47.2 | 47.2 | |||||||||||
Total debt obligations | $ | 1,563.1 | $ | 1,558.4 | $ | 1,575.5 | $ | 1,573.6 | |||||||
Senior Credit Facility
As of September 30, 2018, the senior credit facility included $25.0 million in a term loan and $750.0 million in a revolving credit facility. As of September 30, 2018, the term loan and revolving credit facility were scheduled to mature on May 5, 2020. Principal amounts outstanding under the term loan and revolving credit facility accrue interest, at the option of the borrowers, either (a) at an alternate base rate plus an applicable margin not to exceed 0.75%, or (b) at LIBOR plus an applicable margin not to exceed 1.75% (at September 30, 2018, the interest rate was 3.33%). There was no amount outstanding under the revolving credit facility at September 30, 2018. Interest expense under the senior credit facility was not significant for the three and nine months ended September 30, 2018 and 2017. The fair value of the outstanding balances of the term loan and revolving credit facility at September 30, 2018 and December 31, 2017 approximated par value based on current market rates for similar debt instruments and are classified as Level III within the fair value hierarchy.
36
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
CLO Term Loans
For certain of our CLOs, the Partnership finances a portion of its investment in the CLOs through the proceeds received from term loans with financial institutions. The Partnership's outstanding CLO term loans consist of the following (Dollars in millions):
Formation Date | Borrowing Outstanding September 30, 2018 | Borrowing Outstanding December 31, 2017 | Maturity Date (1) | Interest Rate as of September 30, 2018 | |||||||||||
June 7, 2016 | $ | — | $ | 20.6 | July 15, 2027 | N/A | (2) | ||||||||
February 28, 2017 | 78.0 | 74.3 | September 21, 2029 | 2.33% | (3) | ||||||||||
April 19, 2017 | 22.8 | 22.8 | April 22, 2031 | 4.28% | (4) (15) | ||||||||||
June 28, 2017 | 23.0 | 23.1 | July 22, 2031 | 4.27% | (5) (15) | ||||||||||
July 20, 2017 | 24.4 | 24.4 | April 21, 2027 | 3.88% | (6) (15) | ||||||||||
August 2, 2017 | 22.8 | 22.8 | July 23, 2029 | 4.16% | (7) (15) | ||||||||||
August 2, 2017 | 20.2 | 20.9 | August 3, 2022 | 1.75% | (8) | ||||||||||
August 14, 2017 | 22.5 | 22.6 | August 15, 2030 | 4.17% | (9) (15) | ||||||||||
November 30, 2017 | 22.6 | 22.7 | January 16, 2030 | 4.07% | (10) (15) | ||||||||||
December 6, 2017 | 19.1 | 19.1 | October 16, 2030 | 3.99% | (11) (15) | ||||||||||
December 7, 2017 | 21.2 | 21.2 | January 19, 2029 | 3.70% | (12) (15) | ||||||||||
January 30, 2018 | 19.2 | — | January 22, 2030 | 3.97% | (13) (15) | ||||||||||
March 1, 2018 | 15.4 | — | January 15, 2031 | 3.89% | (14) (15) | ||||||||||
$ | 311.2 | $ | 294.5 | ||||||||||||
(1) Maturity date is earlier of date indicated or the date that the CLO is dissolved.
(2) | Note paid off in third quarter of 2018. |
(3) | Outstanding borrowing of €67.2 million; incurs interest at EURIBOR plus applicable margins as defined in the agreement. |
(4) | Incurs interest at LIBOR plus 1.932%. |
(5) | Incurs interest at LIBOR plus 1.923%. |
(6) | Incurs interest at LIBOR plus 1.536%. |
(7) | Incurs interest at LIBOR plus 1.808%. |
(8) | Original borrowing of €17.4 million; incurs interest at EURIBOR plus 1.75% and has full recourse to the Partnership. |
(9) | Incurs interest at LIBOR plus 1.848%. |
(10) | Incurs interest at LIBOR plus 1.7312%. |
(11) | Incurs interest at LIBOR plus 1.647%. |
(12) | Incurs interest at LIBOR plus 1.365%. |
(13) | Incurs interest at LIBOR plus 1.624%. |
(14) | Incurs interest at LIBOR plus 1.552%. |
(15) | Term loan issued under master credit agreement. |
The CLO term loans are secured by the Partnership's investments in the respective CLO, have a general unsecured interest in the Carlyle entity that manages the CLO, and generally do not have recourse to any other Carlyle entity. Interest expense on these term loans was not significant for the three and nine months ended September 30, 2018 and 2017. The fair value of the outstanding balance of the CLO term loans at September 30, 2018 approximated par value based on current market rates for similar debt instruments. These CLO term loans are classified as Level III within the fair value hierarchy.
European CLO Financing - February 28, 2017
On February 28, 2017, a subsidiary of the Partnership entered into a financing agreement with several financial institutions under which these financial institutions have provided a €67.2 million term loan ($78.0 million at September 30, 2018) to the Partnership. This term loan is secured by the Partnership’s investments in the retained notes in certain European CLOs that were formed in 2014 and 2015. This term loan will mature on the earlier of September 21, 2029 or the date that the
37
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
certain European CLO retained notes have been redeemed. The Partnership may prepay the term loan in whole or in part at any time after the third anniversary of the date of issuance without penalty. Prepayment of the term loan within the first three years will incur a penalty based on the prepayment amount. Interest on this term loan accrues at EURIBOR plus applicable margins (2.33% at September 30, 2018).
Master Credit Agreement - Term Loans
In January 2017, the Partnership entered into a master credit agreement with a financial institution under which the financial institution expects to provide term loans to the Partnership for the purchase of eligible interests in CLOs. This agreement will terminate in January 2020. Any term loan to be issued under this master credit agreement will be secured by the Partnership’s investment in the respective CLO as well as any senior management fee and subordinated management fee payable by each CLO. Any term loan will bear interest at LIBOR plus a weighted average spread over LIBOR on the CLO notes and an applicable margin. Interest will be due quarterly.
3.875% Senior Notes
In January 2013, an indirect finance subsidiary of the Partnership issued $500.0 million in aggregate principal amount of 3.875% senior notes due February 1, 2023 at 99.966% of par. Interest is payable semi-annually on February 1 and August 1, beginning August 1, 2013. This subsidiary may redeem the senior notes in whole at any time or in part from time to time at a price equal to the greater of 100% of the principal amount of the notes being redeemed and the sum of the present values of the remaining scheduled payments of principal and interest on any notes being redeemed discounted to the redemption date on a semi-annual basis at the Treasury rate plus 30 basis points plus accrued and unpaid interest on the principal amounts being redeemed to the redemption date.
In September 2018, the Partnership completed a tender offer to re-purchase $250.0 million in aggregate principal amount of its 3.875% Senior Notes due 2023. As a result of this repurchase, the Partnership recognized $6.9 million of costs in interest expense and $0.9 million of costs in general, administrative and other expenses upon early extinguishment of the debt.
Interest expense on the notes was $4.8 million and $5.0 million for the three months ended September 30, 2018 and 2017, respectively. Further, the interest expense was $14.7 million and $14.9 million for the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018 and December 31, 2017, the fair value of the notes, including accrued interest, was approximately $251.1 million and $520.4 million, respectively, based on indicative quotes. The notes are classified as Level II within the fair value hierarchy.
5.625% Senior Notes
In March 2013, an indirect finance subsidiary of the Partnership issued $400.0 million in aggregate principal amount of 5.625% senior notes due March 30, 2043 at 99.583% of par. Interest is payable semi-annually on March 30 and September 30, beginning September 30, 2013. This subsidiary may redeem the senior notes in whole at any time or in part from time to time at a price equal to the greater of 100% of the principal amount of the notes being redeemed and the sum of the present values of the remaining scheduled payments of principal and interest on any notes being redeemed discounted to the redemption date on a semi-annual basis at the Treasury rate plus 40 basis points plus accrued and unpaid interest on the principal amounts being redeemed to the redemption date.
In March 2014, an indirect finance subsidiary of the Partnership issued $200.0 million of 5.625% Senior Notes due March 30, 2043 at 104.315% of par. These notes were issued as additional 5.625% Senior Notes and are treated as a single class with the already outstanding $400.0 million aggregate principal amount of these senior notes.
Interest expense on the notes was $8.4 million for both the three months ended September 30, 2018 and 2017, and $25.3 million for the nine months ended September 30, 2018 and 2017. At September 30, 2018 and December 31, 2017, the fair value of the notes, including accrued interest, was approximately $594.9 million and $696.3 million, respectively, based on indicative quotes. The notes are classified as Level II within the fair value hierarchy.
5.650% Senior Notes
In September 2018, an indirect finance subsidiary of the Partnership issued $350.0 million in aggregate principal amount of 5.650% senior notes due September 15, 2048 at 99.914% of par. Interest is payable semi-annually on March 15 and
38
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
September 15, beginning March 15, 2019. This subsidiary may redeem the senior notes in whole at any time or in part, from time to time, at a price equal to the accrued and unpaid interest on the principal amounts being redeemed to the redemption date and the greater of 100% of (1) the principal amount of the notes being redeemed and (2) the sum of the present values of the remaining scheduled payments of principal and interest on any notes being redeemed, discounted to the redemption date on a semi-annual basis at the Treasury rate plus 40 basis points.
Interest expense on the notes was $0.9 million for the three and nine months ended September 30, 2018. At September 30, 2018, the fair value of the notes, including accrued interest, was approximately $352.7 million, based on indicative quotes. The notes are classified as Level II within the fair value hierarchy.
Promissory Notes
Promissory Note Due January 1, 2022
On January 1, 2016, the Partnership issued a $120.0 million promissory note to Barclays Natural Resource Investments, a division of Barclays Bank PLC (“BNRI”) as part of the Partnership's strategic investment in NGP. Interest on the promissory note accrues at the three month LIBOR plus 2.50%. In September 2018, the Partnership prepaid the $108.8 million outstanding promissory note, plus $1.2 million of accrued and unpaid interest. The fair value of the outstanding balance of the promissory note at December 31, 2017 approximated par value based on current market rates for similar debt instruments and was classified as Level III within the fair value hierarchy.
Promissory Notes Due July 15, 2019
In June 2017, as part of the settlement with investors in two commodities investment vehicles managed by an affiliate of the Partnership (disclosed in Note 7), the Partnership issued a series of promissory notes, aggregating to $53.9 million, to the investors of these commodities investment vehicles. Interest on these promissory notes accrues at the three month LIBOR plus 2% (4.34% at September 30, 2018). The Partnership may prepay these promissory notes in whole or in part at any time without penalty. Accordingly, as a result of repayments, $26.9 million of these promissory notes are outstanding at September 30, 2018. These promissory notes are scheduled to mature on July 15, 2019. Interest expense on these promissory notes was not significant for the three and nine months ended September 30, 2018 and 2017. The fair value of the outstanding balance of these promissory notes at September 30, 2018 approximated par value based on current market rates for similar debt instruments and is classified as Level III within the fair value hierarchy.
Debt Covenants
The Partnership is subject to various financial covenants under its loan agreements including, among other items, maintenance of a minimum amount of management fee-earning assets. The Partnership is also subject to various non-financial covenants under its loan agreements and the indentures governing its senior notes. The Partnership was in compliance with all financial and non-financial covenants under its various loan agreements as of September 30, 2018.
Loans Payable of Consolidated Funds
Loans payable of Consolidated Funds primarily represent amounts due to holders of debt securities issued by the CLOs. Several of the CLOs issued preferred shares representing the most subordinated interest, however these tranches are mandatorily redeemable upon the maturity dates of the senior secured loans payable, and as a result have been classified as liabilities and are included in loans payable of Consolidated Funds in the condensed consolidated balance sheets.
39
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
As of September 30, 2018 and December 31, 2017, the following borrowings were outstanding, which includes preferred shares classified as liabilities (Dollars in millions):
As of September 30, 2018 | ||||||||||||||
Borrowing Outstanding | Fair Value | Weighted Average Interest Rate | Weighted Average Remaining Maturity in Years | |||||||||||
Senior secured notes | $ | 4,647.6 | $ | 4,556.8 | 2.01 | % | 11.27 | |||||||
Subordinated notes, preferred shares and other | 177.4 | 217.8 | N/A | (a) | 9.58 | |||||||||
Total | $ | 4,825.0 | $ | 4,774.6 | ||||||||||
As of December 31, 2017 | ||||||||||||||
Borrowing Outstanding | Fair Value | Weighted Average Interest Rate | Weighted Average Remaining Maturity in Years | |||||||||||
Senior secured notes | $ | 4,128.3 | $ | 4,100.5 | 2.16 | % | 11.44 | |||||||
Subordinated notes, preferred shares and other | 195.2 | 203.3 | N/A | (a) | 9.85 | |||||||||
Total | $ | 4,323.5 | $ | 4,303.8 | ||||||||||
(a) | The subordinated notes and preferred shares do not have contractual interest rates, but instead receive distributions from the excess cash flows of the CLOs. |
Loans payable of the CLOs are collateralized by the assets held by the CLOs and the assets of one CLO may not be used to satisfy the liabilities of another. This collateral consisted of cash and cash equivalents, corporate loans, corporate bonds and other securities. As of September 30, 2018 and December 31, 2017, the fair value of the CLO assets was $5.3 billion and $4.9 billion, respectively.
6. Accrued Compensation and Benefits
Accrued compensation and benefits consist of the following:
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(Dollars in millions) | |||||||
Accrued performance allocations and incentive fee-related compensation | $ | 2,083.8 | $ | 1,894.8 | |||
Accrued bonuses | 310.2 | 202.6 | |||||
Other | 138.0 | 125.2 | |||||
Total | $ | 2,532.0 | $ | 2,222.6 | |||
40
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
7. Commitments and Contingencies
Capital Commitments
The Partnership and its unconsolidated affiliates have unfunded commitments to entities within the following segments as of September 30, 2018 (Dollars in millions):
Unfunded Commitments | |||
Corporate Private Equity | $ | 2,601.1 | |
Real Assets | 818.2 | ||
Global Credit | 475.3 | ||
Investment Solutions | 148.9 | ||
Total | $ | 4,043.5 | |
Of the $4.0 billion of unfunded commitments, approximately $3.5 billion is subscribed individually by senior Carlyle professionals, advisors and other professionals, with the balance funded directly by the Partnership. In addition to these unfunded commitments, the Partnership may from time to time exercise its right to purchase additional interests in its investment funds that become available in the ordinary course of their operations.
Guaranteed Loans
On August 4, 2001, the Partnership entered into an agreement with a financial institution pursuant to which the Partnership is the guarantor on a credit facility for eligible employees investing in Carlyle sponsored funds. This credit facility renews on an annual basis, allowing for annual incremental borrowings up to an aggregate of $11.3 million, and accrues interest at the lower of the prime rate, as defined, or three-month LIBOR plus 3%, reset quarterly (5.34% weighted-average rate at September 30, 2018). As of September 30, 2018 and December 31, 2017, approximately $10.7 million and $13.3 million, respectively, were outstanding under the credit facility and payable by the employees. The amount funded by the Partnership under this guarantee as of September 30, 2018 was not material. The Partnership believes the likelihood of any material funding under this guarantee to be remote. The fair value of this guarantee is not significant to the consolidated financial statements.
Certain consolidated subsidiaries of the Partnership are the guarantor of revolving credit facilities for certain funds in the Investment Solutions segment. The guarantee is limited to the lesser of the total amount drawn under the credit facilities or the net asset value of the guarantor subsidiaries, which is approximately $16.4 million as of September 30, 2018. The outstanding balances are secured by uncalled capital commitments from the underlying funds and the Partnership believes the likelihood of any material funding under this guarantee to be remote.
Contingent Obligations (Giveback)
A liability for potential repayment of previously received performance allocations of $63.2 million at September 30, 2018, is shown as accrued giveback obligations in the unaudited condensed consolidated balance sheets, representing the giveback obligation that would need to be paid if the funds were liquidated at their current fair values at September 30, 2018. However, the ultimate giveback obligation, if any, generally is not paid until the end of a fund’s life or earlier if the giveback becomes fixed and early payment is agreed upon by the fund's partners (see Note 2). The Partnership has recorded $1.0 million and $5.1 million of unbilled receivables from former and current employees and senior Carlyle professionals as of September 30, 2018 and December 31, 2017, respectively, related to giveback obligations, which are included in due from affiliates and other receivables, net in the accompanying unaudited condensed consolidated balance sheets. The receivables are collateralized by investments made by individual senior Carlyle professionals and employees in Carlyle-sponsored funds. In addition, $168.6 million and $247.6 million have been withheld from distributions of carried interest to senior Carlyle professionals and employees for potential giveback obligations as of September 30, 2018 and December 31, 2017, respectively. Such amounts are held on behalf of the respective current and former Carlyle employees to satisfy any givebacks they may owe and are held by entities not included in the accompanying condensed consolidated balance sheets. Current and former senior Carlyle professionals and employees are personally responsible for their giveback obligations. As of September 30, 2018, approximately $36.0 million of the Partnership's accrued giveback obligation is the responsibility of
41
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
various current and former senior Carlyle professionals and other limited partners of the Carlyle Holdings partnerships, and the net accrued giveback obligation attributable to Carlyle Holdings is $27.2 million.
If, at September 30, 2018, all of the investments held by the Partnership’s Funds were deemed worthless, a possibility that management views as remote, the amount of realized and distributed carried interest subject to potential giveback would be $0.7 billion, on an after-tax basis where applicable.
Leases
The Partnership leases office space in various countries around the world and maintains its headquarters in Washington, D.C., where in June 2018, the Partnership entered into an amended non-cancelable lease agreement expiring on March 31, 2030. In connection with the amended lease for the Washington, D.C. office, the Partnership exercised an option to terminate its office lease in Arlington, Virginia at the end of 2019. The Partnership will be relocating one of its New York City offices in either late 2020 or early 2021 to new office space in Midtown New York. The new lease was signed in July 2018 and expires in 2036. In connection with this new lease, the Partnership incurred a charge of $63.5 million (including transaction costs) during the third quarter of 2018 related to the assignment of an existing office lease in New York City. The charge is expected to be paid over approximately 15 years beginning in 2021. This charge was accounted for as a lease incentive, and is included in our deferred rent payable as of September 30, 2018. Office leases in other locations expire in various years from 2018 through 2032. These leases are accounted for as operating leases. Rent expense was approximately $12.3 million and $15.2 million for the three months ended September 30, 2018 and 2017, respectively, and $40.1 million and $43.4 million for the nine months ended September 30, 2018 and 2017, respectively, and is included in general, administrative and other expenses in the condensed consolidated statements of operations.
The future minimum commitments for the leases are as follows (Dollars in millions):
2018 | $ | 12.8 | |
2019 | 59.4 | ||
2020 | 52.4 | ||
2021 | 37.7 | ||
2022 | 47.8 | ||
Thereafter | 454.9 | ||
$ | 665.0 | ||
The Partnership records contractual escalating minimum lease payments on a straight-line basis over the term of the lease. Deferred rent payable under the leases was $126.7 million and $62.9 million as of September 30, 2018 and December 31, 2017, respectively, and is included in accounts payable, accrued expenses and other liabilities in the accompanying unaudited condensed consolidated balance sheets.
42
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Legal Matters
In the ordinary course of business, the Partnership is a party to litigation, investigations, inquiries, employment-related matters, disputes and other potential claims. Certain of these matters are described below. The Partnership is not currently able to estimate the reasonably possible amount of loss or range of loss, in excess of amounts accrued, for the matters that have not been resolved. The Partnership does not believe it is probable that the outcome of any existing litigation, investigations, disputes or other potential claims will materially affect the Partnership or these financial statements in excess of amounts accrued. The Partnership believes that the claims asserted against the Partnership in the pending litigation matters described below are without merit and intends to vigorously contest such allegations.
Along with many other companies and individuals in the financial sector, the Partnership and Carlyle Mezzanine Partners, L.P. (“CMP”) are named as defendants in Foy v. Austin Capital, a case filed in June 2009 in state court in New Mexico, which purports to be a qui tam suit on behalf of the State of New Mexico under the state Fraud Against Taxpayers Act (“FATA”). The suit alleges that investment decisions by New Mexico public investment funds were improperly influenced by campaign contributions and payments to politically connected placement agents. The plaintiffs seek, among other things, actual damages for lost income, rescission of the investment transactions described in the complaint and disgorgement of all fees received. In September 2017, the Court dismissed the lawsuit and the plaintiffs then filed an appeal seeking to reverse that decision. That appeal is pending. The Attorney General may also separately pursue its own recovery from defendants in the action.
Carlyle Capital Corporation Limited (“CCC”) was a fund sponsored by the Partnership that invested in AAA-rated residential mortgage backed securities on a highly leveraged basis. In March of 2008, amidst turmoil throughout the mortgage markets and money markets, CCC filed for insolvency protection in Guernsey. The Guernsey liquidators who took control of CCC in March 2008 filed a suit on July 7, 2010 against the Partnership, certain of its affiliates and the former directors of CCC in the Royal Court of Guernsey seeking more than $1.0 billion in damages in a case styled Carlyle Capital Corporation Limited v. Conway et al. On September 4, 2017, the Royal Court of Guernsey ruled that the Partnership and Directors of CCC acted reasonably and appropriately in the management and governance of CCC and that none of the Partnership, its affiliates or former directors of CCC had any liability. In December 2017, the plaintiff filed a notice of appeal of the trial court decision. A hearing before the Guernsey appellate court took place from October 8 through October 18, 2018. It is unclear whether the appellate court will affirm or reverse the trial court decision. In December 2017, the Partnership received approximately $29.8 million from the plaintiff as a deposit towards its obligations to reimburse the Partnership for legal fees and expenses, but such amount is subject to adjustment pending a final determination of the correct reimbursement amount and the ultimate outcome of the appeal process.
Cobalt International Energy, Inc. ("Cobalt") was a company owned by two of the Legacy Energy funds and funds advised by certain other private equity sponsors. Cobalt and certain of its affiliates filed for bankruptcy protection on December 14, 2017. A federal securities class action against Cobalt (In re Cobalt International Energy, Inc. Securities Litigation) was filed in November 2014 in the U.S. District Court for the Southern District of Texas, seeking monetary damages and alleging that Cobalt and its directors made misrepresentations in certain of Cobalt’s securities offering filings relating to: (i) the value of oil reserves in Angola for which Cobalt had acquired drilling concessions, and (ii) its compliance with the Foreign Corrupt Practices Act regarding its operations in Angola and a U.S. government investigation regarding the same. The securities class action also named as co-defendants certain securities underwriters and the five private equity sponsors of Cobalt, including Riverstone and the Partnership. The class action alleged that the Partnership has liability as a "control person" for the alleged misrepresentations in Cobalt's securities offerings as well as insider trading liability. The federal court dismissed the insider trading claim against the Partnership. On October 12, 2018, lead plaintiffs in the securities class action moved the district court for approval of a settlement with various parties, including the Partnership, under which the Partnership would receive a release but would not make any financial contribution. In addition to the class action in federal court, derivative claims were also filed in Texas state court in Houston (Ira Gaines v. Joseph Bryant, et al.) on similar grounds, alleging that the private equity sponsors, including the Partnership, breached their fiduciary duties by engaging in insider trading. On May 9, 2018, the Plan Administrator for Cobalt filed a Notice of Nonsuit with Prejudice, dismissing all the claims in the case (including the claim against the Partnership) with prejudice. The court ordered the nonsuit of all claims in an order entered that day.
43
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
A Luxembourg subsidiary of CEREP I, a real estate fund, has been involved since 2010 in a tax dispute with the French tax authorities relating to whether gain from the sale of an investment was taxable in France. In April 2015, the French tax court issued an opinion in this matter adverse to CEREP I, holding the Luxembourg subsidiary of CEREP I liable for approximately €105 million (including interest accrued since the beginning of the tax dispute). CEREP I paid approximately €30 million of the tax obligations, and the Partnership paid the remaining approximately €75 million in its capacity as a guarantor. The Partnership appealed the decision of the French tax court. In December 2017, the French appellate court reversed the earlier tax court opinion and awarded the Partnership a refund of the full €105 million of tax and penalties (inclusive of amounts paid by CEREP I) and awarded interest on the refund of €12.5 million, before tax. On February 22, 2018 the French tax authorities appealed the appellate court decision and on October 2, 2018, CEREP I filed its appellate brief. The parties are awaiting a hearing on the appeal. The Partnership has not recognized income in respect of the refund as of September 30, 2018, pending a final determination on the current appeal. The full amount of the refund is held at CEREP I and its subsidiaries. As CEREP I is a consolidated fund, the refund of €117.5 million is recorded in our assets and liabilities of consolidated funds as of September 30, 2018.
The Partnership currently is and expects to continue to be, from time to time, subject to examinations, formal and informal inquiries and investigations by various U.S. and non-U.S. governmental and regulatory agencies, including but not limited to, the SEC, Department of Justice, state attorneys general, FINRA, National Futures Association and the U.K. Financial Conduct Authority. The Partnership routinely cooperates with such examinations, inquiries and investigations, and they may result in the commencement of civil, criminal, or administrative or other proceedings against the Partnership or its personnel. For example, among various other requests for information, the SEC has requested information about: (i) the Partnership's historical practices relating to the acceleration of monitoring fees received from certain of the Partnership's funds' portfolio companies, and (ii) the Partnership's relationship with a third-party investment adviser to a registered investment company that has invested in various investment funds sponsored by the Partnership. The Partnership is cooperating fully with the SEC's inquiries.
During 2017, the Partnership entered into settlement and purchase agreements with investors in a hedge fund and two structured finance vehicles managed by Vermillion related to investments of approximately $400 million in petroleum commodities that the Partnership believes were misappropriated by third parties outside the U.S. In connection with these settlements, the Partnership acquired certain rights to recoveries from certain marine cargo insurance policies and is continuing to undertake efforts to obtain reimbursement for the misappropriation of petroleum. There is no assurance that the Partnership will be successful in any of its recovery efforts and the Partnership will not recognize any amounts in respect of such recoveries until such amounts are probable of payment.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings and employment-related matters, and some of the matters discussed above involve claims for potentially large and/or indeterminate amounts of damages. Based on information known by management, management does not believe that as of the date of this filing the final resolutions of the matters above will have a material effect upon the Partnership’s unaudited condensed consolidated financial statements. However, given the potentially large and/or indeterminate amounts of damages sought in certain of these matters and the inherent unpredictability of investigations and litigations, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Partnership's financial results in any particular period.
The Partnership accrues an estimated loss contingency liability when it is probable that such a liability has been incurred and the amount of the loss can be reasonably estimated. As of September 30, 2018, the Partnership had recorded liabilities aggregating to approximately $35 million for litigation-related contingencies, regulatory examinations and inquiries, and other matters. The Partnership evaluates its outstanding legal and regulatory proceedings and other matters each quarter to assess its loss contingency accruals, and makes adjustments in such accruals, upward or downward, as appropriate, based on management's best judgment after consultation with counsel. There is no assurance that the Partnership's accruals for loss contingencies will not need to be adjusted in the future or that, in light of the uncertainties involved in such matters, the ultimate resolution of these matters will not significantly exceed the accruals that the Partnership has recorded.
Other Contingency
The Partnership, indirectly through certain Carlyle real estate investment funds, had an investment in Urbplan Desenvolvimento Urbano S.A. (“Urbplan”), a Brazilian residential subdivision and land development company. During 2017,
44
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
the Partnership disposed of its interests in Urbplan in a transaction with a third party. The third party acquired operational control and all of the economic interests in Urbplan in the transaction. For more information, see Note 15 of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. The Partnership is party to certain claims and litigation relating to UrbPlan, including disputes with creditors and customers. The judicial restructuring of UrbPlan may also trigger additional claims against the Partnership. The Partnership does not believe it is probable that the outcome of any Urbplan-related litigation, disputes or other potential claims will materially affect the Partnership or these consolidated financial statements.
Indemnifications
In the normal course of business, the Partnership and its subsidiaries enter into contracts that contain a variety of representations and warranties and provide general indemnifications. The Partnership’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Partnership that have not yet occurred. However, based on experience, the Partnership believes the risk of material loss to be remote.
Risks and Uncertainties
Carlyle’s funds seek investment opportunities that offer the possibility of attaining substantial capital appreciation. Certain events particular to each industry in which the underlying investees conduct their operations, as well as general economic conditions, may have a significant negative impact on the Partnership’s investments and profitability. Such events are beyond the Partnership’s control, and the likelihood that they may occur and the effect on the Partnership cannot be predicted.
Furthermore, certain of the funds’ investments are made in private companies and there are generally no public markets for the underlying securities at the current time. The funds’ ability to liquidate their publicly-traded investments are often subject to limitations, including discounts that may be required to be taken on quoted prices due to the number of shares being sold. The funds’ ability to liquidate their investments and realize value is subject to significant limitations and uncertainties, including among others currency fluctuations and natural disasters.
The Partnership and the funds make investments outside of the United States. Investments outside the United States may be subject to less developed bankruptcy, corporate, partnership and other laws (which may have the effect of disregarding or otherwise circumventing the limited liability structures potentially causing the actions or liabilities of one fund or a portfolio company to adversely impact the Partnership or an unrelated fund or portfolio company). Non-U.S. investments are subject to the same risks associated with the Partnership’s U.S. investments as well as additional risks, such as fluctuations in foreign currency exchange rates, unexpected changes in regulatory requirements, heightened risk of political and economic instability, difficulties in managing non-U.S. investments, potentially adverse tax consequences and the burden of complying with a wide variety of foreign laws.
Furthermore, Carlyle is exposed to economic risk concentrations related to certain large investments as well as concentrations of investments in certain industries and geographies.
Additionally, the Partnership encounters credit risk. Credit risk is the risk of default by a counterparty in the Partnership’s investments in debt securities, loans, leases and derivatives that result from a borrower’s, lessee’s or derivative counterparty’s inability or unwillingness to make required or expected payments.
The Partnership considers cash, cash equivalents, securities, receivables, accounts payable, accrued expenses, other liabilities, loans, senior notes, assets and liabilities of Consolidated Funds and contingent and other consideration for acquisitions to be its financial instruments. Except for the senior notes, the carrying amounts reported in the condensed consolidated balance sheets for these financial instruments equal or closely approximate their fair values. The fair value of the senior notes is disclosed in Note 5.
45
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
8. Related Party Transactions
Due from Affiliates and Other Receivables, Net
The Partnership had the following due from affiliates and other receivables at September 30, 2018 and December 31, 2017:
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(Dollars in millions) | |||||||
Accrued incentive fees | $ | 5.3 | $ | 6.3 | |||
Unbilled receivable for giveback obligations from current and former employees | 1.0 | 5.1 | |||||
Notes receivable and accrued interest from affiliates | 11.6 | 22.8 | |||||
Management fee, reimbursable expenses and other receivables from unconsolidated funds and affiliates, net | 303.9 | 229.2 | |||||
Total | $ | 321.8 | $ | 263.4 | |||
Notes receivable represent loans that the Partnership has provided to certain unconsolidated funds to meet short-term obligations to purchase investments. Reimbursable expenses and other receivables from certain of the unconsolidated funds and portfolio companies relate to management fees receivable from limited partners, advisory fees receivable and expenses paid on behalf of these entities. These costs represent costs related to the pursuit of actual or proposed investments, professional fees and expenses associated with the acquisition, holding and disposition of the investments. The affiliates are obligated at the discretion of the Partnership to reimburse the expenses. Based on management’s determination, the Partnership accrues and charges interest on amounts due from affiliate accounts at interest rates ranging up to 7.19% as of September 30, 2018. The accrued and charged interest to the affiliates was not significant for any period presented.
These receivables are assessed regularly for collectability and amounts determined to be uncollectible are charged directly to general, administrative and other expenses in the condensed consolidated statements of operations. A corresponding allowance for doubtful accounts is recorded and such amounts were not significant for any period presented.
Due to Affiliates
The Partnership had the following due to affiliates balances at September 30, 2018 and December 31, 2017:
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(Dollars in millions) | |||||||
Due to non-consolidated affiliates | $ | 24.2 | $ | 75.7 | |||
Performance-based contingent cash consideration related to acquisitions | — | 37.5 | |||||
Amounts owed under the tax receivable agreement | 101.1 | 94.0 | |||||
Other | 35.4 | 22.7 | |||||
Total | $ | 160.7 | $ | 229.9 | |||
The Partnership has recorded obligations for amounts due to certain of its affiliates. The Partnership periodically offsets expenses it has paid on behalf of its affiliates against these obligations. The amount owed under the tax receivable agreement is related primarily to the acquisition by the Partnership of Carlyle Holdings partnership units in June 2015 and March 2014, respectively, the exchange in May 2012 by CalPERS of its Carlyle Holdings partnership units for Partnership common units, as well as certain unit exchanges by senior Carlyle professionals which began in the second quarter of 2017 (see Note 12).
Other Related Party Transactions
In the normal course of business, the Partnership has made use of aircraft owned by entities controlled by senior Carlyle professionals. The senior Carlyle professionals paid for their purchases of aircraft and bear all operating, personnel and maintenance costs associated with their operation for personal use. Payment by the Partnership for the business use of these aircraft by senior Carlyle professionals and other employees, which is made at market rates, totaled $1.6 million and $1.7
46
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
million for the three months ended September 30, 2018 and 2017, respectively, and $5.1 million and $3.9 million for the nine months ended September 30, 2018 and 2017, respectively. These fees are included in general, administrative, and other expenses in the unaudited condensed consolidated statements of operations.
Senior Carlyle professionals and employees are permitted to participate in co-investment entities that invest in Carlyle funds or alongside Carlyle funds. In many cases, participation is limited by law to individuals who qualify under applicable legal requirements. These co-investment entities generally do not require senior Carlyle professionals and employees to pay management fees or performance allocations, however, Carlyle professionals and employees are required to pay their portion of partnership expenses.
Carried interest income from the funds can be distributed to senior Carlyle professionals and employees on a current basis, but is subject to repayment by the subsidiary of the Partnership that acts as general partner of the fund in the event that certain specified return thresholds are not ultimately achieved. The senior Carlyle professionals and certain other investment professionals have personally guaranteed, subject to certain limitations, the obligation of these subsidiaries in respect of this general partner obligation. Such guarantees are several and not joint and are limited to a particular individual’s distributions received.
The Partnership does business with some of its portfolio companies; all such arrangements are on a negotiated basis.
Substantially all revenue is earned from affiliates of Carlyle.
9. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted. The Act includes numerous changes in existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. The rate reduction became effective on January 1, 2018. As a result, the provision for income taxes included in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2018 reflects the revised tax rate. Further, the SEC Staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) in December 2017, which allows for reporting provisional amounts during a measurement period until the evaluation is complete. The Partnership assessed the impact of the Act during 2017 and believes the material provisions have been properly considered in that period. However, the Partnership will continue to evaluate the provisions of the Act and the impact of any future authoritative guidance.
The Partnership is generally organized as a series of pass through entities pursuant to the United States Internal Revenue Code. As such, the Partnership is not responsible for the tax liability due on certain income earned during the year. Such income is taxed at the unitholder and non-controlling interest holder level, and any income tax is the responsibility of the unitholders and is paid at that level. For income taxes on income earned for which the Partnership is responsible for the tax liability, the Partnership’s income tax expense (benefit) was $17.4 million and $(1.3) million for the three months ended September 30, 2018 and 2017, respectively, and $36.8 million and $17.7 million for the nine months ended September 30, 2018 and 2017, respectively.
In the normal course of business, the Partnership is subject to examination by federal and certain state, local and foreign tax regulators. With a few exceptions, as of September 30, 2018, the Partnership’s U.S. federal income tax returns for the years 2015 through 2017 are open under the normal three-year statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2014 to 2017. Foreign tax returns are generally subject to audit from 2010 to 2017. Certain of the Partnership’s affiliates are currently under audit by federal, state and foreign tax authorities.
The Partnership does not believe that the outcome of these audits will require it to record reserves for uncertain tax positions or that the outcome will have a material impact on the consolidated financial statements. The Partnership does not believe that it has any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.
47
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
10. Non-controlling Interests in Consolidated Entities
The components of the Partnership’s non-controlling interests in consolidated entities are as follows:
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(Dollars in millions) | |||||||
Non-Carlyle interests in Consolidated Funds | $ | 4.3 | $ | 13.3 | |||
Non-Carlyle interests in majority-owned subsidiaries | 380.0 | 386.5 | |||||
Non-controlling interest in carried interest, giveback obligations and cash held for carried interest distributions | (6.0 | ) | 4.9 | ||||
Non-controlling interests in consolidated entities | $ | 378.3 | $ | 404.7 | |||
The components of the Partnership’s non-controlling interests in income of consolidated entities are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Non-Carlyle interests in Consolidated Funds | $ | (0.2 | ) | $ | 8.2 | $ | (5.3 | ) | $ | 8.1 | |||||
Non-Carlyle interests in majority-owned subsidiaries | 14.3 | 11.0 | 41.1 | 22.5 | |||||||||||
Non-controlling interest in carried interest, giveback obligations and cash held for carried interest distributions | 0.4 | 8.4 | 6.4 | 16.8 | |||||||||||
Non-controlling interests in income of consolidated entities | $ | 14.5 | $ | 27.6 | $ | 42.2 | $ | 47.4 | |||||||
11. Earnings Per Common Unit
Basic and diluted net income per common unit are calculated as follows:
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||||||||||
Basic | Diluted | Basic | Diluted | ||||||||||||
Net income attributable to common units | $ | 11,600,000 | $ | 34,100,000 | $ | 108,900,000 | $ | 108,900,000 | |||||||
Weighted-average common units outstanding | 105,560,193 | 346,930,017 | 102,936,949 | 112,851,327 | |||||||||||
Net income per common unit | $ | 0.11 | $ | 0.10 | $ | 1.06 | $ | 0.96 | |||||||
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | ||||||||||||||
Basic | Diluted | Basic | Diluted | ||||||||||||
Net income attributable to common units | $ | 44,600,000 | $ | 142,400,000 | $ | 185,200,000 | $ | 185,200,000 | |||||||
Weighted-average common units outstanding | 95,198,102 | 334,392,424 | 89,815,112 | 97,538,190 | |||||||||||
Net income per common unit | $ | 0.47 | $ | 0.43 | $ | 2.06 | $ | 1.90 | |||||||
48
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The weighted-average common units outstanding, basic and diluted, are calculated as follows:
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||||||
Basic | Diluted | Basic | Diluted | ||||||||
The Carlyle Group L.P. weighted-average common units outstanding | 105,560,193 | 105,560,193 | 102,936,949 | 102,936,949 | |||||||
Unvested deferred restricted common units | — | 8,297,202 | — | 9,395,087 | |||||||
Issuable Carlyle Group L.P. common units | — | 756,818 | — | 519,291 | |||||||
Weighted-average vested Carlyle Holdings Partnership units | — | 232,303,828 | — | — | |||||||
Unvested Carlyle Holdings Partnership units | — | 11,976 | — | — | |||||||
Weighted-average common units outstanding | 105,560,193 | 346,930,017 | 102,936,949 | 112,851,327 | |||||||
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | ||||||||||
Basic | Diluted | Basic | Diluted | ||||||||
The Carlyle Group L.P. weighted-average common units outstanding | 95,198,102 | 95,198,102 | 89,815,112 | 89,815,112 | |||||||
Unvested deferred restricted common units | — | 7,756,460 | — | 7,125,134 | |||||||
Issuable Carlyle Holdings Partnership units | — | 597,944 | — | 597,944 | |||||||
Weighted-average vested Carlyle Holdings Partnership units | — | 228,839,164 | — | — | |||||||
Unvested Carlyle Holdings Partnership units | — | 2,000,754 | — | — | |||||||
Weighted-average common units outstanding | 95,198,102 | 334,392,424 | 89,815,112 | 97,538,190 | |||||||
The Carlyle Group L.P. weighted-average common units outstanding includes vested deferred restricted common units and common units associated with acquisitions that have been earned for which issuance of the related common units is deferred until future periods.
The Partnership applies the treasury stock method to determine the dilutive weighted-average common units represented by the unvested deferred restricted common units. Also included in the determination of dilutive weighted-average common units for the three and nine months ended September 30, 2018 are issuable Carlyle Group L.P. common units associated with the Partnership's strategic investments in NGP.
The Partnership applies the “if-converted” method to the vested Carlyle Holdings partnership units to determine the dilutive weighted-average common units outstanding. The Partnership applies the treasury stock method to the unvested Carlyle Holdings partnership units and the “if-converted” method on the resulting number of additional Carlyle Holdings partnership units to determine the dilutive weighted-average common units represented by the unvested Carlyle Holdings partnership units.
In computing the dilutive effect that the exchange of Carlyle Holdings partnership units would have on earnings per common unit, the Partnership considered that net income available to holders of common units would increase due to the elimination of non-controlling interests in Carlyle Holdings (including any tax impact). Based on these calculations, 232,303,828 of vested Carlyle Holdings partnership units and 11,976 of unvested Carlyle Holdings partnership units for the three months ended September 30, 2018 and 228,839,164 of vested Carlyle Holdings partnership units and 2,000,754 of unvested Carlyle Holdings partnership units for the three months ended September 30, 2017 were dilutive. As a result, net income of non-controlling interests in Carlyle Holdings associated with the assumed exchange of $22.5 million and $97.8 million for the three months ended September 30, 2018 and 2017, respectively, has been included in net income attributable to The Carlyle Group L.P. for purposes of the dilutive earnings per common unit calculation.
Further, based on these calculations, 229,942,607 of vested Carlyle Holdings partnership units and 2,852,616 of unvested Carlyle Holdings partnership units for the nine months ended September 30, 2018 and 227,315,486 of vested Carlyle Holdings partnership units and 1,963,185 of unvested Carlyle Holdings partnership units for the nine months ended September 30, 2017 were antidilutive, and therefore have been excluded.
49
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
12. Equity and Equity-Based Compensation
Preferred Unit Issuance
On September 13, 2017, the Partnership issued 16,000,000 of 5.875% Series A Preferred Units (the “Preferred Units”) for gross proceeds of $400.0 million, or $387.5 million, net of issuance costs and expenses. The Partnership plans to use the net proceeds from the sale of the Preferred Units for general corporate purposes, including to fund investments.
Distributions on the Preferred Units will be payable quarterly on March 15, June 15, September 15, and December 15 of each year, beginning on December 15, 2017, when, as and if declared by the Board of Directors of the general partner of the Partnership, at a rate per annum of 5.875%. Distributions on the Preferred Units are discretionary and non-cumulative.
Subject to certain exceptions, unless distributions have been declared and paid or declared and set apart for payment on the Preferred Units for a quarterly distribution period, during the remainder of that distribution period, the Partnership may not repurchase any common units or any other units that are junior in rank to the Preferred Units and the Partnership may not declare or pay or set apart payment for distributions on any common or junior units for the remainder of that distribution period, other than (i) distributions of tax distribution amounts received from Carlyle Holdings in accordance with the terms of the partnership agreements of the Carlyle Holdings partnerships as in effect on the date the Preferred Units were first issued, (ii) the net unit settlement of equity-based awards granted under The Carlyle Group L.P. 2012 Equity Incentive Plan (the “Equity Incentive Plan”) (or any successor or any similar plan) in order to satisfy associated tax obligations, or (iii) distributions paid in junior units or options, warrants or rights to subscribe for or purchase other units or with proceeds from the substantially concurrent sale of junior units.
The Preferred Units may be redeemed at the Partnership’s option, in whole or in part, at any time on or after September 15, 2022 at a price of $25.00 per Preferred Unit, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. Holders of the Preferred Units have no right to require the redemption of the Preferred Units and there is no maturity date.
If a change of control event or tax redemption event occurs prior to September 15, 2022, the Partnership may, at its option, redeem the Preferred Units, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such change in control event or such tax redemption event, as applicable, at a price of $25.25 per Preferred Unit, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. If (i) a change of control event occurs (whether before, on or after September 15, 2022) and (ii) the Partnership does not give notice prior to the 31st day following the change in control event to redeem all the outstanding Preferred Units, the distribution rate per annum on the Preferred Units will increase by 5.00%, beginning on the 31st day following such change in control event.
If a rating agency event occurs prior to September 15, 2022, the Partnership may, at its option, redeem the Preferred Units, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such rating agency event, as applicable, at a price of $25.50 per Preferred Unit, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions.
The Preferred Units are not convertible into common units or any other class or series of interests or any other security. Holders of the Preferred Units will generally have no voting rights and have none of the voting rights given to holders of the Partnership’s common units, except as otherwise provided in the Partnership's limited partnership agreement.
Unit Repurchase Program
In February 2016, the Board of Directors of the general partner of the Partnership authorized the repurchase of up to $200 million of common units and/or Carlyle Holdings units. Under this unit repurchase program, units may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. No units will be repurchased from the Partnership's executive officers under this program. The timing and actual number of common units and/or Carlyle Holdings units repurchased will depend on a variety of factors, including legal requirements, price, and economic and market conditions. This unit repurchase program may be suspended or discontinued at any time and does not have a specified expiration date. During the three and nine months ended September 30, 2018, the Partnership paid an aggregate of $36.5 million and $87.5 million to repurchase and retire approximately 1.5 million units and 3.9 million units respectively, with all of
50
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
the repurchases done via open market and brokered transactions. Through September 30, 2018, the Partnership has paid an aggregate of $146.6 million to repurchase and retire 7.6 million units under this unit repurchase program.
Quarterly Unit Exchange Program
Beginning in the second quarter of 2017, current and former senior Carlyle professionals are able to exchange their Carlyle Holdings partnership units for common units on a quarterly basis, subject to the terms of the Exchange Agreement. During the three and nine months ended September 30, 2018, current and former senior Carlyle professionals exchanged 1,647,569 and 3,305,299, respectively, Carlyle Holdings partnership units for common units, resulting in a reallocation of capital of $12.0 million and $23.0 million, respectively, from non-controlling interests in Carlyle Holdings to partners' capital and accumulated other comprehensive loss.
Equity-Based Compensation
In May 2012, Carlyle Group Management L.L.C., the general partner of the Partnership, adopted the Equity Incentive Plan. The Equity Incentive Plan is a source of equity-based awards permitting the Partnership to grant to Carlyle employees, directors of the Partnership’s general partner and consultants non-qualified options, unit appreciation rights, common units, restricted common units, deferred restricted common units, phantom restricted common units and other awards based on the Partnership’s common units and Carlyle Holdings partnership units. The total number of the Partnership’s common units and Carlyle Holdings partnership units which were initially available for grant under the Equity Incentive Plan was 30,450,000. The Equity Incentive Plan contains a provision which automatically increases the number of the Partnership’s common units and Carlyle Holdings partnership units available for grant based on a pre-determined formula; this increase occurs annually on January 1. As of January 1, 2018, pursuant to the formula, the total number of the Partnership’s common units and Carlyle Holdings partnership units available for grant under the Equity Incentive Plan was 32,645,874.
A summary of the status of the Partnership’s non-vested equity-based awards as of September 30, 2018 and a summary of changes for the nine months ended September 30, 2018, are presented below:
Carlyle Holdings | The Carlyle Group L.P. | |||||||||||||||||||
Unvested Units | Partnership Units | Weighted- Average Grant Date Fair Value | Deferred Restricted Common Units | Weighted- Average Grant Date Fair Value | Unvested Common Units | Weighted- Average Grant Date Fair Value | ||||||||||||||
Balance, December 31, 2017 | 8,095,015 | $ | 22.03 | 15,519,591 | $ | 16.25 | 7,782 | $ | 22.22 | |||||||||||
Granted | — | $ | — | 12,771,754 | $ | 20.95 | — | $ | — | |||||||||||
Vested | 8,066,499 | $ | 22.00 | 8,121,452 | $ | 17.21 | 7,782 | $ | 22.22 | |||||||||||
Forfeited | — | $ | — | 528,054 | $ | 16.31 | — | $ | — | |||||||||||
Balance, September 30, 2018 | 28,516 | $ | 29.13 | 19,641,839 | $ | 18.91 | — | $ | — | |||||||||||
The Partnership recorded compensation expense for deferred restricted common units of $49.7 million and $38.1 million for the three months ended September 30, 2018 and 2017, respectively, with $4.7 million and $4.6 million of corresponding deferred tax benefits, respectively. The Partnership recorded compensation expense for deferred restricted common units of $143.8 million and $119.9 million for the nine months ended September 30, 2018 and 2017, respectively, with $12.9 million and $14.0 million of corresponding deferred tax benefits, respectively. As of September 30, 2018, the total unrecognized equity-based compensation expense related to unvested deferred restricted common units is $267.0 million, which is expected to be recognized over a weighted-average term of 2.6 years.
51
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
13. Segment Reporting
Carlyle conducts its operations through four reportable segments:
Corporate Private Equity – The Corporate Private Equity segment is comprised of the Partnership’s operations that advise a diverse group of funds that invest in buyout and growth capital transactions that focus on either a particular geography or a particular industry.
Real Assets – The Real Assets segment is comprised of the Partnership’s operations that advise U.S. and international funds focused on real estate, infrastructure, energy and renewable energy transactions.
Global Credit – The Global Credit segment advises a group of funds that pursue investment opportunities across various types of credit, equities and alternative instruments, and (as regards certain macroeconomic strategies) currencies, and interest rate products and their derivatives.
Investment Solutions – The Investment Solutions segment advises global private equity fund of funds programs and related co-investment and secondary activities through AlpInvest. This segment also includes Metropolitan, a global manager of real estate fund of funds and related co-investment and secondary activities.
The Partnership’s reportable business segments are differentiated by their various investment focuses and strategies. Overhead costs are generally allocated based on cash-based compensation and benefits expense for each segment. The Partnership includes adjustments to reflect the Partnership’s 63% economic interests in Claren Road (through January 2017). The Partnership’s earnings from its investment in NGP are presented in the respective operating captions within the Real Assets segment. The net income or loss from the consolidation of Urbplan allocable to the Partnership (after consideration of amounts allocable to non-controlling interests) is presented within investment income in the Real Assets segment until the three months ended September 30, 2017 when Urbplan was deconsolidated from the Partnership's financial results.
Economic Income (“EI”) and its components are key performance measures used by management to make operating decisions and assess the performance of the Partnership’s reportable segments. EI differs from income (loss) before provision for income taxes computed in accordance with U.S. GAAP in that it includes certain tax expenses associated with performance revenues (comprised of performance allocations and incentive fees), and does not include net income (loss) attributable to non-Carlyle interests in consolidated entities or charges (credits) related to Carlyle corporate actions and non-recurring items. Charges (credits) related to Carlyle corporate actions and non-recurring items include: charges associated with equity-based compensation that was issued in the initial public offering in May 2012 or is issued in acquisitions or strategic investments, changes in the tax receivable agreement liability, amortization and any impairment charges associated with acquired intangible assets, transaction costs associated with acquisitions, charges associated with earnouts and contingent consideration including gains and losses associated with the estimated fair value of contingent consideration issued in conjunction with acquisitions or strategic investments, gains and losses from the retirement of debt, charges associated with contract terminations and employee severance.
Fee Related Earnings (“FRE”) is a component of EI and is used to assess the ability of the business to cover cash-based compensation and benefits and operating expenses from total fee revenues. FRE differs from income (loss) before provision for income taxes computed in accordance with U.S. GAAP in that it adjusts for the items included in the calculation of EI and also adjusts EI to exclude net performance revenues, principal investment income from investments in Carlyle funds, equity-based compensation, net interest (interest income less interest expense), and certain general, administrative and other expenses when the timing of any future payment is uncertain.
Distributable Earnings (“DE”) is FRE plus realized net performance revenues, realized principal investment income, and net interest, and is used to assess performance and amounts potentially available for distribution. DE is used by management primarily in making resource deployment and compensation decisions across the Partnership’s four reportable segments. Management also uses Distributable Earnings in our budgeting, forecasting, and the overall management of our segments. Management makes operating decisions and assesses the performance of each of the Partnership’s business segments based on financial and operating metrics and data that is presented without the consolidation of any of the Consolidated Funds. Consequently, the key performance measures discussed above and all segment data exclude the assets, liabilities and operating results related to the Consolidated Funds.
52
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table presents the financial data for the Partnership’s four reportable segments for the three and nine months ended September 30, 2018:
Three Months Ended September 30, 2018 | |||||||||||||||||||
Corporate Private Equity | Real Assets | Global Credit | Investment Solutions | Total | |||||||||||||||
(Dollars in millions) | |||||||||||||||||||
Segment Revenues | |||||||||||||||||||
Fund level fee revenues | |||||||||||||||||||
Fund management fees | $ | 175.8 | $ | 76.3 | $ | 60.4 | $ | 42.7 | $ | 355.2 | |||||||||
Portfolio advisory fees, net | 7.0 | 0.6 | 0.1 | — | 7.7 | ||||||||||||||
Transaction fees, net | — | — | — | — | — | ||||||||||||||
Total fund level fee revenues | 182.8 | 76.9 | 60.5 | 42.7 | 362.9 | ||||||||||||||
Performance revenues | |||||||||||||||||||
Realized | 143.6 | 73.7 | 0.1 | 42.8 | 260.2 | ||||||||||||||
Unrealized | (91.7 | ) | (4.6 | ) | (0.6 | ) | 61.6 | (35.3 | ) | ||||||||||
Total performance revenues | 51.9 | 69.1 | (0.5 | ) | 104.4 | 224.9 | |||||||||||||
Principal investment income (loss) | |||||||||||||||||||
Realized | 4.2 | 0.6 | 2.2 | — | 7.0 | ||||||||||||||
Unrealized | 0.2 | 4.2 | 1.6 | 0.9 | 6.9 | ||||||||||||||
Total principal investment income (loss) | 4.4 | 4.8 | 3.8 | 0.9 | 13.9 | ||||||||||||||
Interest income | 3.0 | 1.5 | 4.2 | 0.4 | 9.1 | ||||||||||||||
Other income | 0.6 | 0.3 | 1.1 | 0.1 | 2.1 | ||||||||||||||
Total revenues | 242.7 | 152.6 | 69.1 | 148.5 | 612.9 | ||||||||||||||
Segment Expenses | |||||||||||||||||||
Compensation and benefits | |||||||||||||||||||
Cash-based compensation and benefits | 93.9 | 33.7 | 36.6 | 22.2 | 186.4 | ||||||||||||||
Equity-based compensation | 25.2 | 12.0 | 9.8 | 4.7 | 51.7 | ||||||||||||||
Performance revenues related compensation | |||||||||||||||||||
Realized | 66.1 | 31.8 | — | 38.4 | 136.3 | ||||||||||||||
Unrealized | (42.1 | ) | 2.7 | (0.2 | ) | 58.9 | 19.3 | ||||||||||||
Total compensation and benefits | 143.1 | 80.2 | 46.2 | 124.2 | 393.7 | ||||||||||||||
General, administrative, and other indirect expenses | 41.1 | 15.5 | 14.2 | 10.1 | 80.9 | ||||||||||||||
Depreciation and amortization expense | 4.3 | 1.7 | 1.5 | 1.2 | 8.7 | ||||||||||||||
Interest expense | 7.5 | 4.1 | 5.8 | 1.6 | 19.0 | ||||||||||||||
Total expenses | 196.0 | 101.5 | 67.7 | 137.1 | 502.3 | ||||||||||||||
Economic Income | $ | 46.7 | $ | 51.1 | $ | 1.4 | $ | 11.4 | $ | 110.6 | |||||||||
(-) Net Performance Revenues | 27.9 | 34.6 | (0.3 | ) | 7.1 | 69.3 | |||||||||||||
(-) Principal Investment Income | 4.4 | 4.8 | 3.8 | 0.9 | 13.9 | ||||||||||||||
(+) Equity-based Compensation | 25.2 | 12.0 | 9.8 | 4.7 | 51.7 | ||||||||||||||
(+) Net Interest | 4.5 | 2.6 | 1.6 | 1.2 | 9.9 | ||||||||||||||
(=) Fee Related Earnings | $ | 44.1 | $ | 26.3 | $ | 9.3 | $ | 9.3 | $ | 89.0 | |||||||||
(+) Realized Net Performance Revenues | 77.5 | 41.9 | 0.1 | 4.4 | 123.9 | ||||||||||||||
(+) Realized Principal Investment Income | 4.2 | 0.6 | 2.2 | — | 7.0 | ||||||||||||||
(+) Net Interest | (4.5 | ) | (2.6 | ) | (1.6 | ) | (1.2 | ) | (9.9 | ) | |||||||||
(=) Distributable Earnings | $ | 121.3 | $ | 66.2 | $ | 10.0 | $ | 12.5 | $ | 210.0 | |||||||||
53
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2018 and the Nine Months Then Ended | |||||||||||||||||||
Corporate Private Equity | Real Assets | Global Credit | Investment Solutions | Total | |||||||||||||||
(Dollars in millions) | |||||||||||||||||||
Segment Revenues | |||||||||||||||||||
Fund level fee revenues | |||||||||||||||||||
Fund management fees | $ | 437.9 | $ | 229.4 | $ | 178.9 | $ | 124.6 | $ | 970.8 | |||||||||
Portfolio advisory fees, net | 13.0 | 1.3 | 0.2 | — | 14.5 | ||||||||||||||
Transaction fees, net | 3.9 | 2.8 | 0.1 | — | 6.8 | ||||||||||||||
Total fund level fee revenues | 454.8 | 233.5 | 179.2 | 124.6 | 992.1 | ||||||||||||||
Performance revenues | |||||||||||||||||||
Realized | 383.6 | 115.1 | 5.9 | 66.1 | 570.7 | ||||||||||||||
Unrealized | 136.7 | 140.8 | 10.8 | 152.8 | 441.1 | ||||||||||||||
Total performance revenues | 520.3 | 255.9 | 16.7 | 218.9 | 1,011.8 | ||||||||||||||
Principal investment income (loss) | |||||||||||||||||||
Realized | 24.4 | 11.9 | 7.1 | — | 43.4 | ||||||||||||||
Unrealized | 2.3 | 17.0 | 1.9 | 4.2 | 25.4 | ||||||||||||||
Total principal investment income (loss) | 26.7 | 28.9 | 9.0 | 4.2 | 68.8 | ||||||||||||||
Interest income | 7.5 | 3.6 | 11.4 | 1.2 | 23.7 | ||||||||||||||
Other income | 4.3 | 2.2 | 3.7 | 0.4 | 10.6 | ||||||||||||||
Total revenues | 1,013.6 | 524.1 | 220.0 | 349.3 | 2,107.0 | ||||||||||||||
Segment Expenses | |||||||||||||||||||
Compensation and benefits | |||||||||||||||||||
Cash-based compensation and benefits | 281.6 | 97.7 | 101.1 | 67.4 | 547.8 | ||||||||||||||
Equity-based compensation | 66.9 | 38.0 | 22.8 | 11.7 | 139.4 | ||||||||||||||
Performance revenues related compensation | |||||||||||||||||||
Realized | 180.8 | 50.8 | 2.7 | 59.8 | 294.1 | ||||||||||||||
Unrealized | 59.0 | 44.6 | 4.9 | 130.3 | 238.8 | ||||||||||||||
Total compensation and benefits | 588.3 | 231.1 | 131.5 | 269.2 | 1,220.1 | ||||||||||||||
General, administrative, and other indirect expenses | 130.5 | 49.5 | 47.3 | 27.3 | 254.6 | ||||||||||||||
Depreciation and amortization expense | 12.5 | 4.9 | 4.5 | 3.4 | 25.3 | ||||||||||||||
Interest expense | 21.6 | 12.1 | 16.9 | 4.7 | 55.3 | ||||||||||||||
Total expenses | 752.9 | 297.6 | 200.2 | 304.6 | 1,555.3 | ||||||||||||||
Economic Income | $ | 260.7 | $ | 226.5 | $ | 19.8 | $ | 44.7 | $ | 551.7 | |||||||||
(-) Net Performance Revenues | 280.5 | 160.5 | 9.1 | 28.8 | 478.9 | ||||||||||||||
(-) Principal Investment Income | 26.7 | 28.9 | 9.0 | 4.2 | 68.8 | ||||||||||||||
(+) Equity-based Compensation | 66.9 | 38.0 | 22.8 | 11.7 | 139.4 | ||||||||||||||
(+) Net Interest | 14.1 | 8.5 | 5.5 | 3.5 | 31.6 | ||||||||||||||
(=) Fee Related Earnings | $ | 34.5 | $ | 83.6 | $ | 30.0 | $ | 26.9 | $ | 175.0 | |||||||||
(+) Realized Net Performance Revenues | 202.8 | 64.3 | 3.2 | 6.3 | 276.6 | ||||||||||||||
(+) Realized Principal Investment Income | 24.4 | 11.9 | 7.1 | — | 43.4 | ||||||||||||||
(+) Net Interest | (14.1 | ) | (8.5 | ) | (5.5 | ) | (3.5 | ) | (31.6 | ) | |||||||||
(=) Distributable Earnings | $ | 247.6 | $ | 151.3 | $ | 34.8 | $ | 29.7 | $ | 463.4 | |||||||||
Segment assets as of September 30, 2018 | $ | 3,798.8 | $ | 2,045.3 | $ | 1,126.3 | $ | 1,242.6 | $ | 8,213.0 | |||||||||
54
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table presents the financial data for the Partnership’s four reportable segments for the three and nine months ended September 30, 2017:
Three Months Ended September 30, 2017 | |||||||||||||||||||
Corporate Private Equity | Real Assets | Global Credit | Investment Solutions | Total | |||||||||||||||
(Dollars in millions) | |||||||||||||||||||
Segment Revenues | |||||||||||||||||||
Fund level fee revenues | |||||||||||||||||||
Fund management fees | $ | 118.3 | $ | 71.4 | $ | 47.6 | $ | 41.1 | $ | 278.4 | |||||||||
Portfolio advisory fees, net | 3.6 | 0.4 | 0.1 | — | 4.1 | ||||||||||||||
Transaction fees, net | 5.3 | 0.8 | — | — | 6.1 | ||||||||||||||
Total fund level fee revenues | 127.2 | 72.6 | 47.7 | 41.1 | 288.6 | ||||||||||||||
Performance revenues | |||||||||||||||||||
Realized | 345.4 | 20.4 | 15.0 | 30.2 | 411.0 | ||||||||||||||
Unrealized | (193.2 | ) | 60.8 | 2.6 | 4.2 | (125.6 | ) | ||||||||||||
Total performance revenues | 152.2 | 81.2 | 17.6 | 34.4 | 285.4 | ||||||||||||||
Principal investment income (loss) | |||||||||||||||||||
Realized | 6.5 | (64.6 | ) | 4.7 | — | (53.4 | ) | ||||||||||||
Unrealized | 4.1 | 12.4 | — | 1.6 | 18.1 | ||||||||||||||
Total principal investment income (loss) | 10.6 | (52.2 | ) | 4.7 | 1.6 | (35.3 | ) | ||||||||||||
Interest income | 1.8 | 1.0 | 2.0 | 0.6 | 5.4 | ||||||||||||||
Other income | 1.6 | 0.6 | 1.1 | 0.1 | 3.4 | ||||||||||||||
Total revenues | 293.4 | 103.2 | 73.1 | 77.8 | 547.5 | ||||||||||||||
Segment Expenses | |||||||||||||||||||
Compensation and benefits | |||||||||||||||||||
Cash-based compensation and benefits | 83.6 | 39.3 | 29.7 | 24.7 | 177.3 | ||||||||||||||
Equity-based compensation | 14.5 | 8.7 | 5.1 | 2.1 | 30.4 | ||||||||||||||
Performance revenues related compensation | |||||||||||||||||||
Realized | 147.7 | 9.2 | 7.3 | 29.9 | 194.1 | ||||||||||||||
Unrealized | (76.1 | ) | 21.6 | 0.8 | (2.0 | ) | (55.7 | ) | |||||||||||
Total compensation and benefits | 169.7 | 78.8 | 42.9 | 54.7 | 346.1 | ||||||||||||||
General, administrative, and other indirect expenses | 20.5 | 10.5 | (63.6 | ) | 6.1 | (26.5 | ) | ||||||||||||
Depreciation and amortization expense | 4.1 | 1.9 | 1.3 | 0.9 | 8.2 | ||||||||||||||
Interest expense | 7.0 | 4.2 | 4.2 | 1.6 | 17.0 | ||||||||||||||
Total expenses | 201.3 | 95.4 | (15.2 | ) | 63.3 | 344.8 | |||||||||||||
Economic Net Income | $ | 92.1 | $ | 7.8 | $ | 88.3 | $ | 14.5 | $ | 202.7 | |||||||||
(-) Net Performance Revenues | 80.6 | 50.4 | 9.5 | 6.5 | 147.0 | ||||||||||||||
(-) Principal Investment Income (Loss) | 10.6 | (52.2 | ) | 4.7 | 1.6 | (35.3 | ) | ||||||||||||
(+) Equity-based Compensation | 14.5 | 8.7 | 5.1 | 2.1 | 30.4 | ||||||||||||||
(+) Net Interest | 5.2 | 3.2 | 2.2 | 1.0 | 11.6 | ||||||||||||||
(+) Reserve for Litigation and Contingencies | (12.5 | ) | (5.8 | ) | (4.1 | ) | (2.6 | ) | (25.0 | ) | |||||||||
(=) Fee Related Earnings | $ | 8.1 | $ | 15.7 | $ | 77.3 | $ | 6.9 | $ | 108.0 | |||||||||
(+) Realized Net Performance Revenues | 197.7 | 11.2 | 7.7 | 0.3 | 216.9 | ||||||||||||||
(+) Realized Principal Investment Income (Loss) | 6.5 | (64.6 | ) | 4.7 | — | (53.4 | ) | ||||||||||||
(+) Net Interest | (5.2 | ) | (3.2 | ) | (2.2 | ) | (1.0 | ) | (11.6 | ) | |||||||||
(=) Distributable Earnings | $ | 207.1 | $ | (40.9 | ) | $ | 87.5 | $ | 6.2 | $ | 259.9 | ||||||||
55
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, 2017 | |||||||||||||||||||
Corporate Private Equity | Real Assets | Global Credit | Investment Solutions | Total | |||||||||||||||
(Dollars in millions) | |||||||||||||||||||
Segment Revenues | |||||||||||||||||||
Fund level fee revenues | |||||||||||||||||||
Fund management fees | $ | 351.7 | $ | 185.6 | $ | 140.8 | $ | 113.1 | $ | 791.2 | |||||||||
Portfolio advisory fees, net | 11.9 | 0.6 | 0.5 | — | 13.0 | ||||||||||||||
Transaction fees, net | 14.2 | 0.8 | — | — | 15.0 | ||||||||||||||
Total fund level fee revenues | 377.8 | 187.0 | 141.3 | 113.1 | 819.2 | ||||||||||||||
Performance revenues | |||||||||||||||||||
Realized | 668.8 | 73.6 | 37.8 | 66.5 | 846.7 | ||||||||||||||
Unrealized | 465.0 | 200.1 | 15.5 | 32.1 | 712.7 | ||||||||||||||
Total performance revenues | 1,133.8 | 273.7 | 53.3 | 98.6 | 1,559.4 | ||||||||||||||
Principal investment income (loss) | |||||||||||||||||||
Realized | 15.6 | (72.4 | ) | 8.6 | — | (48.2 | ) | ||||||||||||
Unrealized | 22.9 | 24.4 | 4.3 | 3.1 | 54.7 | ||||||||||||||
Total principal investment income (loss) | 38.5 | (48.0 | ) | 12.9 | 3.1 | 6.5 | |||||||||||||
Interest income | 3.7 | 2.0 | 4.6 | 0.9 | 11.2 | ||||||||||||||
Other income | 4.2 | 1.3 | 5.6 | 0.3 | 11.4 | ||||||||||||||
Total revenues | 1,558.0 | 416.0 | 217.7 | 216.0 | 2,407.7 | ||||||||||||||
Segment Expenses | |||||||||||||||||||
Compensation and benefits | |||||||||||||||||||
Cash-based compensation and benefits | 230.4 | 107.2 | 76.2 | 63.8 | 477.6 | ||||||||||||||
Equity-based compensation | 47.3 | 26.8 | 16.9 | 6.2 | 97.2 | ||||||||||||||
Performance revenues related compensation | |||||||||||||||||||
Realized | 295.4 | 33.4 | 18.2 | 65.4 | 412.4 | ||||||||||||||
Unrealized | 221.1 | 60.1 | 6.9 | 18.4 | 306.5 | ||||||||||||||
Total compensation and benefits | 794.2 | 227.5 | 118.2 | 153.8 | 1,293.7 | ||||||||||||||
General, administrative, and other indirect expenses | 83.9 | 52.6 | (18.6 | ) | 21.6 | 139.5 | |||||||||||||
Depreciation and amortization expense | 11.5 | 5.3 | 3.8 | 2.6 | 23.2 | ||||||||||||||
Interest expense | 21.1 | 12.7 | 10.0 | 4.6 | 48.4 | ||||||||||||||
Total expenses | 910.7 | 298.1 | 113.4 | 182.6 | 1,504.8 | ||||||||||||||
Economic Income | $ | 647.3 | $ | 117.9 | $ | 104.3 | $ | 33.4 | $ | 902.9 | |||||||||
(-) Net Performance Revenues | 617.3 | 180.2 | 28.2 | 14.8 | 840.5 | ||||||||||||||
(-) Principal Investment Income (Loss) | 38.5 | (48.0 | ) | 12.9 | 3.1 | 6.5 | |||||||||||||
(+) Equity-based Compensation | 47.3 | 26.8 | 16.9 | 6.2 | 97.2 | ||||||||||||||
(+) Net Interest | 17.4 | 10.7 | 5.4 | 3.7 | 37.2 | ||||||||||||||
(+) Reserve for Litigation and Contingencies | (12.5 | ) | (5.8 | ) | (4.1 | ) | (2.6 | ) | (25.0 | ) | |||||||||
(=) Fee Related Earnings | $ | 43.7 | $ | 17.4 | $ | 81.4 | $ | 22.8 | $ | 165.3 | |||||||||
(+) Realized Net Performance Revenues | 373.4 | 40.2 | 19.6 | 1.1 | 434.3 | ||||||||||||||
(+) Realized Principal Investment Income (Loss) | 15.6 | (72.4 | ) | 8.6 | — | (48.2 | ) | ||||||||||||
(+) Net Interest | (17.4 | ) | (10.7 | ) | (5.4 | ) | (3.7 | ) | (37.2 | ) | |||||||||
(=) Distributable Earnings | $ | 415.3 | $ | (25.5 | ) | $ | 104.2 | $ | 20.2 | $ | 514.2 | ||||||||
56
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table reconciles the Total Segments to the Partnership's Income Before Provision for Taxes for the three months ended September 30, 2018 and 2017.
Three Months Ended September 30, 2018 | |||||||||||||||||
Total Reportable Segments | Consolidated Funds | Reconciling Items | Carlyle Consolidated | ||||||||||||||
(Dollars in millions) | |||||||||||||||||
Revenues | $ | 612.9 | $ | 60.5 | $ | 5.7 | (a) | $ | 679.1 | ||||||||
Expenses | $ | 502.3 | $ | 51.0 | $ | 62.3 | (b) | $ | 615.6 | ||||||||
Other income | $ | — | $ | (2.9 | ) | $ | — | (c) | $ | (2.9 | ) | ||||||
Economic income | $ | 110.6 | $ | 6.6 | $ | (56.6 | ) | (d) | $ | 60.6 | |||||||
Three Months Ended September 30, 2017 | |||||||||||||||||
Total Reportable Segments | Consolidated Funds | Reconciling Items | Carlyle Consolidated | ||||||||||||||
(Dollars in millions) | |||||||||||||||||
Revenues | $ | 547.5 | $ | 44.7 | $ | 47.7 | (a) | $ | 639.9 | ||||||||
Expenses | $ | 344.8 | $ | 52.3 | $ | 95.5 | (b) | $ | 492.6 | ||||||||
Other income | $ | — | $ | 18.6 | $ | — | (c) | $ | 18.6 | ||||||||
Economic income | $ | 202.7 | $ | 11.0 | $ | (47.8 | ) | (d) | $ | 165.9 | |||||||
The following table reconciles the Total Segments to the Partnership’s Income Before Provision for Taxes for the nine months ended September 30, 2018 and 2017, and Total Assets as of September 30, 2018.
September 30, 2018 and the Nine Months Then Ended | |||||||||||||||||
Total Reportable Segments | Consolidated Funds | Reconciling Items | Carlyle Consolidated | ||||||||||||||
(Dollars in millions) | |||||||||||||||||
Revenues | $ | 2,107.0 | $ | 161.4 | $ | 7.1 | (a) | $ | 2,275.5 | ||||||||
Expenses | $ | 1,555.3 | $ | 157.3 | $ | 136.0 | (b) | $ | 1,848.6 | ||||||||
Other income | $ | — | $ | 12.0 | $ | — | (c) | $ | 12.0 | ||||||||
Economic income | $ | 551.7 | $ | 16.1 | $ | (128.9 | ) | (d) | $ | 438.9 | |||||||
Total assets | $ | 8,213.0 | $ | 5,469.8 | $ | (249.1 | ) | (e) | $ | 13,433.7 | |||||||
Nine Months Ended September 30, 2017 | |||||||||||||||||
Total Reportable Segments | Consolidated Funds | Reconciling Items | Carlyle Consolidated | ||||||||||||||
(Dollars in millions) | |||||||||||||||||
Revenues | $ | 2,407.7 | $ | 132.6 | $ | 128.1 | (a) | $ | 2,668.4 | ||||||||
Expenses | $ | 1,504.8 | $ | 197.2 | $ | 305.5 | (b) | $ | 2,007.5 | ||||||||
Other income | $ | — | $ | 76.4 | $ | — | (c) | $ | 76.4 | ||||||||
Economic income | $ | 902.9 | $ | 11.8 | $ | (177.4 | ) | (d) | $ | 737.3 | |||||||
(a) | The Revenues adjustment principally represents fund management fees and performance revenues earned from the Consolidated Funds which were eliminated in consolidation to arrive at the Partnership’s total revenues, adjustments for amounts attributable to non-controlling interests in consolidated entities, adjustments related to expenses associated with the investments in NGP Management and its affiliates that are included in operating captions or are excluded from the segment results, adjustments to reflect the reimbursement of certain costs incurred on behalf of Carlyle funds on a net basis, adjustments to reflect the Partnership’s share of Urbplan’s net losses as a component of investment income |
57
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
until Urbplan was deconsolidated during 2017, the inclusion of tax expenses associated with certain performance revenues, and adjustments to reflect the Partnership’s ownership interests in Claren Road (through January 2017) that were included in Revenues in the Partnership’s segment reporting.
The following table reconciles the total segments fund level fee revenue to the most directly comparable U.S. GAAP measure, the Partnership's consolidated fund management fees, for the three months and nine months ended September 30, 2018 and 2017.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Total Reportable Segments - Fund level fee revenues | $ | 362.9 | $ | 288.6 | $ | 992.1 | $ | 819.2 | |||||||
Adjustments (1) | (34.1 | ) | (26.1 | ) | (97.5 | ) | (71.6 | ) | |||||||
Carlyle Consolidated - Fund management fees | $ | 328.8 | $ | 262.5 | $ | 894.6 | $ | 747.6 | |||||||
(1) Adjustments represent the reclassification of NGP management fees from principal investment income, the reclassification of certain incentive fees from business development companies, and management fees earned from our consolidated CLOs which were eliminated in consolidation to arrive at the Partnership's fund management fees.
(b) | The Expenses adjustment represents the elimination of intercompany expenses of the Consolidated Funds payable to the Partnership, the inclusion of certain tax expenses associated with performance revenues related compensation, adjustments related to expenses associated with the investment in NGP Management that are included in operating captions, adjustments to reflect the reimbursement of certain costs incurred on behalf of Carlyle funds on a net basis, adjustments to reflect the Partnership’s share of Urbplan’s net losses as a component of investment income until Urbplan was deconsolidated during 2017, changes in the tax receivable agreement liability, charges and credits associated with Carlyle corporate actions and non-recurring items and adjustments to reflect the Partnership’s economic interests in Claren Road (through January 2017), as detailed below (Dollars in millions): |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Equity-based compensation issued in conjunction with the initial public offering, acquisitions and strategic investments | $ | 0.3 | $ | 58.3 | $ | 68.8 | $ | 183.8 | |||||||
Acquisition related charges and amortization of intangibles and impairment | 2.4 | 7.2 | 16.2 | 25.2 | |||||||||||
Other non-operating expense | 0.3 | — | 0.9 | 0.1 | |||||||||||
Tax (expense) benefit associated with performance revenues | (12.7 | ) | (1.7 | ) | (11.0 | ) | (7.0 | ) | |||||||
Non-Carlyle economic interests in acquired businesses and other adjustments to present certain costs on a net basis | 8.3 | 46.2 | 16.6 | 128.8 | |||||||||||
Lease assignment and termination costs | 63.5 | — | 66.9 | — | |||||||||||
Debt extinguishment costs | 7.8 | — | 7.8 | — | |||||||||||
Severance and other adjustments | 2.9 | 0.6 | 5.4 | 10.9 | |||||||||||
Elimination of expenses of Consolidated Funds | (10.5 | ) | (15.1 | ) | (35.6 | ) | (36.3 | ) | |||||||
$ | 62.3 | $ | 95.5 | $ | 136.0 | $ | 305.5 | ||||||||
(c) | The Other Income (Loss) adjustment results from the Consolidated Funds which were eliminated in consolidation to arrive at the Partnership’s total Other Income (Loss). |
58
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(d) | The following table is a reconciliation of Income Before Provision for Income Taxes to Economic Income, to Fee Related Earnings, and to Distributable Earnings (Dollars in millions): |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Income before provision for income taxes | $ | 60.6 | $ | 165.9 | $ | 438.9 | $ | 737.3 | |||||||
Adjustments: | |||||||||||||||
Equity-based compensation issued in conjunction with the initial public offering, acquisitions and strategic investments | 0.3 | 58.3 | 68.8 | 183.8 | |||||||||||
Acquisition related charges, including amortization of intangibles and impairment | 2.4 | 7.2 | 16.2 | 25.2 | |||||||||||
Other non-operating expense | 0.3 | — | 0.9 | 0.1 | |||||||||||
Tax expense associated with performance revenues | (12.7 | ) | (1.7 | ) | (11.0 | ) | (7.0 | ) | |||||||
Net (income) loss attributable to non-controlling interests in consolidated entities | (14.5 | ) | (27.6 | ) | (42.2 | ) | (47.4 | ) | |||||||
Lease assignment and termination costs | 63.5 | — | 66.9 | — | |||||||||||
Debt extinguishment costs | 7.8 | — | 7.8 | — | |||||||||||
Severance and other adjustments | 2.9 | 0.6 | 5.4 | 10.9 | |||||||||||
Economic Income | $ | 110.6 | $ | 202.7 | $ | 551.7 | $ | 902.9 | |||||||
Net performance revenues(1) | 69.3 | 147.0 | 478.9 | 840.5 | |||||||||||
Principal investment income (loss) (1) | 13.9 | (35.3 | ) | 68.8 | 6.5 | ||||||||||
Equity-based compensation | 51.7 | 30.4 | 139.4 | 97.2 | |||||||||||
Net interest | 9.9 | 11.6 | 31.6 | 37.2 | |||||||||||
Reserve for litigation and contingencies | — | (25.0 | ) | — | (25.0 | ) | |||||||||
Fee Related Earnings | $ | 89.0 | $ | 108.0 | $ | 175.0 | $ | 165.3 | |||||||
Realized performance revenues, net of related compensation | 123.9 | 216.9 | 276.6 | 434.3 | |||||||||||
Realized principal investment income (loss)(1) | 7.0 | (53.4 | ) | 43.4 | (48.2 | ) | |||||||||
Net interest | (9.9 | ) | (11.6 | ) | (31.6 | ) | (37.2 | ) | |||||||
Distributable Earnings | $ | 210.0 | $ | 259.9 | $ | 463.4 | $ | 514.2 | |||||||
59
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(1) See reconciliation to most directly comparable U.S. GAAP measure below:
Three Months Ended September 30, 2018 | |||||||||||
Carlyle Consolidated | Adjustments (2) | Total Reportable Segments | |||||||||
(Dollars in millions) | |||||||||||
Performance revenues(a) | |||||||||||
Realized | $ | 266.6 | $ | (6.4 | ) | $ | 260.2 | ||||
Unrealized | (52.4 | ) | 17.1 | (35.3 | ) | ||||||
Total performance revenues(a) | 214.2 | 10.7 | 224.9 | ||||||||
Performance revenues related compensation expense(b) | |||||||||||
Realized | 134.5 | 1.8 | 136.3 | ||||||||
Unrealized | 11.5 | 7.8 | 19.3 | ||||||||
Total performance revenues related compensation expense(b) | 146.0 | 9.6 | 155.6 | ||||||||
Net performance revenues | |||||||||||
Realized | 132.1 | (8.2 | ) | 123.9 | |||||||
Unrealized | (63.9 | ) | 9.3 | (54.6 | ) | ||||||
Total net performance revenues | $ | 68.2 | $ | 1.1 | $ | 69.3 | |||||
Principal investment income (loss) | |||||||||||
Realized | $ | 30.7 | $ | (23.7 | ) | $ | 7.0 | ||||
Unrealized | 13.7 | (6.8 | ) | 6.9 | |||||||
Total principal investment income (loss) | $ | 44.4 | $ | (30.5 | ) | $ | 13.9 | ||||
Three Months Ended September 30, 2017 | |||||||||||
Carlyle Consolidated | Adjustments (2) | Total Reportable Segments | |||||||||
(Dollars in millions) | |||||||||||
Performance revenues(a) | |||||||||||
Realized | $ | 401.4 | $ | 9.6 | $ | 411.0 | |||||
Unrealized | (126.2 | ) | 0.6 | (125.6 | ) | ||||||
Total performance revenues(a) | 275.2 | 10.2 | 285.4 | ||||||||
Performance revenues related compensation expense(b) | |||||||||||
Realized | 189.4 | 4.7 | 194.1 | ||||||||
Unrealized | (51.8 | ) | (3.9 | ) | (55.7 | ) | |||||
Total performance revenues related compensation expense(b) | 137.6 | 0.8 | 138.4 | ||||||||
Net performance revenues | |||||||||||
Realized | 212.0 | 4.9 | 216.9 | ||||||||
Unrealized | (74.4 | ) | 4.5 | (69.9 | ) | ||||||
Total net performance revenues | $ | 137.6 | $ | 9.4 | $ | 147.0 | |||||
Principal investment income (loss) | |||||||||||
Realized | $ | 15.5 | $ | (68.9 | ) | $ | (53.4 | ) | |||
Unrealized | 21.7 | (3.6 | ) | 18.1 | |||||||
Total principal investment income (loss) | $ | 37.2 | $ | (72.5 | ) | $ | (35.3 | ) | |||
60
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, 2018 | |||||||||||
Carlyle Consolidated | Adjustments (2) | Total Reportable Segments | |||||||||
(Dollars in millions) | |||||||||||
Performance revenues(a) | |||||||||||
Realized | $ | 584.6 | $ | (13.9 | ) | $ | 570.7 | ||||
Unrealized | 362.8 | 78.3 | 441.1 | ||||||||
Total performance revenues(a) | 947.4 | 64.4 | 1,011.8 | ||||||||
Performance revenues related compensation expense(b) | |||||||||||
Realized | 294.6 | (0.5 | ) | 294.1 | |||||||
Unrealized | 231.4 | 7.4 | 238.8 | ||||||||
Total performance revenues related compensation expense(b) | 526.0 | 6.9 | 532.9 | ||||||||
Net performance revenues | |||||||||||
Realized | 290.0 | (13.4 | ) | 276.6 | |||||||
Unrealized | 131.4 | 70.9 | 202.3 | ||||||||
Total net performance revenues | $ | 421.4 | $ | 57.5 | $ | 478.9 | |||||
Principal investment income (loss) | |||||||||||
Realized | $ | 94.5 | $ | (51.1 | ) | $ | 43.4 | ||||
Unrealized | 82.2 | (56.8 | ) | 25.4 | |||||||
Total principal investment income (loss) | $ | 176.7 | $ | (107.9 | ) | $ | 68.8 | ||||
Nine Months Ended September 30, 2017 | |||||||||||
Carlyle Consolidated | Adjustments (2) | Total Reportable Segments | |||||||||
(Dollars in millions) | |||||||||||
Performance revenues(a) | |||||||||||
Realized | $ | 825.6 | $ | 21.1 | $ | 846.7 | |||||
Unrealized | 658.1 | 54.6 | 712.7 | ||||||||
Total performance revenues(a) | 1,483.7 | 75.7 | 1,559.4 | ||||||||
Performance revenues related compensation expense(b) | |||||||||||
Realized | 401.9 | 10.5 | 412.4 | ||||||||
Unrealized | 309.9 | (3.4 | ) | 306.5 | |||||||
Total performance revenues related compensation expense(b) | 711.8 | 7.1 | 718.9 | ||||||||
Net performance revenues | |||||||||||
Realized | 423.7 | 10.6 | 434.3 | ||||||||
Unrealized | 348.2 | 58.0 | 406.2 | ||||||||
Total net performance revenues | $ | 771.9 | $ | 68.6 | $ | 840.5 | |||||
Principal investment income (loss) | |||||||||||
Realized | $ | 42.0 | $ | (90.2 | ) | $ | (48.2 | ) | |||
Unrealized | 100.5 | (45.8 | ) | 54.7 | |||||||
Total principal investment income (loss) | $ | 142.5 | $ | (136.0 | ) | $ | 6.5 | ||||
(a) Amounts labeled as performance allocations in the unaudited condensed consolidated statements of operations.
(b) Amounts labeled as performance allocations and incentive fee related compensation in the unaudited condensed consolidated statements of operations.
61
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(2) Adjustments to performance revenues and principal investment income (loss) relate to (i) amounts earned from the Consolidated Funds, which were eliminated in the U.S. GAAP consolidation but were included in the segment results, (ii) amounts attributable to non-controlling interests in consolidated entities, which were excluded from the segment results, (iii) the reclassification of NGP performance revenues, which are included in investment income in U.S. GAAP financial statements, (iv) the reclassification of certain incentive fees from business development companies, which are included in fund management fees in the segment results, and (v) the reclassification of certain tax expenses associated with performance revenues. Adjustments to principal investment income (loss) also include the reclassification of earnings for the investments in NGP Management and its affiliates to the appropriate operating captions for the segment results, the exclusion of charges associated with the investment in NGP Management and its affiliates that are excluded from the segment results, and adjustments to reflect the Partnership’s share of Urbplan’s net losses as investment losses for the segment results until Urbplan was deconsolidated during the third quarter of 2017. Adjustments are also included in these financial statement captions to reflect the Partnership’s economic interests in Claren Road (through January 2017).
(e) The Total Assets adjustment represents the addition of the assets of the Consolidated Funds that were eliminated in consolidation to arrive at the Partnership’s total assets.
14. Subsequent Events
Distributions
In October 2018, the Board of Directors of the general partner of the Partnership declared a quarterly distribution of $0.42 per common unit to common unitholders of record at the close of business on November 13, 2018, payable on November 20, 2018.
In October 2018, the Board of Directors of the general partner of the Partnership declared a quarterly distribution of $0.367188 per Preferred Unit to preferred unitholders of record at the close of business on December 1, 2018, payable on December 17, 2018. See Note 12 for more information on the Preferred Units.
Acquisition of AAG
On October 10, 2018, a subsidiary of the Partnership entered into a securities purchase agreement with H&K AAG Holdings LLC (the “Seller”), pursuant to which the Partnership has agreed to acquire Apollo Aviation Group (“AAG”) from Seller. The transaction is expected to close by January 31, 2019. At closing, the Partnership will consolidate the financial position and results of operations of AAG within Carlyle's Global Credit segment, operating as Carlyle Aviation Partners Ltd., and will account for this transaction as a business combination.
AAG is a Miami, Florida-based multi-strategy investment manager that is engaged in commercial aviation aircraft financing and investment and providing investment management services related to the commercial aviation industry. AAG has $5.6 billion in assets under management with an investor base that is predominantly institutional, including public and private pension funds, family offices and endowments. In connection with the acquisition of AAG, the Partnership, acting through one of its subsidiaries, has entered into employment agreements with the founders to provide expertise in commercial aviation aircraft financing and investment and investment management services related to the commercial aviation industry.
Pursuant to the securities purchase agreement, the Partnership will acquire 100% of the equity interests in AAG, which will entitle the Partnership to 100% of the management fee-related revenues and advisory fee-related revenues of AAG and its subsidiaries. The Partnership will also be entitled to 55% of performance allocations of AAG, net of compensation to its founders, employees and service providers. In consideration for acquiring 100% of the equity interests in AAG, the Partnership has agreed to pay to the Seller (i) at the closing of the acquisition, subject to customary adjustments for cash, debt, working capital and transaction expenses, $75 million and (ii) subject to AAG achieving certain performance targets during 2020 through 2025, up to $150 million.
62
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
15. Supplemental Financial Information
The following supplemental financial information illustrates the consolidating effects of the Consolidated Funds on the Partnership’s financial position as of September 30, 2018 and December 31, 2017 and results of operations for the three and nine months ended September 30, 2018 and 2017. The supplemental statement of cash flows is presented without effects of the Consolidated Funds.
As of September 30, 2018 | |||||||||||||||
Consolidated Operating Entities | Consolidated Funds | Eliminations | Consolidated | ||||||||||||
(Dollars in millions) | |||||||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | 1,238.2 | $ | — | $ | — | $ | 1,238.2 | |||||||
Cash and cash equivalents held at Consolidated Funds | — | 241.8 | — | 241.8 | |||||||||||
Restricted cash | 1.4 | — | — | 1.4 | |||||||||||
Corporate treasury investments | 224.0 | — | — | 224.0 | |||||||||||
Investments, including performance allocations of $3,952.7 million | 6,051.1 | — | (242.8 | ) | 5,808.3 | ||||||||||
Investments of Consolidated Funds | — | 5,095.4 | — | 5,095.4 | |||||||||||
Due from affiliates and other receivables, net | 328.1 | — | (6.3 | ) | 321.8 | ||||||||||
Due from affiliates and other receivables of Consolidated Funds, net | — | 132.6 | — | 132.6 | |||||||||||
Fixed assets, net | 93.4 | — | — | 93.4 | |||||||||||
Deposits and other | 62.8 | — | — | 62.8 | |||||||||||
Intangible assets, net | 27.2 | — | — | 27.2 | |||||||||||
Deferred tax assets | 186.8 | — | — | 186.8 | |||||||||||
Total assets | $ | 8,213.0 | $ | 5,469.8 | $ | (249.1 | ) | $ | 13,433.7 | ||||||
Liabilities and partners’ capital | |||||||||||||||
Debt obligations | $ | 1,558.4 | $ | — | $ | — | $ | 1,558.4 | |||||||
Loans payable of Consolidated Funds | — | 4,774.6 | — | 4,774.6 | |||||||||||
Accounts payable, accrued expenses and other liabilities | 475.7 | — | — | 475.7 | |||||||||||
Accrued compensation and benefits | 2,532.0 | — | — | 2,532.0 | |||||||||||
Due to affiliates | 160.7 | — | — | 160.7 | |||||||||||
Deferred revenue | 266.5 | — | — | 266.5 | |||||||||||
Deferred tax liabilities | 78.0 | — | — | 78.0 | |||||||||||
Other liabilities of Consolidated Funds | — | 445.4 | — | 445.4 | |||||||||||
Accrued giveback obligations | 63.2 | — | — | 63.2 | |||||||||||
Total liabilities | 5,134.5 | 5,220.0 | — | 10,354.5 | |||||||||||
Series A preferred units | 387.5 | — | — | 387.5 | |||||||||||
Partners’ capital | 741.0 | 75.9 | (75.9 | ) | 741.0 | ||||||||||
Accumulated other comprehensive loss | (82.6 | ) | 2.0 | (3.2 | ) | (83.8 | ) | ||||||||
Non-controlling interests in consolidated entities | 374.0 | 4.3 | — | 378.3 | |||||||||||
Non-controlling interests in Carlyle Holdings | 1,658.6 | 167.6 | (170.0 | ) | 1,656.2 | ||||||||||
Total partners’ capital | 3,078.5 | 249.8 | (249.1 | ) | 3,079.2 | ||||||||||
Total liabilities and partners’ capital | $ | 8,213.0 | $ | 5,469.8 | $ | (249.1 | ) | $ | 13,433.7 | ||||||
63
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
As of December 31, 2017 (As Adjusted) | |||||||||||||||
Consolidated Operating Entities | Consolidated Funds | Eliminations | Consolidated | ||||||||||||
(Dollars in millions) | |||||||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | 1,000.1 | $ | — | $ | — | $ | 1,000.1 | |||||||
Cash and cash equivalents held at Consolidated Funds | — | 377.6 | — | 377.6 | |||||||||||
Restricted cash | 28.7 | — | — | 28.7 | |||||||||||
Corporate treasury investments | 376.3 | — | — | 376.3 | |||||||||||
Investments, including performance allocations of $3,664.3 million | 5,508.5 | — | (219.9 | ) | 5,288.6 | ||||||||||
Investments of Consolidated Funds | — | 4,534.3 | — | 4,534.3 | |||||||||||
Due from affiliates and other receivables, net | 268.7 | — | (5.3 | ) | 263.4 | ||||||||||
Due from affiliates and other receivables of Consolidated Funds, net | — | 50.8 | — | 50.8 | |||||||||||
Fixed assets, net | 100.4 | — | — | 100.4 | |||||||||||
Deposits and other | 54.1 | — | — | 54.1 | |||||||||||
Intangible assets, net | 35.9 | — | — | 35.9 | |||||||||||
Deferred tax assets | 170.4 | — | — | 170.4 | |||||||||||
Total assets | $ | 7,543.1 | $ | 4,962.7 | $ | (225.2 | ) | $ | 12,280.6 | ||||||
Liabilities and partners’ capital | |||||||||||||||
Loans payable | $ | 1,573.6 | $ | — | $ | — | $ | 1,573.6 | |||||||
Loans payable of Consolidated Funds | — | 4,303.8 | — | 4,303.8 | |||||||||||
Accounts payable, accrued expenses and other liabilities | 355.1 | — | — | 355.1 | |||||||||||
Accrued compensation and benefits | 2,222.6 | — | — | 2,222.6 | |||||||||||
Due to affiliates | 229.9 | — | — | 229.9 | |||||||||||
Deferred revenue | 82.1 | — | — | 82.1 | |||||||||||
Deferred tax liabilities | 75.6 | — | — | 75.6 | |||||||||||
Other liabilities of Consolidated Funds | — | 422.1 | — | 422.1 | |||||||||||
Accrued giveback obligations | 66.8 | — | — | 66.8 | |||||||||||
Total liabilities | 4,605.7 | 4,725.9 | — | 9,331.6 | |||||||||||
Series A preferred units | 387.5 | — | — | 387.5 | |||||||||||
Partners’ capital | 701.8 | 62.8 | (62.8 | ) | 701.8 | ||||||||||
Accumulated other comprehensive income (loss) | (72.2 | ) | 4.1 | (4.6 | ) | (72.7 | ) | ||||||||
Non-controlling interests in consolidated entities | 391.4 | 13.3 | — | 404.7 | |||||||||||
Non-controlling interests in Carlyle Holdings | 1,528.9 | 156.6 | (157.8 | ) | 1,527.7 | ||||||||||
Total partners’ capital | 2,937.4 | 236.8 | (225.2 | ) | 2,949.0 | ||||||||||
Total liabilities and partners’ capital | $ | 7,543.1 | $ | 4,962.7 | $ | (225.2 | ) | $ | 12,280.6 | ||||||
64
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended September 30, 2018 | |||||||||||||||
Consolidated Operating Entities | Consolidated Funds | Eliminations | Consolidated | ||||||||||||
(Dollars in millions) | |||||||||||||||
Revenues | |||||||||||||||
Fund management fees | $ | 335.2 | $ | — | $ | (6.4 | ) | $ | 328.8 | ||||||
Incentive fees | 6.8 | — | — | 6.8 | |||||||||||
Investment income (loss) | |||||||||||||||
Performance allocations | |||||||||||||||
Realized | 266.6 | — | — | 266.6 | |||||||||||
Unrealized | (52.4 | ) | — | — | (52.4 | ) | |||||||||
Principal investment income | |||||||||||||||
Realized | 31.2 | — | (0.5 | ) | 30.7 | ||||||||||
Unrealized | 17.6 | — | (3.9 | ) | 13.7 | ||||||||||
Total investment income | 263.0 | — | (4.4 | ) | 258.6 | ||||||||||
Interest and other income | 30.9 | — | (6.5 | ) | 24.4 | ||||||||||
Interest and other income of Consolidated Funds | — | 60.5 | — | 60.5 | |||||||||||
Total revenues | 635.9 | 60.5 | (17.3 | ) | 679.1 | ||||||||||
Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | 186.6 | — | — | 186.6 | |||||||||||
Equity-based compensation | 49.7 | — | — | 49.7 | |||||||||||
Performance allocations and incentive fee related compensation | |||||||||||||||
Realized | 134.5 | — | — | 134.5 | |||||||||||
Unrealized | 11.5 | — | — | 11.5 | |||||||||||
Total compensation and benefits | 382.3 | — | — | 382.3 | |||||||||||
General, administrative and other expenses | 166.2 | — | — | 166.2 | |||||||||||
Interest | 26.3 | — | — | 26.3 | |||||||||||
Interest and other expenses of Consolidated Funds | — | 51.0 | (10.5 | ) | 40.5 | ||||||||||
Other non-operating expenses | 0.3 | — | — | 0.3 | |||||||||||
Total expenses | 575.1 | 51.0 | (10.5 | ) | 615.6 | ||||||||||
Other loss | |||||||||||||||
Net investment losses of Consolidated Funds | — | (2.9 | ) | — | (2.9 | ) | |||||||||
Income before provision for income taxes | 60.8 | 6.6 | (6.8 | ) | 60.6 | ||||||||||
Provision for income taxes | 17.4 | — | — | 17.4 | |||||||||||
Net income | 43.4 | 6.6 | (6.8 | ) | 43.2 | ||||||||||
Net income attributable to non-controlling interests in consolidated entities | 14.7 | — | (0.2 | ) | 14.5 | ||||||||||
Net income attributable to Carlyle Holdings | 28.7 | 6.6 | (6.6 | ) | 28.7 | ||||||||||
Net income attributable to non-controlling interests in Carlyle Holdings | 11.2 | — | — | 11.2 | |||||||||||
Net income attributable to The Carlyle Group L.P. | 17.5 | 6.6 | (6.6 | ) | 17.5 | ||||||||||
Net income attributable to Series A Preferred Unitholders | 5.9 | — | — | 5.9 | |||||||||||
Net income attributable to The Carlyle Group L.P. Common Unitholders | $ | 11.6 | $ | 6.6 | $ | (6.6 | ) | $ | 11.6 | ||||||
65
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, 2018 | |||||||||||||||
Consolidated Operating Entities | Consolidated Funds | Eliminations | Consolidated | ||||||||||||
(Dollars in millions) | |||||||||||||||
Revenues | |||||||||||||||
Fund management fees | $ | 912.9 | $ | — | $ | (18.3 | ) | $ | 894.6 | ||||||
Incentive fees | 20.5 | — | — | 20.5 | |||||||||||
Investment income (loss) | |||||||||||||||
Performance allocations | |||||||||||||||
Realized | 584.6 | — | — | 584.6 | |||||||||||
Unrealized | 362.8 | — | — | 362.8 | |||||||||||
Principal investment income | |||||||||||||||
Realized | 100.2 | — | (5.7 | ) | 94.5 | ||||||||||
Unrealized | 97.2 | — | (15.0 | ) | 82.2 | ||||||||||
Total investment income | 1,144.8 | — | (20.7 | ) | 1,124.1 | ||||||||||
Interest and other income | 92.9 | — | (18.0 | ) | 74.9 | ||||||||||
Interest and other income of Consolidated Funds | — | 161.4 | — | 161.4 | |||||||||||
Total revenues | 2,171.1 | 161.4 | (57.0 | ) | 2,275.5 | ||||||||||
Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | 549.9 | — | — | 549.9 | |||||||||||
Equity-based compensation | 199.5 | — | — | 199.5 | |||||||||||
Performance allocations and incentive fee related compensation | |||||||||||||||
Realized | 294.6 | — | — | 294.6 | |||||||||||
Unrealized | 231.4 | — | — | 231.4 | |||||||||||
Total compensation and benefits | 1,275.4 | — | — | 1,275.4 | |||||||||||
General, administrative and other expenses | 388.0 | — | — | 388.0 | |||||||||||
Interest | 62.6 | — | — | 62.6 | |||||||||||
Interest and other expenses of Consolidated Funds | — | 157.3 | (35.6 | ) | 121.7 | ||||||||||
Other non-operating expenses | 0.9 | — | — | 0.9 | |||||||||||
Total expenses | 1,726.9 | 157.3 | (35.6 | ) | 1,848.6 | ||||||||||
Other loss | |||||||||||||||
Net investment losses of Consolidated Funds | — | 12.0 | — | 12.0 | |||||||||||
Income before provision for income taxes | 444.2 | 16.1 | (21.4 | ) | 438.9 | ||||||||||
Provision for income taxes | 36.8 | — | — | 36.8 | |||||||||||
Net income | 407.4 | 16.1 | (21.4 | ) | 402.1 | ||||||||||
Net income attributable to non-controlling interests in consolidated entities | 47.5 | — | (5.3 | ) | 42.2 | ||||||||||
Net income attributable to Carlyle Holdings | 359.9 | 16.1 | (16.1 | ) | 359.9 | ||||||||||
Net income attributable to non-controlling interests in Carlyle Holdings | 233.3 | — | — | 233.3 | |||||||||||
Net income attributable to The Carlyle Group L.P. | 126.6 | 16.1 | (16.1 | ) | 126.6 | ||||||||||
Net income attributable to Series A Preferred Unitholders | 17.7 | — | — | 17.7 | |||||||||||
Net income attributable to The Carlyle Group L.P. Common Unitholders | $ | 108.9 | $ | 16.1 | $ | (16.1 | ) | $ | 108.9 | ||||||
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended September 30, 2017 (As Adjusted) | |||||||||||||||
Consolidated Operating Entities | Consolidated Funds | Eliminations | Consolidated | ||||||||||||
(Dollars in millions) | |||||||||||||||
Revenues | |||||||||||||||
Fund management fees | $ | 267.5 | $ | — | $ | (5.0 | ) | $ | 262.5 | ||||||
Incentive fees | 10.9 | — | (0.5 | ) | 10.4 | ||||||||||
Investment income (loss) | |||||||||||||||
Performance allocations | |||||||||||||||
Realized | 401.4 | — | — | 401.4 | |||||||||||
Unrealized | (126.2 | ) | — | — | (126.2 | ) | |||||||||
Principal investment income | |||||||||||||||
Realized | 15.4 | — | 0.1 | 15.5 | |||||||||||
Unrealized | 26.1 | — | (4.4 | ) | 21.7 | ||||||||||
Total investment income | 316.7 | — | (4.3 | ) | 312.4 | ||||||||||
Interest and other income | 18.0 | — | (8.1 | ) | 9.9 | ||||||||||
Interest and other income of Consolidated Funds | — | 44.7 | — | 44.7 | |||||||||||
Total revenues | 613.1 | 44.7 | (17.9 | ) | 639.9 | ||||||||||
Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | 174.1 | — | — | 174.1 | |||||||||||
Equity-based compensation | 81.0 | — | — | 81.0 | |||||||||||
Performance allocations and incentive fee related compensation | |||||||||||||||
Realized | 189.4 | — | — | 189.4 | |||||||||||
Unrealized | (51.8 | ) | — | — | (51.8 | ) | |||||||||
Total compensation and benefits | 392.7 | — | — | 392.7 | |||||||||||
General, administrative and other expenses | (18.7 | ) | — | — | (18.7 | ) | |||||||||
Interest | 16.9 | — | — | 16.9 | |||||||||||
Interest and other expenses of Consolidated Funds | — | 52.3 | (15.1 | ) | 37.2 | ||||||||||
Interest and other expenses of a real estate VIE and loss on deconsolidation | 64.5 | — | — | 64.5 | |||||||||||
Total expenses | 455.4 | 52.3 | (15.1 | ) | 492.6 | ||||||||||
Other income | |||||||||||||||
Net investment gains of Consolidated Funds | — | 18.6 | — | 18.6 | |||||||||||
Income before provision for income taxes | 157.7 | 11.0 | (2.8 | ) | 165.9 | ||||||||||
Benefit for income taxes | (1.3 | ) | — | — | (1.3 | ) | |||||||||
Net income | 159.0 | 11.0 | (2.8 | ) | 167.2 | ||||||||||
Net income attributable to non-controlling interests in consolidated entities | 19.4 | — | 8.2 | 27.6 | |||||||||||
Net income attributable to Carlyle Holdings | 139.6 | 11.0 | (11.0 | ) | 139.6 | ||||||||||
Net income attributable to non-controlling interests in Carlyle Holdings | 95.0 | — | — | 95.0 | |||||||||||
Net income attributable to The Carlyle Group L.P. | $ | 44.6 | $ | 11.0 | $ | (11.0 | ) | $ | 44.6 | ||||||
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, 2017 (As Adjusted) | |||||||||||||||
Consolidated Operating Entities | Consolidated Funds | Eliminations | Consolidated | ||||||||||||
(Dollars in millions) | |||||||||||||||
Revenues | |||||||||||||||
Fund management fees | $ | 761.2 | $ | — | $ | (13.6 | ) | $ | 747.6 | ||||||
Incentive fees | 29.6 | — | (2.5 | ) | 27.1 | ||||||||||
Investment income (loss) | |||||||||||||||
Performance allocations | |||||||||||||||
Realized | 825.6 | — | — | 825.6 | |||||||||||
Unrealized | 658.1 | — | — | 658.1 | |||||||||||
Principal investment income | |||||||||||||||
Realized | 42.6 | — | (0.6 | ) | 42.0 | ||||||||||
Unrealized | 105.5 | — | (5.0 | ) | 100.5 | ||||||||||
Total investment income | 1,631.8 | — | (5.6 | ) | 1,626.2 | ||||||||||
Interest and other income | 44.2 | — | (18.3 | ) | 25.9 | ||||||||||
Interest and other income of Consolidated Funds | — | 132.6 | — | 132.6 | |||||||||||
Revenue of a real estate VIE | 109.0 | — | — | 109.0 | |||||||||||
Total revenues | 2,575.8 | 132.6 | (40.0 | ) | 2,668.4 | ||||||||||
Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | 471.1 | — | — | 471.1 | |||||||||||
Equity-based compensation | 241.8 | — | — | 241.8 | |||||||||||
Performance allocations and incentive fee related compensation | |||||||||||||||
Realized | 401.9 | — | — | 401.9 | |||||||||||
Unrealized | 309.9 | — | — | 309.9 | |||||||||||
Total compensation and benefits | 1,424.7 | — | — | 1,424.7 | |||||||||||
General, administrative and other expenses | 170.9 | — | — | 170.9 | |||||||||||
Interest | 48.4 | — | — | 48.4 | |||||||||||
Interest and other expenses of Consolidated Funds | — | 197.2 | (36.3 | ) | 160.9 | ||||||||||
Interest and other expenses of a real estate VIE and loss on deconsolidation | 202.5 | — | — | 202.5 | |||||||||||
Other non-operating expenses | 0.1 | — | — | 0.1 | |||||||||||
Total expenses | 1,846.6 | 197.2 | (36.3 | ) | 2,007.5 | ||||||||||
Other income | |||||||||||||||
Net investment gains of Consolidated Funds | — | 76.4 | — | 76.4 | |||||||||||
Income before provision for income taxes | 729.2 | 11.8 | (3.7 | ) | 737.3 | ||||||||||
Provision for income taxes | 17.7 | — | — | 17.7 | |||||||||||
Net income | 711.5 | 11.8 | (3.7 | ) | 719.6 | ||||||||||
Net income attributable to non-controlling interests in consolidated entities | 39.3 | — | 8.1 | 47.4 | |||||||||||
Net income attributable to Carlyle Holdings | 672.2 | 11.8 | (11.8 | ) | 672.2 | ||||||||||
Net income attributable to non-controlling interests in Carlyle Holdings | 487.0 | — | — | 487.0 | |||||||||||
Net income attributable to The Carlyle Group L.P. | $ | 185.2 | $ | 11.8 | $ | (11.8 | ) | $ | 185.2 | ||||||
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
(Dollars in millions) | |||||||
Cash flows from operating activities | |||||||
Net income | $ | 407.4 | $ | 711.5 | |||
Adjustments to reconcile net income to net cash flows from operating activities: | |||||||
Depreciation and amortization | 34.3 | 30.9 | |||||
Equity-based compensation | 199.5 | 241.8 | |||||
Non-cash performance allocations and incentive fees | (225.9 | ) | (561.5 | ) | |||
Other non-cash amounts | 3.7 | (8.2 | ) | ||||
Principal investment income | (179.1 | ) | (129.5 | ) | |||
Purchases of investments | (419.2 | ) | (445.0 | ) | |||
Proceeds from the sale of investments | 593.1 | 302.7 | |||||
Payments of contingent consideration | (37.5 | ) | (22.5 | ) | |||
Deconsolidation of Claren Road | — | (23.3 | ) | ||||
Deconsolidation of Urbplan (see Note 15) | — | 14.0 | |||||
Change in deferred taxes, net | 1.4 | (8.7 | ) | ||||
Change in due from affiliates and other receivables | (2.8 | ) | (78.8 | ) | |||
Change in receivables and inventory of a real estate VIE | — | (14.5 | ) | ||||
Change in deposits and other | (17.9 | ) | (7.1 | ) | |||
Change in other assets of a real estate VIE | — | 1.6 | |||||
Change in accounts payable, accrued expenses and other liabilities | 115.3 | 1.9 | |||||
Change in accrued compensation and benefits | 132.8 | 42.2 | |||||
Change in due to affiliates | (39.3 | ) | 15.0 | ||||
Change in other liabilities of a real estate VIE | — | 47.9 | |||||
Change in deferred revenue | 185.7 | 178.6 | |||||
Net cash provided by operating activities | 751.5 | 289.0 | |||||
Cash flows from investing activities | |||||||
Purchases of fixed assets, net | (20.1 | ) | (26.0 | ) | |||
Net cash used in investing activities | (20.1 | ) | (26.0 | ) | |||
Cash flows from financing activities | |||||||
Proceeds from issuance of preferred units | — | 387.6 | |||||
Borrowings under credit facility | — | 250.0 | |||||
Repayments under credit facility | — | (250.0 | ) | ||||
Issuance of 5.650% senior notes due 2048, net of financing costs | 346.6 | — | |||||
Repurchase of 3.875% senior notes due 2023 | (254.8 | ) | — | ||||
Payments on debt obligations | (149.8 | ) | (15.0 | ) | |||
Proceeds from debt obligations | 40.8 | 202.6 | |||||
Net payments on loans payable of a real estate VIE | — | (14.3 | ) | ||||
Payments of contingent consideration | — | (0.4 | ) | ||||
Distributions to common unitholders | (84.3 | ) | (63.0 | ) | |||
Distributions to preferred unitholders | (17.7 | ) | — | ||||
Distributions to non-controlling interest holders in Carlyle Holdings | (191.7 | ) | (163.1 | ) | |||
Contributions from non-controlling interest holders | 17.6 | 87.7 | |||||
Distributions to non-controlling interest holders | (69.4 | ) | (74.0 | ) | |||
Common units repurchased | (87.5 | ) | (0.2 | ) | |||
Change in due to/from affiliates financing activities | (58.5 | ) | 38.5 | ||||
Net cash (used in) provided by financing activities | (508.7 | ) | 386.4 | ||||
Effect of foreign exchange rate changes | (11.9 | ) | 31.9 | ||||
Increase in cash, cash equivalents and restricted cash | 210.8 | 681.3 | |||||
Cash, cash equivalents and restricted cash, beginning of period | 1,028.8 | 684.0 | |||||
Cash, cash equivalents and restricted cash, end of period | $ | 1,239.6 | $ | 1,365.3 | |||
Reconciliation of cash, cash equivalents and restricted cash, end of period: | |||||||
Cash and cash equivalents | $ | 1,238.2 | $ | 1,355.7 | |||
Restricted cash | 1.4 | 9.6 | |||||
Total cash, cash equivalents and restricted cash, end of period | $ | 1,239.6 | $ | 1,365.3 | |||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion analyzes the financial condition and results of operations of The Carlyle Group L.P. (the “Partnership”). Such analysis should be read in conjunction with the consolidated financial statements and the related notes included in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K for the year ended December 31, 2017.
Overview
We conduct our operations through four reportable segments: Corporate Private Equity, Real Assets, Global Credit, and Investment Solutions.
• | Corporate Private Equity — Our Corporate Private Equity segment advises our 24 buyout and 10 growth capital funds, which seek a wide variety of investments of different sizes and growth potentials. As of September 30, 2018, our Corporate Private Equity segment had $82 billion in AUM and $56 billion in Fee-earning AUM. |
• | Real Assets — Our Real Assets segment advises our eleven U.S. and internationally focused real estate funds, our two infrastructure funds, our two power funds, our international energy fund, as well as our three Legacy Energy funds (funds that we jointly advise with Riverstone). The segment also includes four NGP management fee funds and four carry funds advised by NGP. As of September 30, 2018, our Real Assets segment had $46 billion in AUM and $32 billion in Fee-earning AUM. |
• | Global Credit — Our Global Credit segment advises a group of 57 funds that pursue investment opportunities across structured credit, direct lending, distressed credit, energy credit, and opportunistic credit. As of September 30, 2018, our Global Credit segment had $37 billion in AUM and $30 billion in Fee-earning AUM. |
• | Investment Solutions — Our Investment Solutions segment advises global private equity and real estate fund of funds programs and related co-investment and secondary activities across 221 fund vehicles. As of September 30, 2018, our Investment Solutions segment had $47 billion in AUM and $29 billion in Fee-earning AUM. |
We earn management fees pursuant to contractual arrangements with the investment funds that we manage and fees for transaction advisory and oversight services provided to portfolio companies of these funds. We also typically receive from an investment fund either an incentive fee or a special residual allocation of income, which we refer to as a performance allocation, or carried interest, in the event that specified investment returns are achieved by the fund. Under U.S. generally accepted accounting principles (“U.S. GAAP”), we are required to consolidate some of the investment funds that we advise. However, for segment reporting purposes, we present revenues and expenses on a basis that deconsolidates these investment funds. Accordingly, our segment revenues primarily consist of fund management and related advisory fees, performance revenues (consisting of incentive fees and performance allocations), principal investment income, including realized and unrealized gains on our investments in our funds and other trading securities, as well as interest and other income. Our segment expenses primarily consist of compensation and benefits expenses, including salaries, bonuses, performance payment arrangements, and equity-based compensation excluding awards granted in our initial public offering or in connection with acquisitions and strategic investments, and general and administrative expenses. While our segment expenses include depreciation and interest expense, our segment expenses exclude acquisition-related charges and amortization of intangibles and impairment. Refer to Note 13 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on the differences between our financial results reported pursuant to U.S. GAAP and our financial results for segment reporting purposes.
Our Family of Funds
The following chart presents the name (acronym), total capital commitments (in the case of our carry funds, structured credit funds, and the NGP management fee funds), assets under management (in the case of structured products), gross assets (in the case of our business development companies), and vintage year of the active funds in each of our segments, as of September 30, 2018. We present total capital commitments (as opposed to assets under management) for our closed-end investment funds because we believe this metric provides the most useful information regarding the relative size and scale of such funds. In the case of our products which are open-ended, and accordingly do not have permanent committed capital, we generally believe the most useful metric regarding relative size and scale is assets under management.
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Corporate Private Equity | Global Credit | Real Assets | ||||||||
Buyout Carry Funds | Loans & Structured Credit | Real Estate Carry Funds | ||||||||
Carlyle Partners (U.S.) | Cash CLO's | Carlyle Realty Partners (U.S.) | ||||||||
CP VII | $18.5 bn | 2018 | U.S. | $17.5 bn | 2012-2018 | CRP VIII | $5.5 bn | 2017 | ||
CP VI | $13.0 bn | 2014 | Europe | €6.5 bn | 2006-2018 | CRP VII | $4.2 bn | 2014 | ||
CP V | $13.7 bn | 2007 | Structured Credit Carry Funds | CRP VI | $2.3 bn | 2011 | ||||
CP IV | $7.9 bn | 2005 | CSC | $838 mm | 2017 | CRP V | $3.0 bn | 2006 | ||
Global Financial Services Partners | CASCOF | $445 mm | 2015 | CRP IV | $950 mm | 2005 | ||||
CGFSP III | $885 mm | 2018 | Direct Lending | CRP III | $564 mm | 2001 | ||||
CGFSP II | $1.0 bn | 2013 | Business Development Companies1 | Core Plus Real Estate (U.S.) | ||||||
CGFSP I | $1.1 bn | 2008 | TCG BDC II, Inc. | $1.1 bn | 2017 | CPI2 | $1.9 bn | 2016 | ||
Carlyle Europe Partners | TCG BDC, Inc. | $2.1 bn | 2013 | International Real Estate | ||||||
CEP V | €5.0 bn | 2018 | Corporate Mezzanine Carry Fund | CER | €478 mm | 2017 | ||||
CEP IV | €3.7 bn | 2014 | CMP II | $553 mm | 2008 | CAREP II | $486 mm | 2008 | ||
CEP III | €5.3 bn | 2007 | Opportunistic Credit Carry Fund | CEREP III | €2.2 bn | 2007 | ||||
CEP II | €1.8 bn | 2003 | CCOF | $950 mm | 2017 | Natural Resources Funds | ||||
Carlyle Asia Partners | Energy Credit Carry Funds | NGP Energy Carry Funds | ||||||||
CAP V | $6.6 bn | 2018 | CEMOF II | $2.8 bn | 2015 | NGP XII | $3.2 bn | 2017 | ||
CBPF II | RMB 1.5 bn | 2017 | CEMOF I | $1.4 bn | 2011 | NGP XI | $5.3 bn | 2014 | ||
CAP IV | $3.9 bn | 2014 | Distressed Credit Carry Funds | NGP X | $3.6 bn | 2012 | ||||
CBPF I | RMB 2.0 bn | 2010 | CSP IV | $2.5 bn | 2016 | NGP Agribusiness Carry Fund | ||||
CAP III | $2.6 bn | 2008 | CSP III | $703 mm | 2011 | NGP GAP | $402 mm | 2014 | ||
CAP II | $1.8 bn | 2006 | CSP II | $1.4 bn | 2007 | NGP Management Fee Funds | ||||
Carlyle Japan Partners | Various3 | $7.0 bn | 2004-2008 | |||||||
CJP III | ¥119.5 bn | 2013 | International Energy Carry Fund | |||||||
CJP II | ¥165.6 bn | 2006 | Investment Solutions | CIEP I | $2.5 bn | 2013 | ||||
Carlyle Global Partners | AlpInvest | Infrastructure Carry Funds | ||||||||
CGP | $3.6 bn | 2015 | Fund of Private Equity Funds | CGIOF | $1.1 bn | 2018 | ||||
Carlyle MENA Partners | 77 vehicles | €42.7 bn | 2000-2018 | CIP I | $1.1 bn | 2006 | ||||
MENA I | $471 mm | 2008 | Secondary Investments | Power Carry Funds | ||||||
Carlyle South American Buyout Fund | 55 vehicles | €15.4 bn | 2002-2018 | CPP II | $1.5 bn | 2014 | ||||
CSABF I | $776 mm | 2009 | Co-Investments | CPOCP | $478 mm | 2013 | ||||
Carlyle Sub-Saharan Africa Fund | 57 vehicles | €15.4 bn | 2000-2018 | Legacy Energy Carry Funds | ||||||
CSSAF I | $698 mm | 2012 | Metropolitan Real Estate | Carlyle/Riverstone Global Energy | ||||||
Carlyle Peru Fund | Real Estate Fund of Funds | Energy IV | $6.0 bn | 2008 | ||||||
CPF I | $308 mm | 2012 | 32 vehicles | $4.4 bn | 2002-2018 | Energy III | $3.8 bn | 2005 | ||
Growth Carry Funds | Carlyle/Riverstone Renewable Energy | |||||||||
Carlyle U.S. Venture/Growth Partners | Renew II | $3.4 bn | 2008 | |||||||
CEOF II | $2.4 bn | 2015 | ||||||||
CEOF I | $1.1 bn | 2011 | ||||||||
CUSGF III | $605 mm | 2006 | ||||||||
CVP II | $602 mm | 2001 | ||||||||
Carlyle Europe Technology Partners | ||||||||||
CETP III | €657 mm | 2014 | ||||||||
CETP II | €522 mm | 2008 | ||||||||
Carlyle Asia Venture/Growth Partners | ||||||||||
CAGP V | $339 mm | 2017 | ||||||||
CAGP IV | $1.0 bn | 2008 | ||||||||
CAGP III | $680 mm | 2005 | ||||||||
Carlyle Cardinal Ireland | ||||||||||
CCI | €292 mm | 2014 | ||||||||
Note: All amounts shown represent total capital commitments as of September 30, 2018 unless otherwise noted. Certain of our recent vintage funds are currently in fundraising and total capital commitments are subject to change. In addition, certain carry funds included herein may be disclosed which are not included in fund performance if they have not made an initial investment or called capital for investments or fees.
(1) | Amounts represent gross assets plus any available capital as of September 30, 2018. |
(2) | Amounts represent Total AUM as of September 30, 2018. |
(3) | Includes NGP M&R, NGP ETP II, NGP VIII and NGP IX. |
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Trends Affecting our Business
While the global economy continues to expand at an annual rate of close to 4%, divergence remains the key theme. Over the past year, the U.S. economy has strengthened while growth elsewhere has generally slowed. On a global basis, corporate earnings continued to grow during the quarter, but the pace of growth decelerated from earlier in the year. Over the most recent 12-month period, weighted average earnings before interest, tax, depreciation and amortization (EBITDA) across our global corporate private equity portfolio increased by 10.1%, but the pace of EBITDA growth was slower than observed in the early part of 2018 due to the impact of a stronger dollar and somewhat slower growth in Asia.
To date, the tariffs and ongoing trade disputes between the U.S. and China appear to be having a larger impact on China than the U.S., particularly in terms of consumer and business confidence. China has faced visible weakness in consumer spending growth, with much of the deceleration attributable to the sizable drop in the Shanghai Composite stock index, flat property prices, and heightened concerns about the impact of tariffs. Our estimates of trend growth in China’s GDP and retail sales, based on our proprietary portfolio company data, have both declined to multi-year lows. Additional tariffs or worsening of the current trade disputes could negatively impact the overall global economy by depressing consumer and business sentiment.
Global stock markets largely reflect the divergence in national economies. Since the end of January through October 25, the S&P 500 has declined by just 4% while the Shanghai Composite and EuroSTOXX 600 indices were down 25% and 10%, respectively. Stronger U.S. growth has increased risks elsewhere in the world by placing upward pressure on U.S. interest rates and the foreign exchange value of the dollar, which has risen by nearly 10% on a trade-weighted basis since the end of January. In general, a stronger dollar relative to other global currencies tightens financial conditions as central banks raise rates in an attempt to prop up their currencies and stem inflation, raises the cost of imported fuel and components, and increases default risks on dollar-denominated debt owed by businesses who earn revenues in emerging market currencies. By reducing the domestic value of foreign sales and earnings, a stronger dollar could also slow the growth of corporate profits in the U.S.
Futures markets currently anticipate an additional Federal Reserve interest rate hike in 2018 and two additional increases in 2019. While Federal Reserve policy cannot be known with any certainty in advance, just the prospect of even more rate hikes jolted financial markets at the start of October 2018. In the first week of October 2018, longer-term bonds (i.e. those with maturities greater than 10 years) declined in value by 5%, with the 10-year Treasury yield reaching 3.23%, its highest level since 2011. While still decidedly late cycle, the yield curve has steepened as a result, with the spread between 10-year and 2-year yields rising to 30 basis points as of October 18, from the cyclical low of 18 basis points reached in August.
The combined effect of tariffs, the rebound in commodity prices, and tightness in parts of the labor market could raise production costs and exert downward pressure on corporate margins. The market volatility in Asia affected our overall portfolio appreciation and contributed to our lower appreciation during the third quarter. If the volatility persists, it could continue to negatively affect our portfolio valuations into the fourth quarter as well.
In the third quarter of 2018, credit remained readily available on reasonable terms for our firm and our portfolio companies. In the third quarter, we issued $350 million of 5.650% senior notes due 2048, repurchased $250 million of our outstanding 3.875% senior notes due 2023 and prepaid the $108.8 million amount outstanding under the promissory note we previously issued to Barclays Natural Resource Investments. In addition, the prospect of continued interest rate hikes has increased the relative appeal of leveraged loans, which offer a floating rate. While high-yield bond funds posted a small inflow for the third quarter, year-to-date outflows stand at $23.2 billion. By contrast, loan funds have posted year-to-date inflows in excess of $15.6 billion. Although interest rate risk has caused increased volatility in the market, we still anticipate that credit will remain available on reasonable terms moving into 2019.
Since the third quarter of 2017, our overall carry fund portfolio has appreciated by 17%. Our overall carry fund portfolio appreciated by 3% in the third quarter of 2018, but was tempered by 1% appreciation in our Corporate Private Equity funds due to a decline in the value of investments in our Asia Buyout and Growth investment funds. Our Real Asset funds appreciated by 3% driven by investment-specific strength in certain real estate and energy funds, and our Global Credit carry funds appreciated by 1%. Appreciation in Investment Solutions was 5% in the third quarter. The current macroeconomic environment continues to support record levels of private equity fundraising globally.
We activated management fees on our latest U.S. buyout and Asia buyout funds in the second quarter, and the full impact of those fees in the third quarter drove Fee Related Earnings higher. We raised $6 billion of new capital in the third quarter, reaching 83% of our four-year $100 billion fundraising target, which we expect to achieve or exceed during 2019. Pending Fee Earning AUM, which is capital that we have raised, but on which we have not yet activated fees, increased to
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$11.4 billion at September 30, 2018, up from $10.1 billion at the prior quarter end. About half of this Pending Fee Earning AUM is attributable to fundraising for our latest Europe buyout fund, for which fees were activated at the beginning of the fourth quarter. While we expect additional funds to launch over the next several quarters, we also expect our overall fundraising pace to decelerate as we complete fundraising for our latest vintage large buyout funds.
The investment environment remains challenging, driven by a high level of competition and high valuations. Our experienced investment teams across the globe continue to pursue investments where we can leverage our competitive advantages, sector expertise and global One Carlyle platform, while still maintaining our rigorous standards for anticipated investment returns. During the third quarter, our carry funds invested $3.3 billion in new or follow-on transactions, and have invested approximately $18 billion over the last twelve months. We generated $6.4 billion in realized proceeds from our carry funds in the third quarter, and $27.1 billion over the last twelve months, in line with our annual average over the last several years. We continue to expect our 2018 realized net performance revenue to be lower than 2017. The generation of large buyout funds just finishing the investment period are performing well, and are currently accruing, but not yet realizing performance revenue. We expect realized net performance revenue to rebound as these funds mature further into the harvesting phase.
We are continuing our efforts to build a larger Global Credit business that leverages our existing platform and operations and extends our asset management capabilities. We recently announced our intention to acquire Apollo Aviation Group, a global commercial aviation investment and servicing firm, and announced that we are entering into a strategic asset management relationship with Fortitude Group Holdings, LLC, a provider of reinsurance, claims handling, and run-off management solutions for long-dated, complex risks to the global insurance industry. We believe that each of these transactions, once completed, will contribute to our plans to expand and grow our Global Credit business.
Recent Transactions
Distributions
In October 2018, the Board of Directors of our general partner declared a quarterly distribution of $0.42 per unit to common unitholders of record at the close of business on November 13, 2018, payable on November 20, 2018.
The Board of Directors of our general partner has declared a quarterly distribution of $0.367188 per Preferred Unit to holders of record at the close of business on December 1, 2018, payable on December 17, 2018. Distributions are on the Preferred Units are discretionary and non-cumulative. See Note 12 of our unaudited condensed consolidated financial statements for more information on the Preferred Units.
Acquisition of AAG
On October 10, 2018, the Partnership agreed to acquire 100% of Apollo Aviation Group (“AAG”), a global commercial aviation investment and servicing firm with $5.6 billion in assets under management. Upon closing, AAG will be included within our Global Credit segment, operating as Carlyle Aviation Partners Ltd. The purchase price consists of a $75 million payment at closing and up to $150 million of earnout payments for performance periods from 2020 through 2025. The transaction is subject to customary conditions and is expected to close by January 31, 2019. See Note 14 of our unaudited condensed consolidated financial statements for more information.
New York Lease
On July 31, 2018, we entered into a new office lease in Midtown New York to provide for a more efficient and collaborative environment for our employees. We expect to relocate one of our existing New York City offices in either late 2020 or early 2021 to this new office space. In the third quarter of 2018, we incurred a charge of $63.5 million, including transaction costs, related to the assignment of an existing office lease in New York City. The charge is excluded from our non-GAAP results and is expected to be paid over approximately 15 years.
Investment in Fortitude Holdings
We expect to close on our 19.9% investment in Fortitude Holdings in Q4 2018. See Note 4 of our unaudited condensed consolidated financial statements for more information on this transaction.
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Key Financial Measures
Our key financial measures are discussed in the following pages. Additional information regarding these key financial measures and our other significant accounting policies can be found in Note 2 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Revenues
On January 1, 2018, we adopted ASU 2014-9, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-9”). Upon adoption, certain performance revenues that represent a performance-based capital allocation from fund limited partners to us are now accounted for as earnings from financial assets and included as a component of investment income (loss). We also are entitled to receive performance-based incentive fees pursuant to management contracts from certain of our Global Credit funds when the return on assets under management exceeds certain benchmark returns or other performance targets. These fees are recorded as incentive fees in our unaudited condensed consolidated statements of operations. See Note 2 to the unaudited condensed consolidated financial statements for more information on our adoption of ASU 2014-9.
Revenues primarily consist of fund management fees, incentive fees, investment income (including performance allocations), realized and unrealized gains of our investments in our funds and other principal investments, as well as interest and other income.
Fund Management Fees. Fund management fees include management fees and transaction and portfolio advisory fees. We earn management fees for advisory services we provide to funds in which we hold a general partner interest or with which we have an investment advisory or investment management agreement. Additionally, management fees include catch-up management fees, which are episodic in nature and represent management fees charged to fund investors in subsequent closings of a fund which apply to the time period between the fee initiation date and the subsequent closing date.
Management fees attributable to Carlyle Partners VII, L.P. (“CP VII”), our seventh U.S. buyout fund with approximately $17.5 billion of Fee-earning AUM as of September 30, 2018 were approximately 19% of total management fees recognized during the three months ended September 30, 2018 and 12% of total management fees recognized during the nine months ended September 30, 2018. Management fees attributable to CP VI were approximately 15% of total management fees recognized during the three months ended September 30, 2017 and 16% of total management fees recognized during the nine months ended September 30, 2017. No other fund generated over 10% of total management fees in the periods presented.
Transaction and portfolio advisory fees are fees we receive for the transaction and portfolio advisory services we provide to our portfolio companies. When covered by separate contractual agreements, we recognize transaction and portfolio advisory fees for these services when the performance obligation has been satisfied and collection is reasonably assured. We are required to offset our fund management fees earned by a percentage of the transaction and advisory fees earned, which we refer to as the “rebate offsets.” Such rebate offset percentages generally approximate a range of 80% to 100% of the fund’s portion of the transaction and advisory fees earned. The recognition of portfolio advisory fees and transactions fees can be volatile as they are primarily generated by investment activity within our funds, and therefore are impacted by our investment pace.
Incentive Fees. Incentive fees consist of performance-based incentive arrangements pursuant to management contracts, primarily from certain of our Global Credit funds, when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, incentive fees are recognized when the performance benchmark has been achieved.
Investment Income. Investment income consists of our performance allocations as well as the realized and unrealized gains and losses resulting from our equity method investments and other principal investments.
Performance allocations are the earnings allocations to us, commonly referred to as carried interest, from certain of our investment funds, which we refer to as the “carry funds.” Carried interest revenue is recognized by Carlyle upon appreciation of the valuation of our funds' investments above certain return hurdles as set forth in each respective partnership agreement and is based on the amount that would be due to us pursuant to the fund partnership agreement at each period end as if the funds were liquidated at such date. Accordingly, the amount of carried interest recognized as performance allocations reflects our share of the fair value gains and losses of the associated funds' underlying investments measured at their then-current fair values relative to the fair values as of the end of the prior period. As a result, the performance allocations earned in an applicable reporting period are not indicative of any future period, as fair values are based on conditions prevalent as of the reporting date. Refer to “— Trends Affecting our Business” for further discussion.
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In addition to performance allocations from our Corporate Private Equity and Real Assets funds and closed-end carry funds in the Global Credit segment, we are also entitled to receive performance allocations from our Investment Solutions and NGP carry funds. The timing of performance allocations realizations for these funds is typically later in the life of the fund as compared to our other carry funds based on the terms of such arrangements.
Our performance allocations are generated by a diverse set of funds with different vintages, geographic concentration, investment strategies and industry specialties. For an explanation of the fund acronyms used throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations section, refer to “— Our Family of Funds.”
Performance allocations in excess of 10% of the total for the three and nine months ended September 30, 2018 and 2017 were generated from the following funds:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||
(Dollars in Millions) | ||||||||||||||||||
AlpInvest Co- & Secondary Investments 2006-2008 | $ | 46.4 | CP VI | $ | 74.2 | CP VI | $ | 210.7 | CP VI | $ | 471.5 | |||||||
CP VI | 46.0 | CIEP | 36.7 | CEP IV | 115.8 | CP V | 286.7 | |||||||||||
CP V | 39.7 | CP V | 33.7 | CP V | 105.2 | CAP IV | 221.7 | |||||||||||
CRP VII | 32.0 | CEOF | (34.2 | ) | CRP VII | 111.1 | ||||||||||||
CAP IV | (89.2 | ) | CAP IV | (133.9 | ) | |||||||||||||
No other fund generated over 10% of performance allocations in the periods presented above.
Under our arrangements with the historical owners and management team of AlpInvest, we generally do not retain any carried interest in respect of the historical investments and commitments to our fund vehicles that existed as of July 1, 2011 (including any options to increase any such commitments exercised after such date). We are entitled to 15% of the carried interest in respect of commitments from the historical owners of AlpInvest for the period between 2011 and 2020, except in certain instances, and 40% of the carried interest in respect of all other commitments (including all future commitments from third parties). In certain instances, carried interest associated with the AlpInvest fund vehicles is subject to entity level income taxes in the Netherlands.
Realized carried interest may be clawed back or given back to the fund if the fund’s investment values decline below certain return hurdles, which vary from fund to fund. When the fair value of a fund’s investments remains constant or falls below certain return hurdles, previously recognized performance allocations are reversed. In all cases, each investment fund is considered separately in evaluating carried interest and potential giveback obligations. For any given period, performance allocations revenue on our statement of operations may include reversals of previously recognized performance allocations due to a decrease in the value of a particular fund that results in a decrease of cumulative performance allocations earned to date. Since fund return hurdles are cumulative, previously recognized performance allocations also may be reversed in a period of appreciation that is lower than the particular fund’s hurdle rate. For the three months ended September 30, 2018 and 2017, the reversals of performance allocations were $103.8 million and $60.7 million, respectively. For the nine months ended September 30, 2018 and 2017, the reversals of performance allocations were $181.5 million and $90.0 million, respectively.
As of September 30, 2018, accrued performance allocations and accrued giveback obligations were approximately $4.0 billion and $63.2 million, respectively. Each balance assumes a hypothetical liquidation of the funds’ investments at September 30, 2018 at their then current fair values. These assets and liabilities will continue to fluctuate in accordance with the fair values of the fund investments until they are realized. As of September 30, 2018, approximately $36.0 million of the accrued giveback obligation is the responsibility of various current and former senior Carlyle professionals and other limited partners of the Carlyle Holdings partnerships, and the net accrued giveback obligation attributable to Carlyle Holdings is $27.2 million. The Partnership uses “net accrued performance revenues” to refer to the aggregation of the accrued performance allocations and incentive fees net of (i) accrued giveback obligations, (ii) accrued performance allocations and incentive fee-related compensation, (iii) performance allocations and incentive fee-related tax obligations, and (iv) accrued performance allocations and incentive fees attributable to non-controlling interests and excludes any net accrued performance allocations
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and incentive fees that have been realized but will be collected in subsequent periods. Net accrued performance revenues as of September 30, 2018 are $1.9 billion.
In addition, realized performance allocations may be reversed in future periods to the extent that such amounts become subject to a giveback obligation. If, at September 30, 2018, all investments held by our carry funds were deemed worthless, the amount of realized and previously distributed performance allocations subject to potential giveback would be approximately $0.7 billion on an after-tax basis where applicable. See the related discussion of “Contingent Obligations (Giveback)” within “— Liquidity and Capital Resources.” Since Carlyle’s inception, we have realized a total of approximately $172.6 million in aggregate giveback obligations. Approximately $36.5 million of the $172.6 million in aggregate realized giveback obligations was attributable to Carlyle Holdings. The funding for employee obligations and givebacks related to carry realized pre-IPO is primarily through a collection of employee receivables related to giveback obligations and from non-controlling interests for their portion of the obligation. The realization of giveback obligations for the Partnership's portion of such obligations reduces Distributable Earnings in the period realized and negatively impacts earnings available for distribution to common unitholders in the period realized. Further, each individual recipient of realized carried interest typically signs a guarantee agreement or partnership agreement that personally obligates such person to return his/her pro rata share of any amounts of realized carried interest previously distributed that are later clawed back. Accordingly, carried interest as performance allocation compensation is subject to return to the Partnership in the event a giveback obligation is funded. Generally, the actual giveback liability, if any, does not become due until the end of a fund's life.
Each investment fund is considered separately in evaluating carried interest and potential giveback obligations. As a result, performance allocations within funds will continue to fluctuate primarily due to certain investments within each fund constituting a material portion of the carry in that fund. Additionally, the fair value of investments in our funds may have substantial fluctuations from period to period.
In addition, in our discussion of our non-GAAP results, we use the term “net performance revenues” to refer to the performance allocations and incentive fees from our funds net of the portion allocated to our investment professionals, if any, and certain tax expenses associated with carried interest attributable to certain partners and employees, which are reflected as performance allocations and incentive fee related compensation expense. We use the term “realized net performance revenues” to refer to realized performance allocations and incentive fees from our funds, net of the portion allocated to our investment professionals, if any, and certain tax expenses associated with carried interest attributable to certain partners and employees, which are reflected as realized performance allocations and incentive fees related compensation expense. See “— Non-GAAP Financial Measures” for the amount of realized and unrealized performance revenues recognized each period. See “— Segment Analysis” for the realized and unrealized performance revenues by segment and related discussion for each period.
Investment income also represents the unrealized and realized gains and losses on our principal investments, including our investments in Carlyle funds that are not consolidated, as well as any interest and other income. Investment income (loss) also includes the related amortization of the basis difference between the carrying value of our investment and our share of the underlying net assets of the investee, as well as the compensation expense associated with compensatory arrangements provided by us to employees of our equity method investee, as it relates to our investments in NGP. Realized principal investment income (loss) is recorded when we redeem all or a portion of our investment or when we receive or are due cash income, such as dividends or distributions. A realized principal investment loss is also recorded when an investment is deemed to be worthless. Unrealized principal investment income (loss) results from changes in the fair value of the underlying investment, as well as the reversal of previously recognized unrealized gains (losses) at the time an investment is realized.
Fair Value Measurement. U.S. GAAP 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.
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The table below summarizes the valuation of investments and other financial instruments included within our AUM, by segment and fair value hierarchy levels, as of September 30, 2018 (amounts in millions):
As of September 30, 2018 | |||||||||||||||||||
Corporate Private Equity | Real Assets | Global Credit | Investment Solutions | Total | |||||||||||||||
Consolidated Results | |||||||||||||||||||
Level I | $ | 2,881 | $ | 5,505 | $ | 320 | $ | 1,071 | $ | 9,777 | |||||||||
Level II | 183 | 78 | 394 | 96 | 751 | ||||||||||||||
Level III | 38,237 | 24,019 | 29,597 | 29,155 | 121,008 | ||||||||||||||
Fair Value of Investments | 41,301 | 29,602 | 30,311 | 30,322 | 131,536 | ||||||||||||||
Available Capital | 40,337 | 16,385 | 7,094 | 16,952 | 80,768 | ||||||||||||||
Total AUM | $ | 81,638 | $ | 45,987 | $ | 37,405 | $ | 47,274 | $ | 212,304 | |||||||||
Interest and Other Income of Consolidated Funds. Interest and other income of Consolidated Funds primarily represents the interest earned on CLO assets. However, the Consolidated Funds are not the same entities in all periods presented. The Consolidated Funds in future periods may change due to changes in fund terms, formation of new funds, and terminations of funds.
Net Investment Gains of Consolidated Funds. Net investment gains (losses) of Consolidated Funds measures the change in the difference in fair value between the assets and the liabilities of the Consolidated Funds. A gain (loss) indicates that the fair value of the assets of the Consolidated Funds appreciated more (less), or depreciated less (more), than the fair value of the liabilities of the Consolidated Funds. A gain or loss is not necessarily indicative of the investment performance of the Consolidated Funds and does not impact the management or incentive fees received by Carlyle for its management of the Consolidated Funds. The portion of the net investment gains (losses) of Consolidated Funds attributable to the limited partner investors is allocated to non-controlling interests. Therefore a gain or loss is not expected to have a material impact on the revenues or profitability of the Partnership. Moreover, although the assets of the Consolidated Funds are consolidated onto our balance sheet pursuant to U.S. GAAP, ultimately we do not have recourse to such assets and such liabilities are generally non-recourse to us. Therefore, a gain or loss from the Consolidated Funds generally does not impact the assets available to our equity holders.
Expenses
Compensation and Benefits. Compensation includes salaries, bonuses, equity-based compensation, and performance payment arrangements. Bonuses are accrued over the service period to which they relate.
We recognize as compensation expense the portion of performance allocations and incentive fees that are due to our employees, senior Carlyle professionals, advisors, and operating executives in a manner consistent with how we recognize the performance allocations and incentive fee revenue. These amounts are accounted for as compensation expense in conjunction with the related performance allocations and incentive fee revenue and, until paid, are recognized as a component of the accrued compensation and benefits liability. Compensation in respect of performance allocations and incentive fees is paid when the related performance allocations and incentive fees are realized, and not when such performance allocations and incentive fees are accrued. The funds do not have a uniform allocation of performance allocations and incentive fees to our employees, senior Carlyle professionals, advisors, and operating executives. Therefore, for any given period, the ratio of performance allocations and incentive fee compensation to performance allocations and incentive fee revenue may vary based on the funds generating the performance allocations and incentive fee revenue for that period and their particular allocation percentages.
In addition, we have implemented various equity-based compensation arrangements that require senior Carlyle professionals and other employees to vest ownership of a portion of their equity interests over a service period of up to 60 months, which under U.S. GAAP will result in compensation charges over current and future periods. Further, in order to recruit and retain existing and future senior Carlyle professionals and other employees, we have implemented additional equity-based compensation programs that have resulted in increases to our equity-based compensation expenses. Compensation charges associated with the equity-based compensation grants issued in our initial public offering in May 2012, which are fully
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vested as of May 2018, or grants issued in acquisitions or strategic investments are excluded from our calculation of Economic Income. Compensation charges associated with all equity-based compensation grants are excluded from Fee Related Earnings and Distributable Earnings.
We may hire additional individuals and overall compensation levels may correspondingly increase, which could result in an increase in compensation and benefits expense. A portion of our compensation expense relates to internal fundraising costs, and compensation may fluctuate based on increases or decreases in our fundraising activity. Amounts due to employees related to such fundraising will be expensed when earned even though the benefit of the new capital and related fees will be reflected in operations over the life of the related fund.
General, Administrative and Other Expenses. General, administrative and other expenses include occupancy and equipment expenses and other expenses, which consist principally of professional fees, including those related to our global regulatory compliance program, external costs of fundraising, travel/entertainment and related expenses, communications and information services, depreciation and amortization (including intangible asset amortization and impairment) and foreign currency transactions. We expect that general, administrative and other expenses will vary due to infrequently occurring or unusual items, such as the impairment of intangible assets and expenses associated with litigation and contingencies. Also, in periods of significant fundraising, to the extent that we use third parties to assist in our fundraising efforts, our general, administrative and other expenses may increase accordingly. Additionally, we anticipate that general, administrative and other expenses will fluctuate from period to period due to the impact of foreign exchange transactions.
Interest and Other Expenses of Consolidated Funds. The interest and other expenses of Consolidated Funds consist primarily of interest expenses related primarily to our CLO loans, professional fees and other third-party expenses.
Income Taxes. The Carlyle Holdings partnerships and their subsidiaries primarily operate as pass-through entities for U.S. income tax purposes and record a provision for state and local income taxes for certain entities based on applicable laws and a provision for foreign income taxes for certain foreign entities. In addition, Carlyle Holdings I GP Inc. is subject to U.S. income taxes on only a portion of our income or loss. Depending on the sources of our taxable income or loss, our income tax provision or benefit can vary significantly from period to period.
Income taxes for foreign entities are accounted for using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized.
In the normal course of business, we are subject to examination by federal and certain state, local and foreign tax regulators. With a few exceptions, as of September 30, 2018, our U.S. federal income tax returns for the years 2015 through 2017 are open under the normal three-year statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2014 to 2017. Foreign tax returns are generally subject to audit from 2010 to 2017. Certain of our affiliates are currently under audit by federal, state and foreign tax authorities. We do not believe the outcome of any future audit will have a material impact on our consolidated financial statements.
Non-controlling Interests in Consolidated Entities. Non-controlling interests in consolidated entities represent the component of equity in consolidated entities not held by us. These interests are adjusted for general partner allocations.
We record significant non-controlling interests in Carlyle Holdings relating to the ownership interests of the limited partners of the Carlyle Holdings partnerships. The Partnership, through wholly owned subsidiaries, is the sole general partner of Carlyle Holdings. Accordingly, 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 a non-controlling interest in the Partnership’s financial statements.
Non-GAAP Financial Measures
Economic Income. Economic income, or “EI,” is a key performance benchmark used in our industry. EI differs from income (loss) before provision for income taxes computed in accordance with U.S. GAAP in that it includes certain tax expenses associated with performance revenues (comprised of performance allocations and incentive fees), and does not include net income (loss) attributable to non-Carlyle interests in consolidated entities or charges (credits) related to Carlyle corporate actions and non-recurring items. Charges (credits) related to Carlyle corporate actions and non-recurring items include: charges associated
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with equity-based compensation that was issued in the initial public offering in May 2012 or is issued in acquisitions or strategic investments, changes in the tax receivable agreement liability, amortization and any impairment charges associated with acquired intangible assets, transaction costs associated with acquisitions, charges associated with earnouts and contingent consideration including gains and losses associated with the estimated fair value of contingent consideration issued in conjunction with acquisitions or strategic investments, gains and losses from the retirement of debt, charges associated with contract terminations and employee severance. We believe the inclusion or exclusion of these items provides investors with a meaningful indication of our core operating performance. For segment reporting purposes, revenues and expenses, and, accordingly, segment net income, are presented on a basis that deconsolidates the Consolidated Funds. Total Segment EI equals the aggregate of EI for all segments. This measure supplements and should be considered in addition to and not in lieu of the results of operations discussed further under “Consolidated Results of Operations” prepared in accordance with U.S. GAAP.
Fee Related Earnings. Fee Related Earnings, or “FRE,” is a component of EI and is used to assess the ability of the business to cover cash-based compensation and benefits and operating expenses from total fee revenues. FRE differs from income (loss) before provision for income taxes computed in accordance with U.S. GAAP in that it adjusts for the items included in the calculation of EI and also adjusts EI to exclude net performance revenues, principal investment income from investments in Carlyle funds, equity-based compensation, net interest (interest income less interest expense), and certain general, administrative and other expenses when the timing of any future payment is uncertain.
Distributable Earnings. Distributable Earnings is FRE plus realized net performance revenues, realized principal investment income, and net interest. Distributable Earnings is intended to show the amount of net realized earnings without the effects of consolidation of the Consolidated Funds. Distributable Earnings is derived from our segment reported results and is an additional measure to assess performance and determine amounts potentially available for distribution from Carlyle Holdings to its unitholders. Distributable Earnings is evaluated regularly by management in making resource deployment and compensation decisions and in assessing performance of our four segments. We also use Distributable Earnings in our budgeting, forecasting, and the overall management of our segments. We believe that reporting Distributable Earnings is helpful to understanding our business and that investors should review the same supplemental financial measure that management uses to analyze our segment performance.
Operating Metrics
We monitor certain operating metrics that are common to the alternative asset management industry.
Fee-earning Assets under Management. Fee-earning assets under management or Fee-earning AUM refers to the assets we manage or advise from which we derive recurring fund management fees. Our Fee-earning AUM is generally based on one of the following, once fees have been activated:
(a) | the amount of limited partner capital commitments, generally for carry funds where the original investment period has not expired, for AlpInvest carry funds during the commitment fee period and for Metropolitan carry funds during the weighted-average investment period of the underlying funds (see “Fee-earning AUM based on capital commitments” in the table below for the amount of this component at each period); |
(b) | the remaining amount of limited partner invested capital at cost, generally for carry funds and certain co-investment vehicles where the original investment period has expired, Metropolitan carry funds after the expiration of the weighted-average investment period of the underlying funds, and one of our business development companies (see “Fee-earning AUM based on invested capital” in the table below for the amount of this component at each period); |
(c) | the amount of aggregate fee-earning collateral balance at par of our collateralized loan obligations (“CLOs”), as defined in the fund indentures (typically exclusive of equities and defaulted positions) as of the quarterly cut-off date for each CLO (see “Fee-earning AUM based on collateral balances, at par” in the table below for the amount of this component at each period); |
(d) | the external investor portion of the net asset value of our hedge fund and fund of hedge funds vehicles (pre redemptions and subscriptions), as well as certain carry funds (see “Fee-earning AUM based on net asset value” in the table below for the amount of this component at each period); |
(e) | the gross assets (including assets acquired with leverage), excluding cash and cash equivalents, of one of our business development companies and certain carry funds (see “Fee-earning AUM based on lower of cost or fair value and other” in the table below for the amount of this component at each period); and |
(f) | the lower of cost or fair value of invested capital, generally for AlpInvest carry funds where the commitment fee period has expired and certain carry funds where the investment period has expired, (see “Fee-earning AUM based on lower of cost or fair value and other” in the table below for the amount of this component at each period). |
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The table below details Fee-earning AUM by its respective components at each period.
As of September 30, | |||||||
2018 | 2017 | ||||||
Consolidated Results | (Dollars in millions) | ||||||
Components of Fee-earning AUM | |||||||
Fee-earning AUM based on capital commitments (1) | $ | 63,231 | $ | 60,065 | |||
Fee-earning AUM based on invested capital (2) | 40,208 | 21,252 | |||||
Fee-earning AUM based on collateral balances, at par (3) | 21,013 | 17,647 | |||||
Fee-earning AUM based on net asset value (4) | 2,485 | 1,518 | |||||
Fee-earning AUM based on lower of cost or fair value and other (5) | 20,464 | 21,299 | |||||
Balance, End of Period (6) (7) | $ | 147,401 | $ | 121,781 | |||
(1) | Reflects limited partner capital commitments where the original investment period, weighted-average investment period, or commitment fee period has not expired. |
(2) | Reflects limited partner invested capital at cost and includes amounts committed to or reserved for investments for certain Real Assets and Investment Solutions funds. |
(3) | Represents the amount of aggregate Fee-earning collateral balances and principal balances, at par, for our CLOs/structured products. |
(4) | Reflects the net asset value (pre-redemptions and subscriptions) of certain carry funds. |
(5) | Includes funds with fees based on gross asset value. |
(6) | Energy II, Energy III, Energy IV, and Renew II (collectively, the “Legacy Energy Funds”), are managed with Riverstone Holdings LLC and its affiliates. Affiliates of both Carlyle and Riverstone act as investment advisers to each of the Legacy Energy Funds. Carlyle has a minority representation on the management committees of Energy IV and Renew II. Carlyle and Riverstone each hold half of the seats on the management committees of Energy II and Energy III, but the investment period for these funds has expired and the remaining investments in such funds are being disposed of in the ordinary course of business. As of September 30, 2018, the Legacy Energy Funds had, in the aggregate, approximately $4.6 billion in AUM and $3.4 billion in Fee-earning AUM. We are no longer raising capital for the Legacy Energy Funds and expect these balances to continue to decrease over time as the funds wind down. |
(7) | Ending balance excludes $11 billion of pending Fee-earning AUM for which fees have not yet been activated. |
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The table below provides the period to period rollforward of Fee-earning AUM.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Consolidated Results | (Dollars in millions) | ||||||||||||||
Fee-earning AUM Rollforward | |||||||||||||||
Balance, Beginning of Period | $ | 146,477 | $ | 116,134 | $ | 124,595 | $ | 114,994 | |||||||
Inflows, including Fee-paying Commitments (1) | 2,420 | 7,708 | 30,911 | 12,747 | |||||||||||
Outflows, including Distributions (2) | (2,498 | ) | (3,590 | ) | (9,567 | ) | (9,751 | ) | |||||||
Changes in CLO collateral balances (3) | 1,001 | 332 | 2,601 | (17 | ) | ||||||||||
Market Appreciation/(Depreciation) (4) | 107 | (65 | ) | 85 | (220 | ) | |||||||||
Foreign Exchange and other (5) | (106 | ) | 1,262 | (1,224 | ) | 4,028 | |||||||||
Balance, End of Period | $ | 147,401 | $ | 121,781 | $ | 147,401 | $ | 121,781 | |||||||
(1) | Inflows represent limited partner capital raised and capital invested by our carry funds and the NGP management fee funds outside the investment period, weighted-average investment period or commitment fee period. Inflows do not include funds raised of $11 billion and $5 billion as of September 30, 2018 and 2017, respectively, which are not yet earning fees. |
(2) | Outflows represent limited partner distributions from our carry funds and the NGP management fee funds, changes in basis for our carry funds where the investment period, weighted-average investment period or commitment fee period has expired, and reductions for funds that are no longer calling for fees. |
(3) | Represents the change in the aggregate Fee-earning collateral balances at par of our CLOs/structured products, as of the quarterly cut-off dates. |
(4) | Market Appreciation/(Depreciation) represents realized and unrealized gains (losses) on portfolio investments in our carry funds based on the lower of cost or fair value and net asset value. |
(5) | Includes activity of funds with fees based on gross asset value. Represents the impact of foreign exchange rate fluctuations on the translation of our non-U.S. dollar denominated funds. Activity during the period is translated at the average rate for the period. Ending balances are translated at the spot rate as of the period end. |
Refer to “— Segment Analysis” for a detailed discussion by segment of the activity affecting Fee-earning AUM for each of the periods presented by segment.
Assets under Management. Assets under management or AUM refers to the assets we manage or advise. Our AUM equals the sum of the following:
(a) the aggregate fair value of our carry funds and related co-investment vehicles, NGP management fee funds and separately managed accounts, plus the capital that Carlyle is entitled to call from investors in those funds and vehicles (including Carlyle 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 and principal cash at par or aggregate principal amount of the notes of our CLOs and other structured products (inclusive of all positions); |
(c) | the net asset value (pre-redemptions and subscriptions) of our long/short credit, emerging markets, multi-product macroeconomic, fund of hedge funds vehicles, mutual fund and other hedge funds; and |
(d) | the gross assets (including assets acquired with leverage) of our business development companies, plus the capital that Carlyle is entitled to call from investors in those vehicles pursuant to the terms of their capital commitments to those vehicles. |
We include in our calculation of AUM and Fee-earning AUM certain energy and renewable resources funds that we jointly advise with Riverstone and certain NGP management fee funds and carry funds that are advised by NGP.
For most of our carry funds, 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, depending on whether the original 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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Our calculations of Fee-earning AUM and 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 management fees or performance allocations. Our calculations 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 manage or advise.
We generally use Fee-earning AUM as a metric to measure changes in the assets from which we earn recurring management fees. Total AUM tends to be a better measure of our investment and fundraising performance as it reflects assets at fair value plus available uncalled capital.
Available Capital. “Available Capital” refers to the amount of capital commitments available to be called for investments, which may be reduced for equity invested that is funded via a fund credit facility and expected to be called from investors at a later date, plus any additional assets/liabilities at the fund level other than active investments. Amounts previously called may be added back to available capital following certain distributions. “Expired Available Capital” occurs when a fund has passed the investment period and follow-on periods and can no longer invest capital into new or existing deals. Any remaining Available Capital, typically a result of either recycled distributions or specific reserves established for the follow-on period that are not drawn, can only be called for fees and expenses and is therefore removed from the Total AUM calculation.
The table below provides the period to period rollforward of Total AUM.
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||
(Dollars in millions) | |||||||
Consolidated Results | |||||||
Total AUM Rollforward | |||||||
Balance, Beginning of Period | $ | 209,742 | $ | 195,061 | |||
New Commitments (1) | 5,979 | 25,792 | |||||
Outflows (2) | (6,132 | ) | (18,424 | ) | |||
Market Appreciation/(Depreciation) (3) | 3,453 | 12,468 | |||||
Foreign Exchange Gain/(Loss) (4) | (391 | ) | (2,141 | ) | |||
Other (5) | (347 | ) | (452 | ) | |||
Balance, End of Period | $ | 212,304 | $ | 212,304 | |||
(1) | New Commitments reflects the impact of gross fundraising during the period. For funds or vehicles denominated in foreign currencies, this reflects translation at the average quarterly rate, while the separately reported Fundraising metric is translated at the spot rate for each individual closing. |
(2) | Outflows includes distributions in our carry funds and related co-investment vehicles, the NGP management fee funds and separately managed accounts, as well as runoff of CLO collateral balances. |
(3) | Market Appreciation/(Depreciation) generally represents realized and unrealized gains (losses) on portfolio investments in our carry funds and related co-investment vehicles, the NGP management fee funds and separately managed accounts. |
(4) | Represents the impact of foreign exchange rate fluctuations on the translation of our non-U.S. dollar denominated funds. Activity during the period is translated at the average rate for the period. Ending balances are translated at the spot rate as of the period end. |
(5) | Includes expiring available capital, the impact of capital calls for fees and expenses, change in gross asset value for our business development companies and other changes in AUM. |
Please refer to “— Segment Analysis” for a detailed discussion by segment of the activity affecting Total AUM for each of the periods presented.
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The table below presents the change in appreciation on portfolio investments of our carry funds. Please refer to “— Segment Analysis” for a detailed discussion by segment of the activity affecting Total AUM for each of the periods presented.
Carlyle Portfolio Appreciation(1,2) vs. % Change in MSCI All Country World Index - All Cap
(1) | Reflects carry funds only. Appreciation/Depreciation is fund only, and excludes the impact of external co-investment. |
(2) | For Carlyle returns, “Appreciation/Depreciation” represents realized and unrealized gain / loss for the period on a total return basis before fees and expenses. The percentage of return is calculated as the sum of ending remaining investment fair market value (“FMV”) and net investment outflow (sales proceeds less net purchases) less beginning remaining investment FMV divided by beginning remaining investment FMV. |
(3) | In the Corporate Private Equity, Real Assets, and Global Credit carry funds, public investments made up 12% of remaining fair value at 9/30/2018 and 14% of remaining fair value at 9/30/2017. For Q3 2018, public investments depreciated 3% while private investments appreciated 3%, compared to 2% public appreciation and 3% private appreciation for Q3 2017. For YTD 2018, public investments appreciated 4% while private investments appreciated 10%, compared to 18% public appreciation and 19% private appreciation for the comparable prior YTD period. Public portfolio includes initial public offerings (“IPO”) that occurred in the quarter. Investments may be reported as private in quarters prior to the IPO quarter. |
(4) | The MSCI ACWI - All Cap Index represents the performance of the MSCI All Country World Index across all market capitalization sizes of the global equity market. There are significant differences between the types of securities and assets typically acquired by our carry funds and the investments covered by the MSCI All Country World Index. Specifically, our carry funds may make investments in securities and other assets that have a greater degree of risk and volatility, and less liquidity, than those securities included in the MSCI All Country World Index. Moreover, investors in the securities included in the MSCI All Country World Index may not be subject to the management fees, carried interest or expenses to which investors in our carry funds are typically subject. Comparisons between the our carry fund appreciation and the MSCI All Country World Index are included for informational purposes only. |
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Consolidation of Certain Carlyle Funds
The Partnership consolidates all entities that it controls either through a majority voting interest or as the primary beneficiary of variable interest entities. The entities we consolidate are referred to collectively as the Consolidated Funds in our unaudited condensed consolidated financial statements. For further information on our consolidation policy, see Note 2 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
As of September 30, 2018, our Consolidated Funds represent approximately 2% of our AUM; 2% of our fund management fees and investment income for both the three and nine months ended September 30, 2018.
We are not required under the consolidation guidance to consolidate in our financial statements most of the investment funds we advise. However, we consolidate certain CLOs that we advise. As of September 30, 2018, our consolidated CLOs held approximately $5.3 billion of total assets and comprised substantially all of the assets and loans payable of the Consolidated Funds. The assets and liabilities of the Consolidated Funds are generally held within separate legal entities and, as a result, the liabilities of the Consolidated Funds are non-recourse to us. For further information on consolidation of certain funds, see Note 2 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Generally, the consolidation of the Consolidated Funds has a gross-up effect on our assets, liabilities and cash flows but has no net effect on the net income attributable to the Partnership and partners’ capital. The majority of the net economic ownership interests of the Consolidated Funds are reflected as non-controlling interests in consolidated entities in the consolidated financial statements. For further information, see Note 2 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Because only a small portion of our funds are consolidated, the performance of the Consolidated Funds is not necessarily consistent with or representative of the combined performance trends of all of our funds.
Consolidated Results of Operations
The following table and discussion sets forth information regarding our unaudited condensed consolidated results of operations for the three and nine months ended September 30, 2018 and 2017. The unaudited condensed consolidated financial statements have been prepared on substantially the same basis for all historical periods presented; however, the consolidated funds are not the same entities in all periods shown due to changes in U.S. GAAP, changes in fund terms and the creation and termination of funds. As further described below, the consolidation of these funds primarily had the impact of increasing interest and other income of Consolidated Funds, interest and other expenses of Consolidated Funds, and net investment gains (losses) of Consolidated Funds in the year that the fund is initially consolidated. The consolidation of these funds had no effect on net income attributable to the Partnership for the periods presented.
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Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 (As Adjusted) | 2018 | 2017 (As Adjusted) | ||||||||||||
(Dollars in millions, except unit and per unit data) | |||||||||||||||
Revenues | |||||||||||||||
Fund management fees | $ | 328.8 | $ | 262.5 | $ | 894.6 | $ | 747.6 | |||||||
Incentive fees | 6.8 | 10.4 | 20.5 | 27.1 | |||||||||||
Investment income | |||||||||||||||
Performance allocations | |||||||||||||||
Realized | 266.6 | 401.4 | 584.6 | 825.6 | |||||||||||
Unrealized | (52.4 | ) | (126.2 | ) | 362.8 | 658.1 | |||||||||
Principal investment income | |||||||||||||||
Realized | 30.7 | 15.5 | 94.5 | 42.0 | |||||||||||
Unrealized | 13.7 | 21.7 | 82.2 | 100.5 | |||||||||||
Total investment income | 258.6 | 312.4 | 1,124.1 | 1,626.2 | |||||||||||
Interest and other income | 24.4 | 9.9 | 74.9 | 25.9 | |||||||||||
Interest and other income of Consolidated Funds | 60.5 | 44.7 | 161.4 | 132.6 | |||||||||||
Revenue of a real estate VIE | — | — | — | 109.0 | |||||||||||
Total revenues | 679.1 | 639.9 | 2,275.5 | 2,668.4 | |||||||||||
Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | 186.6 | 174.1 | 549.9 | 471.1 | |||||||||||
Equity-based compensation | 49.7 | 81.0 | 199.5 | 241.8 | |||||||||||
Performance allocations and incentive fee related compensation | |||||||||||||||
Realized | 134.5 | 189.4 | 294.6 | 401.9 | |||||||||||
Unrealized | 11.5 | (51.8 | ) | 231.4 | 309.9 | ||||||||||
Total compensation and benefits | 382.3 | 392.7 | 1,275.4 | 1,424.7 | |||||||||||
General, administrative and other expenses | 166.2 | (18.7 | ) | 388.0 | 170.9 | ||||||||||
Interest | 26.3 | 16.9 | 62.6 | 48.4 | |||||||||||
Interest and other expenses of Consolidated Funds | 40.5 | 37.2 | 121.7 | 160.9 | |||||||||||
Interest and other expenses of a real estate VIE and loss on deconsolidation | — | 64.5 | — | 202.5 | |||||||||||
Other non-operating expenses | 0.3 | — | 0.9 | 0.1 | |||||||||||
Total expenses | 615.6 | 492.6 | 1,848.6 | 2,007.5 | |||||||||||
Other income | |||||||||||||||
Net investment gains (losses) of Consolidated Funds | (2.9 | ) | 18.6 | 12.0 | 76.4 | ||||||||||
Income before provision for income taxes | 60.6 | 165.9 | 438.9 | 737.3 | |||||||||||
Provision (benefit) for income taxes | 17.4 | (1.3 | ) | 36.8 | 17.7 | ||||||||||
Net income | 43.2 | 167.2 | 402.1 | 719.6 | |||||||||||
Net income attributable to non-controlling interests in consolidated entities | 14.5 | 27.6 | 42.2 | 47.4 | |||||||||||
Net income attributable to Carlyle Holdings | 28.7 | 139.6 | 359.9 | 672.2 | |||||||||||
Net income attributable to non-controlling interests in Carlyle Holdings | 11.2 | 95.0 | 233.3 | 487.0 | |||||||||||
Net income attributable to The Carlyle Group L.P. | 17.5 | 44.6 | 126.6 | 185.2 | |||||||||||
Net income attributable to Series A Preferred Unitholders | 5.9 | — | 17.7 | — | |||||||||||
Net income attributable to The Carlyle Group L.P. common unitholders | $ | 11.6 | $ | 44.6 | $ | 108.9 | $ | 185.2 | |||||||
Net income attributable to The Carlyle Group L.P. per common unit | |||||||||||||||
Basic | $ | 0.11 | $ | 0.47 | $ | 1.06 | $ | 2.06 | |||||||
Diluted | $ | 0.10 | $ | 0.43 | $ | 0.96 | $ | 1.90 | |||||||
Weighted-average common units | |||||||||||||||
Basic | 105,560,193 | 95,198,102 | 102,936,949 | 89,815,112 | |||||||||||
Diluted | 346,930,017 | 334,392,424 | 112,851,327 | 97,538,190 | |||||||||||
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Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017 and Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
Revenues
Total revenues increased $39.2 million, or 6.1%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $392.9 million, or 15% for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in total revenues for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2018 v. 2017 | |||||||
(Dollars in Millions) | |||||||
Total Revenues, September 30, 2017 | $ | 639.9 | $ | 2,668.4 | |||
Increases (Decreases): | |||||||
Increase in fund management fees | 66.3 | 147.0 | |||||
Decrease in incentive fees | (3.6 | ) | (6.6 | ) | |||
Decrease in investment income, including performance allocations | (53.8 | ) | (502.1 | ) | |||
Increase in interest and other income | 14.5 | 49.0 | |||||
Increase in interest and other income of Consolidated Funds | 15.8 | 28.8 | |||||
Decrease in revenue from a real estate VIE | — | (109.0 | ) | ||||
Total increase (decrease) | 39.2 | (392.9 | ) | ||||
Total Revenues, September 30, 2018 | $ | 679.1 | $ | 2,275.5 | |||
Fund Management Fees. Fund management fees increased $66.3 million, or 25.3%, to $328.8 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $147.0 million, or 20%, to $894.6 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to the following:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2018 v. 2017 | |||||||
(Dollars in Millions) | |||||||
Higher management fees from the commencement of the investment period for certain newly raised funds | $ | 104.1 | $ | 222.6 | |||
Lower management fees resulting from the change in basis for earning management fees from commitments to invested capital for certain funds and from distributions from funds whose management fees are based on invested capital | (41.4 | ) | (77.3 | ) | |||
Increase in catch-up management fees from subsequent closes of funds that are in the fundraising period | 6.1 | 9.9 | |||||
Lower transaction and portfolio advisory fees | (2.5 | ) | (6.7 | ) | |||
All other changes | — | (1.5 | ) | ||||
Total increase in fund management fees | $ | 66.3 | $ | 147.0 | |||
Fund management fees include transaction and portfolio advisory fees, net of rebate offsets, of $7.7 million and $10.2 million for the three months ended September 30, 2018 and 2017, respectively, and $21.3 million and $28.0 million for the nine months ended September 30, 2018 and 2017, respectively. The $6.7 million decrease in transaction and portfolio advisory fees for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 resulted primarily from transaction fees earned related to investments in one of our U.S. buyout funds in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2018.
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Investment Income. Investment income decreased $53.8 million to $258.6 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $502.1 million to $1,124.1 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to the following:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2018 v. 2017 | |||||||
(Dollars in Millions) | |||||||
Decrease in performance allocations, excluding NGP | $ | (61.0 | ) | $ | (536.3 | ) | |
Increase in investment income from NGP, which includes performance allocations from the investments in NGP | 12.0 | 24.1 | |||||
Absence in 2018 of investment expenses related to Q1 2017 amended NGP agreements | — | 20.8 | |||||
Decrease in investment income from our buyout and growth funds | (4.9 | ) | (13.2 | ) | |||
Decrease in losses on foreign currency derivatives | 3.0 | 7.4 | |||||
Increase in investment income from our real assets funds, excluding NGP | (1.6 | ) | 2.2 | ||||
Increase (Decrease) in investment income from our distressed debt funds and energy mezzanine funds | 0.6 | (10.6 | ) | ||||
Decrease in investment income from CLOs | (1.2 | ) | (0.5 | ) | |||
All other changes | (0.7 | ) | 4.0 | ||||
Total decrease in investment income | $ | (53.8 | ) | $ | (502.1 | ) | |
Performance Allocations. Performance allocations decreased $61.0 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $536.3 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The decrease in performance allocations for both periods was primarily due to lower appreciation in our Corporate Private Equity segment. Performance allocations by segment on a consolidated U.S. GAAP basis for the three and nine months ended September 30, 2018 and 2017 comprised the following:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||
(Dollars in Millions) | |||||||||||||
Corporate Private Equity | $ | 52.2 | $ | 159.6 | $ | 520.8 | $ | 1,147.4 | |||||
Real Assets | 58.2 | 74.5 | 193.3 | 214.0 | |||||||||
Global Credit | (0.5 | ) | 6.8 | 14.4 | 23.7 | ||||||||
Investment Solutions | 104.3 | 34.3 | 218.9 | 98.6 | |||||||||
Total performance allocations | $ | 214.2 | $ | 275.2 | $ | 947.4 | $ | 1,483.7 | |||||
Total carry fund appreciation | 3% | 3% | 12% | 14% | |||||||||
Approximately $74.9 million of our performance allocations for the three months ended September 30, 2018 were related to AlpInvest Co- & Secondary Investments 2006-2008, CP VI, CP V, CRP VII and CAP IV, while approximately $110.4 million of our performance allocations for the three months ended September 30, 2017 were related to CP VI, CIEP, CP V, and CEOF. Approximately $408.9 million of our performance allocations for the nine months ended September 30, 2018 were related to CP VI, CEP IV, CP V, CRP VII and CAP IV while approximately $979.9 million of our performance allocations for the nine months ended September 30, 2017 were related to CP VI, CP V, and CAP IV.
While the global economy continues to expand at an annual rate of close to 4%, divergence remains the key theme. Over the past year, the U.S. economy has strengthened while growth elsewhere has generally slowed. On a global basis,
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corporate earnings continued to grow during the quarter, but the pace of growth decelerated from earlier in the year. Over the most recent 12-month period, weighted average earnings before interest, tax, depreciation and amortization (EBITDA) across our global portfolio increased by 10.1%, but the pace of EBITDA growth was slower than observed in the early part of 2018 due to the impact of a stronger dollar and somewhat slower growth in Asia. To date, the tariffs and ongoing trade disputes between the U.S. and China appear to be having a larger impact on China than the U.S., particularly in terms of consumer and business confidence. Additional tariffs or worsening of the current trade disputes could negatively impact the overall global economy by depressing consumer and business sentiment. Global stock markets largely reflect the divergence in national economies. Since the end of January through October 25, the S&P 500 has declined by just 4% while the Shanghai Composite and EuroSTOXX 600 indices were down 25% and 10%, respectively. In addition, the combined effect of tariffs, the rebound in commodity prices, and tightness in parts of the labor market could raise production costs and exert downward pressure on corporate margins. The market volatility in Asia affected our overall portfolio appreciation and contributed to our lower appreciation during the third quarter. If the volatility persists, it could continue to negatively affect our portfolio valuations into the fourth quarter as well. In the third quarter of 2018, credit remained readily available on reasonable terms for our firm and our portfolio companies. Since the third quarter of 2017, our overall carry fund portfolio has appreciated by 17%. Our overall carry fund portfolio appreciated by 3% in the third quarter of 2018, but was tempered by 1% appreciation in our Corporate Private Equity funds due to a decline in the value of investments in our Asia Buyout and Growth investment funds. Our Real Asset funds appreciated by 3% driven by investment-specific strength in certain real estate and energy funds, and our Global Credit carry funds appreciated by 1%. Appreciation in Investment Solutions was 5% in the third quarter.
Interest and Other Income. Interest and other income increased $14.5 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $49.0 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. Increases for both periods were primarily as a result of increased interest income related to our CLOs and certain money market accounts. In addition, contributing to the increase was the Partnership's adoption of the revenue recognition standard, ASU 2014-9, on January 1, 2018. As part of the adoption, the reimbursement of certain costs incurred on behalf of Carlyle funds, primarily travel and entertainment costs, that were previously presented net in our unaudited condensed consolidated statements of operations are presented gross beginning on January 1, 2018. For the three and nine months ended September 30, 2018, these costs were approximately $6.7 million and $21.0 million, respectively, and are presented in interest and other income and general, administrative and other expenses in our unaudited condensed consolidated statements of operations. See Note 2 to our unaudited condensed consolidated financial statements for more information on the adoption of the revenue recognition standard.
Interest and Other Income of Consolidated Funds. Our CLOs generate interest income primarily from investments in bonds and loans inclusive of amortization of discounts and generate other income from consent and amendment fees. Substantially all interest and other income of the CLOs and other consolidated funds together with interest expense of our CLOs and net investment gains (losses) of Consolidated Funds is attributable to the related funds’ limited partners or CLO investors and therefore is allocated to non-controlling interests. Accordingly, such amounts have no material impact on net income attributable to the Partnership.
Interest and other income of Consolidated Funds increased $15.8 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $28.8 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. Substantially all of the increase in interest and other income of Consolidated Funds for both periods relates to increased interest income from CLOs.
Revenue of a Real Estate VIE. Revenue of a real estate VIE was $109.0 million for the nine months ended September 30, 2017. There was no revenue recognized for the three and nine months ended September 30, 2018 or the three months ended September 30, 2017 due to the deconsolidation of the VIE in the third quarter of 2017 when the Partnership disposed of its interest in Urbplan. See Note 15 to the consolidated financial statements included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2017 for more information on the disposal transaction.
The revenue for the nine months ended September 30, 2017 consisted of amounts recognized as a result of the completion of land development projects during the period and investment income earned on Urbplan's investments. Urbplan recognized revenue during the nine months ended September 30, 2017 using the completed contract method of accounting. This accounting method required Urbplan to recognize revenue in the period in which the land development services contract was completed.
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Expenses
Total expenses increased $123.0 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $158.9 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in total expenses for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Total Expenses, September 30, 2017 | $ | 492.6 | $ | 2,007.5 | |||
Increases (Decreases): | |||||||
Decrease in total compensation and benefits | (10.4 | ) | (149.3 | ) | |||
Increase in general, administrative and other expenses | 184.9 | 217.1 | |||||
Increase (Decrease) in interest and other expenses of Consolidated Funds | 3.3 | (39.2 | ) | ||||
Decrease in interest and other expenses of a real estate VIE and loss on deconsolidation | (64.5 | ) | (202.5 | ) | |||
All other changes | 9.7 | 15.0 | |||||
Total increase (decrease) | 123.0 | (158.9 | ) | ||||
Total Expenses, September 30, 2018 | $ | 615.6 | $ | 1,848.6 | |||
Total Compensation and Benefits. Total compensation and benefits decreased $10.4 million, or 2.6%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $149.3 million, or 10%, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, due to the following:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2018 v. 2017 | |||||||
(Dollars in Millions) | |||||||
Increase in cash-based compensation and benefits | $ | 12.5 | $ | 78.8 | |||
Decrease in equity-based compensation | (31.3 | ) | (42.3 | ) | |||
Increase (Decrease) in performance allocations and incentive fee related compensation | 8.4 | (185.8 | ) | ||||
Total decrease in total compensation and benefits | $ | (10.4 | ) | $ | (149.3 | ) | |
Cash-based Compensation and Benefits. Cash-based compensation and benefits increased $12.5 million, or 7.2%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $78.8 million, or 17%, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to the following:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2018 v. 2017 | |||||||
(Dollars in Millions) | |||||||
Increase in headcount and bonuses | $ | 18.1 | $ | 82.5 | |||
Decrease in compensation costs associated with fundraising activities | (5.6 | ) | (3.7 | ) | |||
Total increase in cash-based compensation and benefits | $ | 12.5 | $ | 78.8 | |||
Equity-based Compensation. Equity-based compensation decreased $31.3 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $42.3 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The decrease in equity-based compensation for both periods was due primarily to the timing of the last vesting of awards related to our initial public offering in 2012 in
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May 2018. This decrease is partially offset by the ongoing grants of deferred restricted common units to new and existing employees during 2017 and 2018.
Performance allocations and incentive fee related compensation expense. Performance allocations and incentive fee related compensation expense increased $8.4 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $185.8 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. Performance allocations and incentive fee related compensation as a percentage of performance allocations and incentive fees was 68% and 56% for the three and nine months ended September 30, 2018, and 50% and 48% for the three and nine months ended September 30, 2017. For our largest segment, Corporate Private Equity, our performance allocations and incentive fee related compensation expense as a percentage of performance allocations and incentive fees is generally around 45%. Performance allocations from our Investment Solutions segment pay a higher ratio of performance allocations and incentive fees as compensation. Performance allocations from our Investment Solutions segment increased for the three and nine months ended September 30, 2018 as compared to the same periods in 2017. Conversely, performance allocations from the Legacy Energy funds in the Real Assets segment are primarily allocated to Carlyle because the investment teams for the Legacy Energy funds are employed by Riverstone and not Carlyle.
General, Administrative and Other Expenses. General, administrative and other expenses increased $184.9 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $217.1 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2018 v. 2017 | |||||||
(Dollars in Millions) | |||||||
Reversal of reserve in 2017 related to the CCC litigation | $ | 25.0 | $ | 25.0 | |||
Absence in 2018 of net insurance recoveries recognized for certain legal matters in 2017 | 74.0 | 68.1 | |||||
Certain costs incurred on behalf of Carlyle funds, primarily travel and entertainment costs, that are now presented on a gross basis as a result of the adoption of the new revenue recognition standard (See Note 2 to the unaudited condensed consolidated financial statements) | 6.7 | 21.0 | |||||
Lease assignment and termination costs | 63.5 | 66.9 | |||||
Higher professional fees and office expenses | 15.2 | 2.8 | |||||
Higher external fundraising costs | 1.5 | 29.1 | |||||
Foreign exchange and other changes | (1.0 | ) | 4.2 | ||||
Total increase in general, administrative and other expenses | $ | 184.9 | $ | 217.1 | |||
Interest. Interest increased $9.4 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased 14.2 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The increase in interest for both periods is primarily related to the $7.8 million of costs upon early extinguishment of debt (most of which is included in interest expense). See Note 5 of our unaudited condensed consolidated financial statements for more information.
Interest and Other Expenses of Consolidated Funds. Interest and other expenses of Consolidated Funds increased $3.3 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $39.2 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The variances are primarily related to interest expense on the consolidated CLOs.
The CLOs incur interest expense on their loans payable and incur other expenses consisting of trustee fees, rating agency fees and professional fees. Substantially all interest and other income of the CLOs together with interest expense of our CLOs and net investment gains (losses) of Consolidated Funds is attributable to the related funds’ limited partners or CLO investors and therefore is allocated to non-controlling interests. Accordingly, such amounts have no material impact on net income attributable to the Partnership.
Interest and Other Expenses of a Real Estate VIE and Loss on Deconsolidation. Interest and other expenses of a real estate VIE and loss on deconsolidation was $64.5 million and $202.5 million for the three and nine months ended September
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30, 2017, respectively. There were no expenses recognized for the three and nine months ended September 30, 2018 due to the deconsolidation of the VIE in the third quarter of 2017 when the Partnership disposed of its interest in Urbplan. See Note 15 to the consolidated financial statements included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2017 for more information on the disposal transaction.
Net Investment Gains of Consolidated Funds
For the three months ended September 30, 2018, net investment losses of Consolidated Funds were $2.9 million as compared to net investment gains of $18.6 million for the three months ended September 30, 2017. For the nine months ended September 30, 2018, net investment gains of Consolidated Funds were $12.0 million as compared to net investment gains of $76.4 million for the nine months ended September 30, 2017. For both the three and nine months ended September 30, 2018 and 2017, net investment gains (losses) comprise the activity of the consolidated CLOs and certain other funds. For the consolidated CLOs, the amount reflects the net gain or loss on the fair value adjustment of both assets and liabilities. The components of net investment gains of consolidated funds for the respective periods are:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Realized losses | $ | (2.5 | ) | $ | (3.3 | ) | $ | (6.8 | ) | $ | (9.1 | ) | |||
Net change in unrealized gains (losses) | (8.1 | ) | 0.8 | (45.3 | ) | 36.2 | |||||||||
Total gains (losses) | (10.6 | ) | (2.5 | ) | (52.1 | ) | 27.1 | ||||||||
Gains from liabilities of CLOs | 7.7 | 21.1 | 64.1 | 49.3 | |||||||||||
Total investment gains (losses) of Consolidated Funds | $ | (2.9 | ) | $ | 18.6 | $ | 12.0 | $ | 76.4 | ||||||
Net Income Attributable to Non-controlling Interests in Consolidated Entities
Net income attributable to non-controlling interests in consolidated entities was $14.5 million for the three months ended September 30, 2018 as compared to $27.6 million for the three months ended September 30, 2017. Net income attributable to non-controlling interests in consolidated entities was $42.2 million for the nine months ended September 30, 2018 as compared to $47.4 million for the nine months ended September 30, 2017. These amounts are primarily attributable to the net earnings or losses of the Consolidated Funds for each period, which are substantially all allocated to the related funds' limited partners or CLO investors. This balance also includes the net income attributable to non-controlling interests in carried interest, giveback obligations, and cash held for carried interest distributions as well as the allocation of Urbplan’s net losses that are attributable to non-controlling interests (for the nine months ended September 30, 2017 only).
Net Income Attributable to The Carlyle Group L.P. Common Unitholders
The net income attributable to The Carlyle Group L.P. common unitholders was $11.6 million for the three months ended September 30, 2018 as compared to $44.6 million for the three months ended September 30, 2017. The net income attributable to The Carlyle Group L.P. common unitholders was $108.9 million for the nine months ended September 30, 2018 as compared to $185.2 million for the nine months ended September 30, 2017. The Partnership is allocated a portion of the net income (loss) attributable to Carlyle Holdings based on the Partnership’s ownership in Carlyle Holdings (which was approximately 32% and 29% as of September 30, 2018 and 2017, respectively). Net income or loss attributable to The Carlyle Group L.P. common unitholders also includes 100% of the net income (loss) attributable to the Partnership’s wholly-owned taxable subsidiary, Carlyle Holdings I GP Inc., which was $(6.4) million and $(5.4) million for the three months ended September 30, 2018 and 2017, respectively, and $(5.8) million and $(2.5) million for the nine months ended September 30, 2018 and 2017, respectively. As a result, the total net income or loss attributable to the Partnership will vary as a percentage of the net income or loss attributable to Carlyle Holdings.
Non-GAAP Financial Measures
The following tables set forth information in the format used by management when making resource deployment decisions and in assessing performance of our segments. These non-GAAP financial measures are presented for the three and nine months ended September 30, 2018 and 2017. The tables below show our total segment Economic Income which is the sum of Fee Related Earnings, Net Performance Revenues, Principal Investment Income (Loss), Reserve for Litigation and
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Contingencies, Net Interest, and Equity-based compensation expense (excluding equity-based compensation grants issued in May 2012 upon the completion of the initial public offering or grants issued in acquisitions or strategic investments). Our Non-GAAP financial measures exclude the effects of consolidated funds, acquisition-related items including amortization and any impairment charges of acquired intangible assets and contingent consideration taking the form of earn-outs, charges associated with equity-based compensation grants issued in May 2012 upon completion of the initial public offering or grants issued in acquisitions or strategic investments, changes in the tax receivable agreement liability, corporate actions and infrequently occurring or unusual events.
The following table shows our total segment Economic Income, Fee Related Earnings and Distributable Earnings for the three and nine months ended September 30, 2018 and 2017.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Total Segment Revenues | $ | 612.9 | $ | 547.5 | $ | 2,107.0 | $ | 2,407.7 | |||||||
Total Segment Expenses | 502.3 | 344.8 | 1,555.3 | 1,504.8 | |||||||||||
Economic Income | $ | 110.6 | $ | 202.7 | $ | 551.7 | $ | 902.9 | |||||||
(-) Net Performance Revenues | 69.3 | 147.0 | 478.9 | 840.5 | |||||||||||
(-) Principal Investment Income | 13.9 | (35.3 | ) | 68.8 | 6.5 | ||||||||||
(+) Equity-based Compensation | 51.7 | 30.4 | 139.4 | 97.2 | |||||||||||
(+) Net Interest | 9.9 | 11.6 | 31.6 | 37.2 | |||||||||||
(+) Reserve for Litigation and Contingencies | — | (25.0 | ) | — | (25.0 | ) | |||||||||
(=) Fee Related Earnings | $ | 89.0 | $ | 108.0 | $ | 175.0 | $ | 165.3 | |||||||
(+) Realized Net Performance Revenues | 123.9 | 216.9 | 276.6 | 434.3 | |||||||||||
(+) Realized Principal Investment Income (Loss) | 7.0 | (53.4 | ) | 43.4 | (48.2 | ) | |||||||||
(+) Net Interest | (9.9 | ) | (11.6 | ) | (31.6 | ) | (37.2 | ) | |||||||
(=) Distributable Earnings | $ | 210.0 | $ | 259.9 | $ | 463.4 | $ | 514.2 | |||||||
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The following table sets forth our total segment revenues for the three and nine months ended September 30, 2018 and 2017.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Segment Revenues | |||||||||||||||
Fund level fee revenues | |||||||||||||||
Fund management fees | $ | 355.2 | $ | 278.4 | $ | 970.8 | $ | 791.2 | |||||||
Portfolio advisory fees, net | 7.7 | 4.1 | 14.5 | 13.0 | |||||||||||
Transaction fees, net | — | 6.1 | 6.8 | 15.0 | |||||||||||
Total fund level fee revenues | 362.9 | 288.6 | 992.1 | 819.2 | |||||||||||
Performance revenues | |||||||||||||||
Realized | 260.2 | 411.0 | 570.7 | 846.7 | |||||||||||
Unrealized | (35.3 | ) | (125.6 | ) | 441.1 | 712.7 | |||||||||
Total performance revenues | 224.9 | 285.4 | 1,011.8 | 1,559.4 | |||||||||||
Principal investment income (loss) | |||||||||||||||
Realized | 7.0 | (53.4 | ) | 43.4 | (48.2 | ) | |||||||||
Unrealized | 6.9 | 18.1 | 25.4 | 54.7 | |||||||||||
Total principal investment income | 13.9 | (35.3 | ) | 68.8 | 6.5 | ||||||||||
Interest income | 9.1 | 5.4 | 23.7 | 11.2 | |||||||||||
Other income | 2.1 | 3.4 | 10.6 | 11.4 | |||||||||||
Total Segment Revenues | $ | 612.9 | $ | 547.5 | $ | 2,107.0 | $ | 2,407.7 | |||||||
The following table sets forth our total segment expenses for the three and nine months ended September 30, 2018 and 2017.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Segment Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | $ | 186.4 | $ | 177.3 | $ | 547.8 | $ | 477.6 | |||||||
Equity-based compensation | 51.7 | 30.4 | 139.4 | 97.2 | |||||||||||
Performance revenues related compensation | |||||||||||||||
Realized | 136.3 | 194.1 | 294.1 | 412.4 | |||||||||||
Unrealized | 19.3 | (55.7 | ) | 238.8 | 306.5 | ||||||||||
Total compensation and benefits | 393.7 | 346.1 | 1,220.1 | 1,293.7 | |||||||||||
General, administrative, and other indirect expenses | 80.9 | (26.5 | ) | 254.6 | 139.5 | ||||||||||
Depreciation and amortization expense | 8.7 | 8.2 | 25.3 | 23.2 | |||||||||||
Interest expense | 19.0 | 17.0 | 55.3 | 48.4 | |||||||||||
Total Segment Expenses | $ | 502.3 | $ | 344.8 | $ | 1,555.3 | $ | 1,504.8 | |||||||
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Income before provision for income taxes is the GAAP financial measure most comparable to economic income, fee related earnings, and distributable earnings. The following table is a reconciliation of income before provision for income taxes to economic income, to fee related earnings, and to distributable earnings.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Income before provision for income taxes | $ | 60.6 | $ | 165.9 | $ | 438.9 | $ | 737.3 | |||||||
Adjustments: | |||||||||||||||
Equity-based compensation issued in conjunction with the initial public offering, acquisitions and strategic investments | 0.3 | 58.3 | 68.8 | 183.8 | |||||||||||
Acquisition related charges, including amortization of intangibles and impairment | 2.4 | 7.2 | 16.2 | 25.2 | |||||||||||
Other non-operating expense | 0.3 | — | 0.9 | 0.1 | |||||||||||
Tax expense associated with performance fee compensation | (12.7 | ) | (1.7 | ) | (11.0 | ) | (7.0 | ) | |||||||
Net income attributable to non-controlling interests in consolidated entities | (14.5 | ) | (27.6 | ) | (42.2 | ) | (47.4 | ) | |||||||
Lease assignment and termination costs | 63.5 | — | 66.9 | — | |||||||||||
Debt extinguishment costs | 7.8 | — | 7.8 | — | |||||||||||
Severance and other adjustments | 2.9 | 0.6 | 5.4 | 10.9 | |||||||||||
Economic Income | $ | 110.6 | $ | 202.7 | $ | 551.7 | $ | 902.9 | |||||||
(-) Net performance revenues(1) | 69.3 | 147.0 | 478.9 | 840.5 | |||||||||||
(-) Principal investment income(1) | 13.9 | (35.3 | ) | 68.8 | 6.5 | ||||||||||
(+) Equity-based compensation | 51.7 | 30.4 | 139.4 | 97.2 | |||||||||||
(+) Net Interest | 9.9 | 11.6 | 31.6 | 37.2 | |||||||||||
(+) Reserve for Litigation and Contingencies | — | (25.0 | ) | — | (25.0 | ) | |||||||||
(=) Fee Related Earnings | $ | 89.0 | $ | 108.0 | $ | 175.0 | $ | 165.3 | |||||||
(+) Realized net performance revenues(1) | 123.9 | 216.9 | 276.6 | 434.3 | |||||||||||
(+) Realized principal investment income (loss)(1) | 7.0 | (53.4 | ) | 43.4 | (48.2 | ) | |||||||||
(+) Net Interest | (9.9 | ) | (11.6 | ) | (31.6 | ) | (37.2 | ) | |||||||
(=) Distributable Earnings | $ | 210.0 | $ | 259.9 | $ | 463.4 | $ | 514.2 | |||||||
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(1) | – See reconciliation to most directly comparable U.S. GAAP measure below: |
Three Months Ended September 30, 2018 | |||||||||||
Carlyle Consolidated | Adjustments (2) | Total Reportable Segments | |||||||||
(Dollars in millions) | |||||||||||
Performance revenues(a) | |||||||||||
Realized | $ | 266.6 | $ | (6.4 | ) | $ | 260.2 | ||||
Unrealized | (52.4 | ) | 17.1 | (35.3 | ) | ||||||
Total performance revenues(a) | 214.2 | 10.7 | 224.9 | ||||||||
Performance revenues related compensation expense(b) | |||||||||||
Realized | 134.5 | 1.8 | 136.3 | ||||||||
Unrealized | 11.5 | 7.8 | 19.3 | ||||||||
Total performance revenues related compensation expense(b) | 146.0 | 9.6 | 155.6 | ||||||||
Net performance revenues | |||||||||||
Realized | 132.1 | (8.2 | ) | 123.9 | |||||||
Unrealized | (63.9 | ) | 9.3 | (54.6 | ) | ||||||
Total net performance revenues | $ | 68.2 | $ | 1.1 | $ | 69.3 | |||||
Principal investment income (loss) | |||||||||||
Realized | $ | 30.7 | $ | (23.7 | ) | $ | 7.0 | ||||
Unrealized | 13.7 | (6.8 | ) | 6.9 | |||||||
Principal investment income (loss) | $ | 44.4 | $ | (30.5 | ) | $ | 13.9 | ||||
Nine Months Ended September 30, 2018 | |||||||||||
Carlyle Consolidated | Adjustments (2) | Total Reportable Segments | |||||||||
(Dollars in millions) | |||||||||||
Performance revenues(a) | |||||||||||
Realized | $ | 584.6 | $ | (13.9 | ) | $ | 570.7 | ||||
Unrealized | 362.8 | 78.3 | 441.1 | ||||||||
Total performance revenues(a) | 947.4 | 64.4 | 1,011.8 | ||||||||
Performance revenues related compensation expense(b) | |||||||||||
Realized | 294.6 | (0.5 | ) | 294.1 | |||||||
Unrealized | 231.4 | 7.4 | 238.8 | ||||||||
Total performance revenues related compensation expense(b) | 526.0 | 6.9 | 532.9 | ||||||||
Net performance revenues | |||||||||||
Realized | 290.0 | (13.4 | ) | 276.6 | |||||||
Unrealized | 131.4 | 70.9 | 202.3 | ||||||||
Total net performance revenues | $ | 421.4 | $ | 57.5 | $ | 478.9 | |||||
Principal investment income (loss) | |||||||||||
Realized | $ | 94.5 | $ | (51.1 | ) | $ | 43.4 | ||||
Unrealized | 82.2 | (56.8 | ) | 25.4 | |||||||
Principal investment income (loss) | $ | 176.7 | $ | (107.9 | ) | $ | 68.8 | ||||
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Three Months Ended September 30, 2017 | |||||||||||
Carlyle Consolidated | Adjustments (2) | Total Reportable Segments | |||||||||
(Dollars in millions) | |||||||||||
Performance revenues(a) | |||||||||||
Realized | $ | 401.4 | $ | 9.6 | $ | 411.0 | |||||
Unrealized | (126.2 | ) | 0.6 | (125.6 | ) | ||||||
Total performance revenues(a) | 275.2 | 10.2 | 285.4 | ||||||||
Performance revenues related compensation expense(b) | |||||||||||
Realized | 189.4 | 4.7 | 194.1 | ||||||||
Unrealized | (51.8 | ) | (3.9 | ) | (55.7 | ) | |||||
Total performance revenues related compensation expense(b) | 137.6 | 0.8 | 138.4 | ||||||||
Net performance revenues | |||||||||||
Realized | 212.0 | 4.9 | 216.9 | ||||||||
Unrealized | (74.4 | ) | 4.5 | (69.9 | ) | ||||||
Total net performance revenues | $ | 137.6 | $ | 9.4 | $ | 147.0 | |||||
Principal investment income (loss) | |||||||||||
Realized | $ | 15.5 | $ | (68.9 | ) | $ | (53.4 | ) | |||
Unrealized | 21.7 | (3.6 | ) | 18.1 | |||||||
Total principal investment income (loss) | $ | 37.2 | $ | (72.5 | ) | $ | (35.3 | ) | |||
Nine Months Ended September 30, 2017 | |||||||||||
Carlyle Consolidated | Adjustments (2) | Total Reportable Segments | |||||||||
(Dollars in millions) | |||||||||||
Performance revenues(a) | |||||||||||
Realized | $ | 825.6 | $ | 21.1 | $ | 846.7 | |||||
Unrealized | 658.1 | 54.6 | 712.7 | ||||||||
Total performance revenues(a) | 1,483.7 | 75.7 | 1,559.4 | ||||||||
Performance revenues related compensation expense(b) | |||||||||||
Realized | 401.9 | 10.5 | 412.4 | ||||||||
Unrealized | 309.9 | (3.4 | ) | 306.5 | |||||||
Total performance revenues related compensation expense(b) | 711.8 | 7.1 | 718.9 | ||||||||
Net performance revenues | |||||||||||
Realized | 423.7 | 10.6 | 434.3 | ||||||||
Unrealized | 348.2 | 58.0 | 406.2 | ||||||||
Total net performance revenues | $ | 771.9 | $ | 68.6 | $ | 840.5 | |||||
Principal investment income (loss) | |||||||||||
Realized | $ | 42.0 | $ | (90.2 | ) | $ | (48.2 | ) | |||
Unrealized | 100.5 | (45.8 | ) | 54.7 | |||||||
Total principal investment income (loss) | $ | 142.5 | $ | (136.0 | ) | $ | 6.5 | ||||
(a) | Amounts labeled as performance allocations in the unaudited condensed consolidated statements of operations. |
(b) | Amounts labeled as performance allocations and incentive fee related compensation in the unaudited condensed consolidated statements of operations. |
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(2) | Adjustments to performance revenues and principal investment income (loss) relate to (i) amounts earned from the Consolidated Funds, which were eliminated in the U.S. GAAP consolidation but were included in the Non-GAAP results, (ii) amounts attributable to non-controlling interests in consolidated entities, which were excluded from the Non-GAAP results, (iii) the reclassification of NGP performance revenues, which are included in investment income in the U.S. GAAP financial statements, (iv) the reclassification of certain incentive fees from business development companies, which are included in fund management fees in the segment results, and (v) the reclassification of certain tax expenses associated with performance revenues. Adjustments to principal investment income (loss) also include the reclassification of earnings for the investment in NGP Management and its affiliates to the appropriate operating captions for the Non-GAAP results, the exclusion of charges associated with the investment in NGP Management and its affiliates that are excluded from the Non-GAAP results and adjustments to reflect the Partnership’s share of Urbplan net losses, until Urbplan was deconsolidated during the three months ended September 30, 2017, as investment losses for the Non-GAAP results. Adjustments are also included in these financial statement captions to reflect Carlyle’s economic interests in Claren Road (through January 2017). |
Economic Income and Distributable Earnings for our reportable segments are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Economic Income | |||||||||||||||
Corporate Private Equity | $ | 46.7 | $ | 92.1 | $ | 260.7 | $ | 647.3 | |||||||
Real Assets | 51.1 | 7.8 | 226.5 | 117.9 | |||||||||||
Global Credit | 1.4 | 88.3 | 19.8 | 104.3 | |||||||||||
Investment Solutions | 11.4 | 14.5 | 44.7 | 33.4 | |||||||||||
Economic Income | $ | 110.6 | $ | 202.7 | $ | 551.7 | $ | 902.9 | |||||||
Distributable Earnings | |||||||||||||||
Corporate Private Equity | $ | 121.3 | $ | 207.1 | $ | 247.6 | $ | 415.3 | |||||||
Real Assets | 66.2 | (40.9 | ) | 151.3 | (25.5 | ) | |||||||||
Global Credit | 10.0 | 87.5 | 34.8 | 104.2 | |||||||||||
Investment Solutions | 12.5 | 6.2 | 29.7 | 20.2 | |||||||||||
Distributable Earnings | $ | 210.0 | $ | 259.9 | $ | 463.4 | $ | 514.2 | |||||||
Segment Analysis
Discussed below is our DE, FRE and EI for our segments for the periods presented. Our segment information is reflected in the manner used by our senior management to make operating and compensation decisions, assess performance and allocate resources.
For segment reporting purposes, revenues and expenses are presented on a basis that deconsolidates our Consolidated Funds. As a result, segment revenues from management fees, performance revenues and principal investment income (loss) are different than those presented on a consolidated U.S. GAAP basis because fund management fees recognized in certain segments are received from Consolidated Funds and are eliminated in consolidation when presented on a consolidated U.S. GAAP basis. Furthermore, segment expenses are different than related amounts presented on a consolidated U.S. GAAP basis due to the exclusion of fund expenses that are paid by the Consolidated Funds. Segment revenue and expenses are also different than those presented on a consolidated U.S. GAAP basis because we present our segment revenues and expenses related to Claren Road based on our 63% economic interest in that entity (through January 31, 2017). Also, EI excludes expenses associated with equity-based compensation that was issued in our initial public offering or issued in acquisitions and strategic investments.
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Corporate Private Equity
The following table presents our results of operations for our Corporate Private Equity segment:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Segment Revenues | |||||||||||||||
Fund level fee revenues | |||||||||||||||
Fund management fees | $ | 175.8 | $ | 118.3 | $ | 437.9 | $ | 351.7 | |||||||
Portfolio advisory fees, net | 7.0 | 3.6 | 13.0 | 11.9 | |||||||||||
Transaction fees, net | — | 5.3 | 3.9 | 14.2 | |||||||||||
Total fund level fee revenues | 182.8 | 127.2 | 454.8 | 377.8 | |||||||||||
Performance revenues | |||||||||||||||
Realized | 143.6 | 345.4 | 383.6 | 668.8 | |||||||||||
Unrealized | (91.7 | ) | (193.2 | ) | 136.7 | 465.0 | |||||||||
Total performance revenues | 51.9 | 152.2 | 520.3 | 1,133.8 | |||||||||||
Principal investment income | |||||||||||||||
Realized | 4.2 | 6.5 | 24.4 | 15.6 | |||||||||||
Unrealized | 0.2 | 4.1 | 2.3 | 22.9 | |||||||||||
Total principal investment income | 4.4 | 10.6 | 26.7 | 38.5 | |||||||||||
Interest income | 3.0 | 1.8 | 7.5 | 3.7 | |||||||||||
Other income | 0.6 | 1.6 | 4.3 | 4.2 | |||||||||||
Total revenues | 242.7 | 293.4 | 1,013.6 | 1,558.0 | |||||||||||
Segment Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | 93.9 | 83.6 | 281.6 | 230.4 | |||||||||||
Equity-based compensation | 25.2 | 14.5 | 66.9 | 47.3 | |||||||||||
Performance revenues related compensation | |||||||||||||||
Realized | 66.1 | 147.7 | 180.8 | 295.4 | |||||||||||
Unrealized | (42.1 | ) | (76.1 | ) | 59.0 | 221.1 | |||||||||
Total compensation and benefits | 143.1 | 169.7 | 588.3 | 794.2 | |||||||||||
General, administrative, and other indirect expenses | 41.1 | 20.5 | 130.5 | 83.9 | |||||||||||
Depreciation and amortization expense | 4.3 | 4.1 | 12.5 | 11.5 | |||||||||||
Interest expense | 7.5 | 7.0 | 21.6 | 21.1 | |||||||||||
Total expenses | 196.0 | 201.3 | 752.9 | 910.7 | |||||||||||
Economic Income | $ | 46.7 | $ | 92.1 | $ | 260.7 | $ | 647.3 | |||||||
(-) Net Performance Revenues | 27.9 | 80.6 | 280.5 | 617.3 | |||||||||||
(-) Principal Investment Income | 4.4 | 10.6 | 26.7 | 38.5 | |||||||||||
(+) Equity-based Compensation | 25.2 | 14.5 | 66.9 | 47.3 | |||||||||||
(+) Net Interest | 4.5 | 5.2 | 14.1 | 17.4 | |||||||||||
(+) Reserve for Litigation and Contingencies | — | (12.5 | ) | — | (12.5 | ) | |||||||||
(=) Fee Related Earnings | $ | 44.1 | $ | 8.1 | $ | 34.5 | $ | 43.7 | |||||||
(+) Realized Net Performance Revenues | 77.5 | 197.7 | 202.8 | 373.4 | |||||||||||
(+) Realized Principal Investment Income | 4.2 | 6.5 | 24.4 | 15.6 | |||||||||||
(+) Net Interest | (4.5 | ) | (5.2 | ) | (14.1 | ) | (17.4 | ) | |||||||
(=) Distributable Earnings | $ | 121.3 | $ | 207.1 | $ | 247.6 | $ | 415.3 | |||||||
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Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017 and Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Distributable Earnings
Distributable Earnings decreased $85.8 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $167.7 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in distributable earnings for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Distributable earnings, September 30, 2017 | $ | 207.1 | $ | 415.3 | |||
Increases (decreases): | |||||||
Increase (decrease) in fee related earnings | 36.0 | (9.2 | ) | ||||
Decrease in realized net performance revenues | (120.2 | ) | (170.6 | ) | |||
(Decrease) increase in realized principal investment income | (2.3 | ) | 8.8 | ||||
Decrease in net interest | 0.7 | 3.3 | |||||
Total decrease | (85.8 | ) | (167.7 | ) | |||
Distributable earnings, September 30, 2018 | $ | 121.3 | $ | 247.6 | |||
Realized Net Performance Revenues. Realized net performance revenues decreased $120.2 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $170.6 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The decrease in realized net performance revenues for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 was primarily due to lower realizations in our U.S. buyout funds. The decrease in realized net performance revenues for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily due to lower realizations from our U.S. buyout funds in carry in 2018 as compared to 2017, partially offset by higher realizations from our Asia and Europe buyout funds in 2018 as compared to 2017. Realized net performance revenues were primarily generated by the following funds for the three and nine months ended September 30, 2018 and 2017:
Three Months Ended September 30, | Nine Months Ended September 30, | |||
2018 | 2017 | 2018 | 2017 | |
CP V | CP V | CP V | CP V | |
CAP III | CEP III | CEP III | CEP III | |
CETP III | CETP II | CAP III | CAP III | |
CETP III | CGFSP I | |||
CETP II | ||||
Realized Principal Investment Income. Realized principal investment income decreased $2.3 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The decrease in realized principal investment income for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 was primarily due to realized gains for the three months ended September 30, 2017 in our investments in Europe buyout funds and lower realized gains in our investments in U.S. growth and financial services funds, partially offset by higher realized gains for the three months ended September 30, 2018 in our investments in Europe growth funds.
Realized principal investment income increased $8.8 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The increase in realized principal investment income for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily due to higher realized gains in our investments in U.S., Europe and Asia buyout funds and Europe growth funds as well as lower realized losses in our investments in South America buyout funds, partially offset by lower realized gains in our investments in our U.S. Growth funds.
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Fee Related Earnings
Fee related earnings increased $36.0 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $9.2 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in fee related earnings for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Fee related earnings, September 30, 2017 | $ | 8.1 | $ | 43.7 | |||
Increases (decreases): | |||||||
Increase in fee revenues | 55.6 | 77.0 | |||||
Increase in cash-based compensation and benefits | (10.3 | ) | (51.2 | ) | |||
Increase in general, administrative and other indirect expenses | (8.1 | ) | (34.1 | ) | |||
All other changes | (1.2 | ) | (0.9 | ) | |||
Total increase (decrease) | 36.0 | (9.2 | ) | ||||
Fee related earnings, September 30, 2018 | $ | 44.1 | $ | 34.5 | |||
Fee Revenues. Total fee revenues increased $55.6 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $77.0 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, due to the following:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Higher fund management fees | $ | 57.5 | $ | 86.2 | |||
Lower transaction fees | (5.3 | ) | (10.3 | ) | |||
Higher portfolio advisory fees | 3.4 | 1.1 | |||||
Total increase in fee revenues | $ | 55.6 | $ | 77.0 | |||
The increase in fund management fees for both the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 was primarily due to the activation of management fees during the second quarter of 2018 on our seventh U.S. buyout fund (“CP VII”) and our fifth Asia buyout fund (“CAP V”). These increases were partially offset by lower assets under management from sales of investments during 2017 for CP V and CP VI, and CP VI and CAP IV stepping down effective fee rates as they exit the investment period. The total weighted-average management fee rate decreased from 1.32% at September 30, 2017 to 1.22% at September 30, 2018. Fee-earning assets under management were $56.3 billion and $35.6 billion as of September 30, 2018 and 2017, respectively, reflecting an increase of $20.7 billion.
The decrease in transaction fees for both the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 was primarily from significant investments in one of our U.S. buyout funds in 2017.
Cash-based compensation and benefits expense. Cash-based compensation and benefits expense increased $10.3 million, or 12%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The increase was primarily due to higher projected year-end bonuses.
Cash-based compensation and benefits expense increased $51.2 million, or 22%, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The increase was primarily due to higher projected year-end bonuses, increased headcount and higher compensation costs related to fundraising activities of approximately $17.7 million.
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General, administrative and other indirect expenses. General, administrative and other indirect expenses increased $8.1 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, primarily due to higher professional fees and higher external costs associated with fundraising activities, partially offset by positive foreign currency adjustments for the three months ended September 30, 2018 as compared to negative foreign currency adjustments for the three months ended September 30, 2017.
General, administrative and other indirect expenses increased $34.1 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to higher external costs associated with fundraising activities of approximately $27.2 million and higher professional fees, partially offset by lower negative foreign currency adjustments.
Economic Income
Economic income decreased $45.4 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $386.6 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in economic income for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Economic income, September 30, 2017 | $ | 92.1 | $ | 647.3 | |||
Increases (decreases): | |||||||
Decrease in net performance revenues | (52.7 | ) | (336.8 | ) | |||
Decrease in principal investment income | (6.2 | ) | (11.8 | ) | |||
Increase in equity-based compensation | (10.7 | ) | (19.6 | ) | |||
Increase (decrease) in fee related earnings | 36.0 | (9.2 | ) | ||||
Decrease in net interest | 0.7 | 3.3 | |||||
Change in reserve for litigation and contingencies (1) | (12.5 | ) | (12.5 | ) | |||
Total decrease | (45.4 | ) | (386.6 | ) | |||
Economic income, September 30, 2018 | $ | 46.7 | $ | 260.7 | |||
(1) Corporate Private Equity's share of the $25 million reserve reversal related to the CCC litigation recognized in 2017.
Performance Revenues. Performance revenues (realized and unrealized) decreased $100.3 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $613.5 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The decrease for both the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily due to lower appreciation on our buyout and growth funds.
Performance revenues are from the following types of funds:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Buyout funds | $ | 37.6 | $ | 148.6 | $ | 453.5 | $ | 1,097.1 | |||||||
Growth Capital funds | 14.3 | 3.6 | 66.8 | 36.7 | |||||||||||
Total performance revenues | $ | 51.9 | $ | 152.2 | $ | 520.3 | $ | 1,133.8 | |||||||
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The $51.9 million of performance revenues for the three months ended September 30, 2018 was driven primarily by performance revenues recognized from the following funds:
•CP VI of $46.0 million,
•CP V of $39.5 million,
•CJP III of $19.2 million,
•CEOF of $13.5 million, and
•CAP IV of $(89.2) million.
The $152.2 million of performance revenues for the three months ended September 30, 2017 was driven by performance revenues recognized from the following funds:
•CP VI of $74.2 million,
•CP V of $33.3 million,
•CETP III of $22.3 million,
•CGFSP II of $17.2 million,
•CAP II of $10.7 million, and
•CEOF of $(34.2) million.
The $520.3 million of performance revenues for the nine months ended September 30, 2018 was driven primarily by performance revenues recognized from the following funds:
•CP VI of $210.7 million,
•CEP IV of $115.8 million,
•CP V of $104.3 million,
•CJP III of $57.3 million,
•CEP III of $35.8 million,
•CGP I of $35.3 million,
•CEOF of $31.1 million,
•CETP of $25.8 million,
•CAP IV of $(133.9) million, and
•CAP III of $(34.0) million.
The $1,133.8 million of performance revenues for the nine months ended September 30, 2017 was driven by performance revenues recognized from the following funds:
•CP VI of $471.5 million,
•CP V of $284.9 million,
•CAP IV of $221.7 million,
•CGFSP II of $46.9 million,
•CETP II of $30.1 million,
•CETP III of $28.0 million,
•CEOF of $(22.7) million, and
•CP IV of $(22.5) million.
Performance revenues of $51.9 million and $152.2 million are inclusive of performance revenues reversed of approximately $99.2 million and $57.6 million for the three months ended September 30, 2018 and 2017, respectively. Performance revenues of $520.3 million and $1,133.8 million are inclusive of performance revenues reversed of approximately $172.5 million and $72.1 million for the nine months ended September 30, 2018 and 2017, respectively.
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The appreciation (depreciation) in remaining value of assets for this segment by type of fund are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||
2018 | 2017 | 2018 | 2017 | ||
Buyout funds | 1% | 3% | 8% | 24% | |
Growth Capital funds | 1% | 6% | 6% | 17% | |
Total | 1% | 4% | 8% | 23% | |
Net performance revenues as a percentage of total performance revenues are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2018 | 2017 | 2018 | 2017 | ||||
(Dollars in millions) | |||||||
Net Performance Revenues | $27.9 | $80.6 | $280.5 | $617.3 | |||
Percentage of Total Performance Revenues | 54% | 53% | 54% | 54% | |||
Unrealized performance revenues reflect the difference between total performance revenues and realized performance revenues. The recognition of realized performance revenues results in a reversal of accumulated unrealized performance revenues, generally resulting in minimal impact on total performance revenues. Because unrealized performance revenues are reversed upon a realization event, in periods where the Partnership generates significant realized performance revenues unrealized performance revenues may be negative even in periods of portfolio appreciation.
Principal investment income. Principal investment income (realized and unrealized) for the three months ended September 30, 2018 was $4.4 million as compared to principal investment income of $10.6 million for the three months ended September 30, 2017. The decrease related primarily to unrealized losses on certain Asia buyout funds for the three months ended September 30, 2018 as compared to unrealized gains on these same funds for the three months ended September 30, 2017.
Principal investment income (realized and unrealized) for the nine months ended September 30, 2018 was $26.7 million as compared to principal investment income of $38.5 million for the nine months ended September 30, 2017. The decrease related primarily to unrealized losses on certain Asia buyout funds for the three months ended September 30, 2018 as compared to unrealized gains on these same funds for the three months ended September 30, 2017. These unrealized losses were partially offset by higher realized gains on our U.S. buyout funds.
Equity-based compensation. Equity-based compensation was $25.2 million for the three months ended September 30, 2018, an increase of $10.7 million from $14.5 million for the three months ended September 30, 2017. Equity-based compensation was $66.9 million for the nine months ended September 30, 2018, an increase of $19.6 million from $47.3 million for the nine months ended September 30, 2017. The increase for both periods primarily relates to the ongoing grants of deferred restricted common units to new and existing employees during 2017 and 2018, as well as the probable vesting of certain awards containing performance conditions.
Reserve for Litigation and Contingencies. Corporate Private Equity's share of the reserve for litigation and contingencies decreased $12.5 million for both the three and nine months ended September 30, 2018. The decrease was related to Corporate Private Equity's share of the $25 million reserve reversal related to the CCC litigation recognized in 2017.
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Fee-earning AUM as of and for the Three and Nine Months Ended September 30, 2018 and 2017
Fee-earning AUM is presented below for each period together with the components of change during each respective period.
The table below breaks out Fee-earning AUM by its respective components at each period.
As of September 30, | |||||||
2018 | 2017 | ||||||
Corporate Private Equity | (Dollars in millions) | ||||||
Components of Fee-earning AUM (1) | |||||||
Fee-earning AUM based on capital commitments | $ | 33,416 | $ | 26,180 | |||
Fee-earning AUM based on invested capital | 20,430 | 7,726 | |||||
Fee-earning AUM based on lower of cost or fair value | 2,454 | 1,697 | |||||
Total Fee-earning AUM | $ | 56,300 | $ | 35,603 | |||
Weighted Average Management Fee Rates (2) | |||||||
All Funds | 1.22 | % | 1.32 | % | |||
Funds in Investment Period | 1.46 | % | 1.44 | % | |||
(1) | For additional information concerning the components of Fee-earning AUM, see “—Fee-earning Assets under Management.” |
(2) | Represents the aggregate effective management fee rate of each fund in the segment, weighted by each fund’s Fee-earning AUM, as of the end of each period presented. |
The table below provides the period to period rollforward of Fee-earning AUM.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Corporate Private Equity | (Dollars in millions) | (Dollars in millions) | |||||||||||||
Fee-earning AUM Rollforward | |||||||||||||||
Balance, Beginning of Period | $ | 56,310 | $ | 36,216 | $ | 35,584 | $ | 36,327 | |||||||
Inflows, including Fee-paying Commitments (1) | 399 | 303 | 24,235 | 830 | |||||||||||
Outflows, including Distributions (2) | (321 | ) | (1,167 | ) | (3,234 | ) | (2,299 | ) | |||||||
Market Appreciation/(Depreciation) (3) | (11 | ) | 21 | 11 | 12 | ||||||||||
Foreign Exchange and other (4) | (77 | ) | 230 | (296 | ) | 733 | |||||||||
Balance, End of Period | $ | 56,300 | $ | 35,603 | $ | 56,300 | $ | 35,603 | |||||||
(1) | Inflows represent limited partner capital raised and capital invested by carry funds outside the original investment period. |
(2) | Outflows represent distributions from funds outside the investment period and changes in fee basis for our carry funds where the original investment period has expired. |
(3) | Market Appreciation/(Depreciation) represents realized and unrealized gains (losses) on portfolio investments in our carry funds based on the lower of cost or fair value. |
(4) | Represents the impact of foreign exchange rate fluctuations on the translation of our non-U.S. dollar denominated funds. Activity during the period is translated at the average rate for the period. Ending balances are translated at the spot rate as of period end. |
Fee-earning AUM was $56.3 billion at September 30, 2018 and June 30, 2018. Inflows of $0.4 billion were driven by new fee-earning commitments raised in CBPF II and CP VII. These inflows were offset by outflows of $0.3 billion from dispositions in various funds which charge fees based on invested equity and $0.1 billion of foreign exchange losses. Investment and distribution activity by funds still in the investment period does not impact Fee-earning AUM as these funds are based on commitments.
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Fee-earning AUM was $56.3 billion at September 30, 2018, an increase of $20.7 billion, or approximately 58%, compared to $35.6 billion at December 31, 2017. The increase was driven by inflows of $24.2 billion primarily from new fee-earning commitments in CP VII and CAP V. Partially offsetting the increase were outflows of $3.2 billion primarily due to the step-down of fees in CP VI and dispositions in various funds which charge fees based on invested equity.
Fee-earning AUM was $56.3 billion at September 30, 2018, an increase of $20.7 billion, or approximately 58%, compared to $35.6 billion at September 30, 2017. The increase was driven by inflows of $25.5 billion primarily related to new fee-earning commitments in CP VII and CAP V, as well as new investments made by CGP. This was partially offset by outflows of $4.6 billion primarily due to the step-down of fees in CP VI and dispositions in various funds which charge fees based on invested equity.
Fee-earning AUM was $35.6 billion at September 30, 2017, a decrease of $0.6 billion, or approximately 2%, compared to $36.2 billion at June 30, 2017. The decrease was driven by outflows of $1.2 billion primarily due to dispositions in CP V and CEP III. This decrease was partially offset by inflows of $0.3 billion from new investments made by CGP and foreign exchange gains of $0.2 billion primarily due to the translation of Fee-earning AUM in our Europe buyout and growth funds from EUR to USD.
Fee-earning AUM was $35.6 billion at September 30, 2017, a decrease of $0.7 billion, or approximately 2% compared to $36.3 billion at December 31, 2016. The decrease was driven by outflows of $2.3 billion primarily due to dispositions in CP V. This was offset by inflows of $0.8 billion primarily related to new investments made by CGP and new commitments to CAGP V, and foreign exchange gains of $0.7 billion primarily due to the translation of Fee-earning AUM in our Europe buyout and growth funds from EUR to USD.
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Total AUM as of and for the Three and Nine Months Ended September 30, 2018
The table below provides the period to period rollforward of Total AUM.
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||
(Dollars in millions) | |||||||
Corporate Private Equity | |||||||
Total AUM Rollforward | |||||||
Balance, Beginning of Period | $ | 81,168 | $ | 72,558 | |||
New Commitments (1) | 1,763 | 14,429 | |||||
Outflows (2) | (1,214 | ) | (6,755 | ) | |||
Market Appreciation/(Depreciation) (3) | 475 | 2,918 | |||||
Foreign Exchange Gain/(Loss) (4) | (146 | ) | (549 | ) | |||
Other (5) | (408 | ) | (963 | ) | |||
Balance, End of Period | $ | 81,638 | $ | 81,638 | |||
(1) | New Commitments reflects the impact of gross fundraising during the period. For funds or vehicles denominated in foreign currencies, this reflects translation at the average quarterly rate, while the separately reported Fundraising metric is translated at the spot rate for each individual closing. |
(2) | Outflows includes distributions in our carry funds, related co-investment vehicles and separately managed accounts. |
(3) | Market Appreciation/(Depreciation) generally represents realized and unrealized gains (losses) on portfolio investments in our carry funds, related co-investment vehicles and separately managed accounts. |
(4) | Represents the impact of foreign exchange rate fluctuations on the translation of our non-U.S. dollar denominated funds. Activity during the period is translated at the average rate for the period. Ending balances are translated at the spot rate as of the period end. |
(5) | Includes expiring available capital, the impact of capital calls for fees and expenses and other changes in AUM. |
Total AUM was $81.6 billion at September 30, 2018, an increase of $0.4 billion, compared to $81.2 billion as of June 30, 2018. The increase was driven by $1.8 billion of new commitments raised primarily in CEP V, CP VII, and CBPF II. Also driving the increase was market appreciation of $0.5 billion due to overall segment appreciation of 1% for the period. The carry funds driving appreciation for the period included $0.3 billion attributable to CP VI, $0.2 billion attributable to CP V, and $0.1 billion attributable to CJP III. The increase was partially offset by outflows of $1.2 billion primarily in CP V, CP VI, CETP III, and CAP IV.
Total AUM was $81.6 billion at September 30, 2018, an increase of $9.0 billion, or approximately 12%, compared to $72.6 billion as of December 31, 2017. The increase was driven by $14.4 billion of new commitments raised primarily in CEP V, CP VII, and CAP V. Also driving the increase was $2.9 billion of market appreciation due to overall segment appreciation of 8% for the period. The carry funds driving appreciation for the period included $1.2 billion attributable to CP VI, $0.6 billion attributable to CEP IV, and $0.6 billion attributable to CP V. The increase was partially offset by outflows of $6.8 billion primarily in our US, Asia, and Europe buyout funds, as well as in our financial services funds.
Fund Performance Metrics
Fund performance information for our investment funds that generally have at least $1.0 billion in capital commitments, cumulative equity invested or total value as of September 30, 2018, which we refer to as our “significant funds” is included throughout this discussion and analysis to facilitate an understanding of our results of operations for the periods presented. The fund return information reflected in this discussion and analysis is not indicative of the performance of The Carlyle Group L.P. and is also not necessarily indicative of the future performance of any particular fund. An investment in The Carlyle Group L.P. is not an investment in any of our funds. There can be no assurance that any of our funds or our other existing and future funds will achieve similar returns.
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The following tables reflect the performance of our significant funds in our Corporate Private Equity business. Please see “— Our Family of Funds” for a legend of the fund acronyms listed below.
TOTAL INVESTMENTS | REALIZED/PARTIALLY REALIZED INVESTMENTS(5) | ||||||||||||||||||||||||
As of September 30, 2018 | As of September 30, 2018 | ||||||||||||||||||||||||
Fund Inception Date(1) | Committed Capital | Cumulative Invested Capital(2) | Total Fair Value(3) | MOIC(4) | Gross IRR (7)(12) | Net IRR (8)(12) | Cumulative Invested Capital(2) | Total Fair Value(3) | MOIC (4) | Gross IRR(7) | |||||||||||||||
Corporate Private Equity | (Reported in Local Currency, in Millions) | (Reported in Local Currency, in Millions) | |||||||||||||||||||||||
Fully Invested/Committed Funds(6) | |||||||||||||||||||||||||
CP II | 10/1994 | $ | 1,331.1 | $ | 1,362.4 | $ | 4,072.2 | 3.0x | 34 | % | 25 | % | $ | 1,362.4 | $ | 4,072.2 | 3.0x | 34 | % | ||||||
CP III | 2/2000 | $ | 3,912.7 | $ | 4,031.6 | $ | 10,146.9 | 2.5x | 27 | % | 21 | % | $ | 4,031.6 | $ | 10,146.9 | 2.5x | 27 | % | ||||||
CP IV | 12/2004 | $ | 7,850.0 | $ | 7,612.6 | $ | 18,024.3 | 2.4x | 16 | % | 13 | % | $ | 7,612.6 | $ | 18,024.3 | 2.4x | 16 | % | ||||||
CP V | 5/2007 | $ | 13,719.7 | $ | 13,190.9 | $ | 27,919.2 | 2.1x | 18 | % | 14 | % | $ | 9,836.1 | $ | 25,329.1 | 2.6x | 25 | % | ||||||
CP VI | 5/2012 | $ | 13,000.0 | $ | 12,671.3 | $ | 18,389.8 | 1.5x | 18 | % | 12 | % | $ | 1,689.2 | $ | 4,382.3 | 2.6x | 40 | % | ||||||
CEP I | 12/1997 | € | 1,003.6 | € | 981.6 | € | 2,126.5 | 2.2x | 18 | % | 11 | % | € | 981.6 | € | 2,126.5 | 2.2x | 18 | % | ||||||
CEP II | 9/2003 | € | 1,805.4 | € | 2,048.4 | € | 4,125.8 | 2.0x | 36 | % | 20 | % | € | 1,883.8 | € | 4,106.8 | 2.2x | 43 | % | ||||||
CEP III | 12/2006 | € | 5,294.9 | € | 5,127.5 | € | 11,736.9 | 2.3x | 19 | % | 14 | % | € | 4,389.9 | € | 11,248.8 | 2.6x | 21 | % | ||||||
CAP I | 12/1998 | $ | 750.0 | $ | 627.7 | $ | 2,521.8 | 4.0x | 25 | % | 18 | % | $ | 627.7 | $ | 2,521.8 | 4.0x | 25 | % | ||||||
CAP II | 2/2006 | $ | 1,810.0 | $ | 1,628.2 | $ | 3,081.4 | 1.9x | 11 | % | 8 | % | $ | 1,628.2 | $ | 3,081.4 | 1.9x | 11 | % | ||||||
CAP III | 5/2008 | $ | 2,551.6 | $ | 2,543.2 | $ | 4,641.1 | 1.8x | 17 | % | 11 | % | $ | 2,071.8 | $ | 4,285.5 | 2.1x | 19 | % | ||||||
CAP IV | 11/2012 | $ | 3,880.4 | $ | 3,855.0 | $ | 5,215.5 | 1.4x | 16 | % | 9 | % | $ | 185.1 | $ | 386.1 | 2.1x | 43 | % | ||||||
CJP I | 10/2001 | ¥ | 50,000.0 | ¥ | 47,291.4 | ¥ | 138,902.1 | 2.9x | 61 | % | 37 | % | ¥ | 47,291.4 | ¥ | 138,902.1 | 2.9x | 61 | % | ||||||
CJP II | 7/2006 | ¥ | 165,600.0 | ¥ | 141,866.7 | ¥ | 210,602.1 | 1.5x | 7 | % | 4 | % | ¥ | 126,166.7 | ¥ | 191,642.2 | 1.5x | 7 | % | ||||||
CGFSP I | 9/2008 | $ | 1,100.2 | $ | 1,080.7 | $ | 2,471.8 | 2.3x | 20 | % | 14 | % | $ | 1,080.7 | $ | 2,471.8 | 2.3x | 20 | % | ||||||
CGFSP II | 4/2013 | $ | 1,000.0 | $ | 942.7 | $ | 1,452.8 | 1.5x | 23 | % | 14 | % | $ | 283.1 | $ | 580.5 | 2.1x | 33 | % | ||||||
CEOF I | 5/2011 | $ | 1,119.1 | $ | 1,168.2 | $ | 1,664.5 | 1.4x | 13 | % | 8 | % | $ | 346.9 | $ | 840.2 | 2.4x | 38 | % | ||||||
CETP II | 2/2007 | € | 521.6 | € | 437.4 | € | 1,265.3 | 2.9x | 27 | % | 19 | % | € | 359.7 | € | 1,180.5 | 3.3x | 30 | % | ||||||
CAGP IV | 6/2008 | $ | 1,041.4 | $ | 954.1 | $ | 1,326.3 | 1.4x | 9 | % | 4 | % | $ | 532.1 | $ | 983.2 | 1.8x | 15 | % | ||||||
All Other Funds (9) | Various | $ | 4,854.6 | $ | 7,580.8 | 1.6x | 16 | % | 7 | % | $ | 3,916.6 | $ | 6,158.4 | 1.6x | 17 | % | ||||||||
Coinvestments and Other (10) | Various | $ | 11,683.7 | $ | 25,525.6 | 2.2x | 36 | % | 33 | % | $ | 6,960.4 | $ | 20,704.6 | 3.0x | 36 | % | ||||||||
Total Fully Invested Funds | $ | 79,857.1 | $ | 159,478.8 | 2.0x | 26 | % | 18 | % | $ | 52,538.2 | $ | 128,558.7 | 2.4x | 27 | % | |||||||||
Funds in the Investment Period (6) | |||||||||||||||||||||||||
CP VII | 11/2017 | $ | 18,510.0 | $ | 246.2 | $ | 246.2 | 1.0x | NM | NM | |||||||||||||||
CEP IV | 8/2013 | € | 3,669.5 | € | 3,082.6 | € | 4,250.6 | 1.4x | 21 | % | 11 | % | |||||||||||||
CAP V | 10/2017 | $ | 6,554.2 | $ | 488.2 | $ | 480.2 | 1.0x | NM | NM | |||||||||||||||
CGP | 12/2014 | $ | 3,588.0 | $ | 2,551.5 | $ | 2,950.4 | 1.2x | 9 | % | 7% | ||||||||||||||
CJP III | 8/2013 | ¥ | 119,505.1 | ¥ | 60,094.5 | ¥ | 141,827.2 | 2.4x | 31 | % | 21 | % | |||||||||||||
CEOF II | 3/2015 | $ | 2,400.0 | $ | 1,167.6 | $ | 1,435.3 | 1.2x | NM | NM | |||||||||||||||
All Other Funds (11) | Various | $ | 1,539.7 | $ | 2,114.6 | 1.4x | NM | NM | |||||||||||||||||
Total Funds in the Investment Period | $ | 10,103.3 | $ | 13,413.5 | 1.3x | 18 | % | 9 | % | $ | 702.5 | $ | 1,984.9 | 2.8x | 50 | % | |||||||||
TOTAL CORPORATE PRIVATE EQUITY (13) | $ | 89,960.5 | $ | 172,892.3 | 1.9x | 26 | % | 18 | % | $ | 53,240.7 | $ | 130,543.5 | 2.5x | 27 | % | |||||||||
(1) | The data presented herein that provides “inception to date” performance results of our segments relates to the period following the formation of the first fund within each segment. For our Corporate Private Equity segment our first fund was formed in 1990. |
(2) | Represents the original cost of investments since inception of the fund. |
(3) | Represents all realized proceeds combined with remaining fair value, before management fees, expenses and carried interest. |
(4) | Multiple of invested capital (“MOIC”) represents total fair value, before management fees, expenses and carried interest, divided by cumulative invested capital. |
(5) | An investment is considered realized when the investment fund has completely exited, and ceases to own an interest in, the investment. An investment is considered partially realized when the total amount of proceeds received in respect of such investment, including dividends, interest or other distributions and/or return of capital, represents at least 85% of invested capital and such investment is not yet fully realized. Because part of our value creation strategy involves pursuing best exit |
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alternatives, we believe information regarding Realized/Partially Realized MOIC and Gross IRR, when considered together with the other investment performance metrics presented, provides investors with meaningful information regarding our investment performance by removing the impact of investments where significant realization activity has not yet occurred. Realized/Partially Realized MOIC and Gross IRR have limitations as measures of investment performance, and should not be considered in isolation. Such limitations include the fact that these measures do not include the performance of earlier stage and other investments that do not satisfy the criteria provided above. The exclusion of such investments will have a positive impact on Realized/Partially Realized MOIC and Gross IRR in instances when the MOIC and Gross IRR in respect of such investments are less than the aggregate MOIC and Gross IRR. Our measurements of Realized/Partially Realized MOIC and Gross IRR may not be comparable to those of other companies that use similarly titled measures. We do not present Realized/Partially Realized performance information separately for funds that are still in the investment period because of the relatively insignificant level of realizations for funds of this type. However, to the extent such funds have had realizations, they are included in the Realized/Partially Realized performance information presented for Total Corporate Private Equity.
(6) | Fully Invested funds are past the expiration date of the investment period as defined in the respective limited partnership agreement. In instances where a successor fund has had its first capital call, the predecessor fund is categorized as fully invested. |
(7) | Gross Internal Rate of Return (“Gross IRR”) represents the annualized IRR for the period indicated on Limited Partner invested capital based on contributions, distributions and unrealized value before management fees, expenses and carried interest. |
(8) | Net Internal Rate of Return (“Net IRR”) represents the annualized IRR for the period indicated on Limited Partner invested capital based on contributions, distributions and unrealized value after management fees, expenses and carried interest. Fund level IRRs are based on aggregate Limited Partner cash flows, and this blended return may differ from that of individual Limited Partners. As a result, certain funds may generate accrued performance revenues with a blended Net IRR that is below the preferred return hurdle for that fund. |
(9) | Aggregate includes the following funds: CP I, CMG, CVP I, CVP II, CUSGF III, CEVP, CETP I, CAVP I, CAVP II, CAGP III, CSABF, CPF I, Mexico, CBPF, and MENA. |
(10) | Includes coinvestments and certain other stand-alone investments arranged by us. |
(11) | Aggregate, which is considered not meaningful, includes the following funds and their respective commencement dates: CSSAF (April 2012) , CCI (December 2012), CETP III (May 2014), CAGP V (May 2016), CGFSP III (June 2017), and CBPF II (November 2017). |
(12) | For funds marked “NM,” IRR may be positive or negative, but is not considered meaningful because of the limited time since initial investment and early stage of capital deployment. For funds marked “Neg,” IRR is negative as of reporting period end. |
(13) | For purposes of aggregation, funds that report in foreign currency have been converted to U.S. dollars at the reporting period spot rate. |
Remaining Fair Value(1) | Unrealized MOIC(2) | Total MOIC(3) | % Invested(4) | In Accrued Carry/ (Clawback) (5) | LTM Realized Carry (6) | Catch-up Rate | Fee Initiation Date(7) | Quarters Since Fee Initiation | Original Investment Period End Date | |||||
As of September 30, 2018 | ||||||||||||||
Corporate Private Equity | (Reported in Local Currency, in Millions) | |||||||||||||
CP VI | $ | 13,470.1 | 1.3x | 1.5x | 97 | % | X | 100 | % | Jun-13 | 22 | May-18 | ||
CAP IV | $ | 4,446.1 | 1.3x | 1.4x | 99 | % | X | 100 | % | Jul-13 | 21 | Nov-18 | ||
CEP IV | € | 3,481.0 | 1.5x | 1.4x | 84 | % | X | 100 | % | Sep-14 | 17 | Aug-19 | ||
CGP | $ | 2,903.6 | 1.1x | 1.2x | 71 | % | X | 100 | % | Jan-15 | 15 | Dec-20 | ||
CP V | $ | 2,639.0 | 0.8x | 2.1x | 96 | % | X | X | 100 | % | Jun-07 | 46 | May-13 | |
CEOF II | $ | 1,298.8 | 1.2x | 1.2x | 49 | % | 80 | % | Nov-15 | 12 | Mar-21 | |||
CJP III | ¥ | 102,649.0 | 2.2x | 2.4x | 50 | % | X | 100 | % | Sep-13 | 21 | Feb-20 | ||
CEOF I | $ | 787.8 | 1.0x | 1.4x | 104 | % | X | 80 | % | Sep-11 | 29 | May-17 | ||
CGFSP II | $ | 773.5 | 1.3x | 1.5x | 94 | % | X | X | 100 | % | Jun-13 | 22 | Dec-17 | |
CEP III | € | 490.0 | 0.7x | 2.3x | 97 | % | X | X | 100 | % | Jul-07 | 45 | Dec-12 | |
CAP V | $ | 490.9 | 1.0x | 1.0x | 7 | % | 100 | % | Jun-18 | 2 | Jun-24 | |||
CAP III | $ | 447.9 | 1.0x | 1.8x | 100 | % | X | X | 100 | % | Jun-08 | 42 | May-14 | |
CAGP IV | $ | 277.2 | 0.7x | 1.4x | 92 | % | 100 | % | Aug-08 | 41 | Jun-14 | |||
CP IV | $ | 276.1 | 2.9x | 2.4x | 97 | % | X | 80 | % | Apr-05 | 54 | Dec-10 | ||
CP VII | $ | 247.0 | 1.0x | 1.0x | 1 | % | 200 | % | May-18 | 2 | May-24 | |||
CJP II | ¥ | 15,535.0 | 1.0x | 1.5x | 86 | % | 80 | % | Oct-06 | 48 | Jul-12 | |||
All Other Funds (8) | $ | 2,956.3 | 1.2x | 2.2x | NM | NM | ||||||||
Coinvestment and Other (9) | $ | 4,602.9 | 1.1x | 2.2x | NM | NM | ||||||||
Total Corporate Private Equity (10) | $ | 41,271.0 | 1.2x | 1.9x | ||||||||||
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(1) | Remaining Fair Value reflects the unrealized carrying value of investments for Corporate Private Equity, Real Assets and Global Credit carry funds and related co-investment vehicles. Significant funds with remaining fair value of greater than $100 million are listed individually. |
(2) | Unrealized multiple of invested capital (“MOIC”) represents remaining fair market value, before management fees, expenses and carried interest, divided by remaining investment cost. |
(3) | Total MOIC represents total fair value (realized proceeds combined with remaining fair value), before management fees, expenses and carried interest, divided by cumulative invested capital. For certain funds, represents the original cost of investments net of investment-level recallable proceeds, which is adjusted to reflect recyclability of invested capital for the purpose of calculating the fund MOIC. |
(4) | Represents cumulative invested capital as of the reporting period divided by total commitments. Amount can be greater than 100% due to the re-investment of recallable distributions to fund investors. |
(5) | Fund has a net accrued performance revenue balance/(giveback obligation) as of the current quarter end, driven by a significant portion of the fund’s asset base. |
(6) | Fund has generated realized net performance revenues/(realized giveback) in the last twelve months. |
(7) | Represents the date of the first capital contribution for management fees. |
(8) | Aggregate includes the following funds: CMG, CP I, CP II, CP III, CEP I, CEP II, CAP I, CAP II, CBPF, CBPF II, CJP I, CEVP, CETP I, CETP II, CETP III, CCI, CAVP I, CAVP II, CAGP III, CAGP V, Mexico, MENA, CSABF, CSSAF, CPF, CGFSP I, CGFSP III, CVP I, CVP II, and CUSGF III. In Accrued Carry/(Clawback) and LTM Realized Carry not indicated because the indicator does not apply to each fund within the aggregate. |
(9) | Includes co-investments, prefund investments and certain other stand-alone investments arranged by us. In Accrued Carry/(Clawback) and LTM Realized Carry not indicated because the indicator does not apply to each fund within the aggregate. |
(10) | For purposes of aggregation, funds that report in foreign currency have been converted to U.S. dollars at the reporting period spot rate. |
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Real Assets
For purposes of presenting results of operations for this segment, our earnings from our investments in NGP are presented in the respective operating captions, and the net income or loss from Urbplan allocable to the Partnership (after consideration of amounts allocable to non-controlling interests) is presented within principal investment income until we disposed of our interests in Urbplan in the three months ended September 30, 2017. The following table presents our results of operations for our Real Assets segment:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Segment Revenues | |||||||||||||||
Fund level fee revenues | |||||||||||||||
Fund management fees | $ | 76.3 | $ | 71.4 | $ | 229.4 | $ | 185.6 | |||||||
Portfolio advisory fees, net | 0.6 | 0.4 | 1.3 | 0.6 | |||||||||||
Transaction fees, net | — | 0.8 | 2.8 | 0.8 | |||||||||||
Total fund level fee revenues | 76.9 | 72.6 | 233.5 | 187.0 | |||||||||||
Performance revenues | |||||||||||||||
Realized | 73.7 | 20.4 | 115.1 | 73.6 | |||||||||||
Unrealized | (4.6 | ) | 60.8 | 140.8 | 200.1 | ||||||||||
Total performance revenues | 69.1 | 81.2 | 255.9 | 273.7 | |||||||||||
Principal investment income (loss) | |||||||||||||||
Realized | 0.6 | (64.6 | ) | 11.9 | (72.4 | ) | |||||||||
Unrealized | 4.2 | 12.4 | 17.0 | 24.4 | |||||||||||
Total principal investment income (loss) | 4.8 | (52.2 | ) | 28.9 | (48.0 | ) | |||||||||
Interest income | 1.5 | 1.0 | 3.6 | 2.0 | |||||||||||
Other income | 0.3 | 0.6 | 2.2 | 1.3 | |||||||||||
Total revenues | 152.6 | 103.2 | 524.1 | 416.0 | |||||||||||
Segment Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | 33.7 | 39.3 | 97.7 | 107.2 | |||||||||||
Equity-based compensation | 12.0 | 8.7 | 38.0 | 26.8 | |||||||||||
Performance revenues related compensation | |||||||||||||||
Realized | 31.8 | 9.2 | 50.8 | 33.4 | |||||||||||
Unrealized | 2.7 | 21.6 | 44.6 | 60.1 | |||||||||||
Total compensation and benefits | 80.2 | 78.8 | 231.1 | 227.5 | |||||||||||
General, administrative, and other indirect expenses | 15.5 | 10.5 | 49.5 | 52.6 | |||||||||||
Depreciation and amortization expense | 1.7 | 1.9 | 4.9 | 5.3 | |||||||||||
Interest expense | 4.1 | 4.2 | 12.1 | 12.7 | |||||||||||
Total expenses | 101.5 | 95.4 | 297.6 | 298.1 | |||||||||||
Economic Income | $ | 51.1 | $ | 7.8 | $ | 226.5 | $ | 117.9 | |||||||
(-) Net Performance Revenues | 34.6 | 50.4 | 160.5 | 180.2 | |||||||||||
(-) Principal Investment Income (Loss) | 4.8 | (52.2 | ) | 28.9 | (48.0 | ) | |||||||||
(+) Equity-based Compensation | 12.0 | 8.7 | 38.0 | 26.8 | |||||||||||
(+) Net Interest | 2.6 | 3.2 | 8.5 | 10.7 | |||||||||||
(+) Reserve for Litigation and Contingencies | — | (5.8 | ) | — | (5.8 | ) | |||||||||
(=) Fee Related Earnings | $ | 26.3 | $ | 15.7 | $ | 83.6 | $ | 17.4 | |||||||
(+) Realized Net Performance Revenues | 41.9 | 11.2 | 64.3 | 40.2 | |||||||||||
(+) Realized Principal Investment Income (Loss) | 0.6 | (64.6 | ) | 11.9 | (72.4 | ) | |||||||||
(+) Net Interest | (2.6 | ) | (3.2 | ) | (8.5 | ) | (10.7 | ) | |||||||
(=) Distributable Earnings | $ | 66.2 | $ | (40.9 | ) | $ | 151.3 | $ | (25.5 | ) | |||||
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Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017 and Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Distributable Earnings
Distributable earnings increased $107.1 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $176.8 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in distributable earnings for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Distributable earnings, September 30, 2017 | $ | (40.9 | ) | $ | (25.5 | ) | |
Increases (decreases): | |||||||
Increase in fee related earnings | 10.6 | 66.2 | |||||
Increase in realized net performance revenues | 30.7 | 24.1 | |||||
Increase in realized principal investment income | 65.2 | 84.3 | |||||
Decrease in net interest | 0.6 | 2.2 | |||||
Total increase | 107.1 | 176.8 | |||||
Distributable earnings, September 30, 2018 | $ | 66.2 | $ | 151.3 | |||
Realized Net Performance Revenues. Realized net performance revenues increased $30.7 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $24.1 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The increase in realized net performance revenue for both the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily due to higher realizations on our U.S. real estate funds. Realized net performance revenues were primarily generated by the following funds for the three and nine months ended September 30, 2018 and 2017:
Three Months Ended September 30, | Nine Months Ended September 30, | |||
2018 | 2017 | 2018 | 2017 | |
CRP VII | CRP VI | CRP VII | CRP VI | |
CRP III | CRP III | CPOCP | ||
CRP VI | CRP VI | CEREP III - External Coinvest | ||
CAREP - External Coinvestment | ||||
Realized Principal Investment Income (Loss). Realized principal investment income for the three months ended September 30, 2018 was $0.6 million as compared to realized principal investment loss of $64.6 million for the three months ended September 30, 2017, and realized principal investment income for the nine months ended September 30, 2018 was $11.9 million as compared to realized principal investment loss of $72.4 million for the nine months ended September 30, 2017. The increase for both periods was primarily related to the absence in 2018 of $65.0 million of realized principal investment losses recognized in the three months ended September 30, 2017 associated with Urbplan. In the third quarter of 2017, we disposed of our interests in Urbplan in a transaction in which a third party acquired operational control and all of the economic interests in Urbplan. With this transaction,we deconsolidated Urbplan from our financial results. See Note 15 of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for more information. Additionally, we recognized higher realized principal investment income related to our investments in U.S. and Europe real estate funds for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.
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Fee Related Earnings
Fee related earnings increased $10.6 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $66.2 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in fee related earnings for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Fee related earnings, September 30, 2017 | $ | 15.7 | $ | 17.4 | |||
Increases (decreases): | |||||||
Increase in fee revenues | 4.3 | 46.5 | |||||
Decrease in cash-based compensation and benefits | 5.6 | 9.5 | |||||
Decrease in general, administrative and other indirect expenses | 0.8 | 8.9 | |||||
All other changes | (0.1 | ) | 1.3 | ||||
Total increase | 10.6 | 66.2 | |||||
Fee related earnings, September 30, 2018 | $ | 26.3 | $ | 83.6 | |||
Fee Revenues. Fee revenues increased $4.3 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $46.5 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, due to the following:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2018 v. 2017 | |||||||
(Dollars in Millions) | |||||||
Higher fund management fees | $ | 4.9 | $ | 43.8 | |||
(Lower) higher transaction fees | (0.8 | ) | 2.0 | ||||
Higher portfolio advisory fees | 0.2 | 0.7 | |||||
Total increase in fee revenues | $ | 4.3 | $ | 46.5 | |||
The increase in fund management fees for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 primarily reflected increased management fees from both our eighth U.S. real estate fund (“CRP VIII”), which had its first closing in 2017. Management fees also increased as a result of $2.9 million in catch-up management fees from subsequent closes in 2018 for CER, CRP VIII and NGP XII during the three months ended September 30, 2018 as compared to approximately $1.3 million in catch-up management fees earned during the three months ended September 30, 2017.
The increase in fund management fees for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 primarily reflects increased management fees from CRP VIII, CGIOF and NGP XII, all of which had their first closings in 2017. Management fees also increased as a result of $11.3 million in catch-up management fees mainly from subsequent closes in 2018 for CGIOF, CRP VIII and NGP XII during the nine months ended September 30, 2018 as compared to approximately $0.1 million in catch-up management fees earned during the nine months ended September 30, 2017.
The weighted average management fee rate for funds in the investment period increased to 1.31% at September 30, 2018 from 1.30% at September 30, 2017 due to new funds raised over the past year with higher management fee rates, primarily CGIOF, offset by funds raised with lower management fee rates primarily in CRP VIII and NGP XII. The total weighted average management fee rate was 1.22% at September 30, 2018, a slight increase from 1.21% at September 30, 2017.
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The increase in transaction fees for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily from a significant investment in our first international energy fund (“CIEP”) in the nine months ended September 30, 2018.
Cash-based compensation and benefits expense. Cash-based compensation and benefits expense decreased $5.6 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, primarily due to a decrease in compensation costs related to fundraising activities of approximately $4.1 million.
Cash-based compensation and benefits expense decreased $9.5 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to a decrease in compensation costs related to fundraising activities of approximately $15.0 million, partially offset by an increase in headcount and higher projected year-end bonuses.
General, administrative and other indirect expenses. General, administrative and other indirect expenses decreased $0.8 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, primarily due to decreased external costs associated with fundraising activities of approximately $1.5 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017.
General, administrative and other indirect expenses decreased $8.9 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to decreased real estate costs, professional fees and lower negative foreign currency adjustments in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.
Economic Income
Economic income increased $43.3 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $108.6 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in economic income for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Economic income, September 30, 2017 | $ | 7.8 | $ | 117.9 | |||
Increases (decreases): | |||||||
Decrease in net performance revenues | (15.8 | ) | (19.7 | ) | |||
Increase in principal investment income | 57.0 | 76.9 | |||||
Increase in equity-based compensation | (3.3 | ) | (11.2 | ) | |||
Increase in fee related earnings | 10.6 | 66.2 | |||||
Decrease in net interest | 0.6 | 2.2 | |||||
Change in reserve for litigation and contingencies (1) | (5.8 | ) | (5.8 | ) | |||
Total increase | 43.3 | 108.6 | |||||
Economic income, September 30, 2018 | $ | 51.1 | $ | 226.5 | |||
(1) Real Assets' share of the $25 million reserve reversal related to the CCC litigation recognized in 2017.
Performance Revenues. Performance revenues (realized and unrealized) decreased $12.1 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 primarily due to a decrease in performance fees generated by certain natural resources funds, partially offset by higher realized gains from our U.S. real estate funds. Performance revenues (realized and unrealized) decreased $17.8 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 primarily due to lower realized gains from our U.S. real estate funds, partially offset by an increase in performance fees generated by certain natural resources funds.
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Performance revenues are from the following types of funds:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Real Estate funds | $ | 43.5 | $ | 33.2 | $ | 119.5 | $ | 164.5 | |||||||
Natural Resources funds | 25.4 | 45.2 | 136.2 | 106.1 | |||||||||||
Legacy Energy funds | 0.2 | 2.8 | 0.2 | 3.1 | |||||||||||
Total performance revenues | $ | 69.1 | $ | 81.2 | $ | 255.9 | $ | 273.7 | |||||||
The $69.1 million of performance revenues for the three months ended September 30, 2018 was driven primarily by performance revenues recognized from the following funds:
•CRP VII of $32.1 million,
•CIEP of $15.7 million, and
•NGP XI of $11.2 million.
The $81.2 million of performance revenues for the three months ended September 30, 2017 was driven primarily by performance revenues recognized from the following funds:
•CIEP of $36.7 million,
•CRP VII of $14.4 million,
•CRP V of $8.0 million,
•NGP XI of $6.8 million, and
•CRP III of $6.7 million.
The $255.9 million of performance revenues for the nine months ended September 30, 2018 was driven primarily by performance revenues recognized from the following funds:
•CRP VII of $111.1 million,
•CIEP of $73.6 million, and
•NGP XI of $60.3 million.
The $273.7 million of performance revenues for the nine months ended September 30, 2017 was driven primarily by performance revenues recognized from the following funds:
•CRP VII of $75.8 million,
•NGP XI of $62.0 million,
•CRP V of $51.6 million,
•CIEP of $36.9 million, and
•CRP III of $24.9 million.
Performance revenues of $69.1 million and $81.2 million are inclusive of performance revenues reversed of approximately $1.7 million and $1.0 million for the three months ended September 30, 2018 and 2017, respectively. Performance revenues of $255.9 million and $273.7 million are inclusive of performance revenues reversed of approximately $8.6 million and $9.4 million for the nine months ended September 30, 2018 and 2017, respectively.
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The appreciation (depreciation) in remaining value of assets for this segment by type of fund are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||
2018 | 2017 | 2018 | 2017 | ||
Real Estate funds | 3% | 3% | 9% | 15% | |
Natural Resources funds | 3% | 5% | 16% | 20% | |
Legacy Energy funds | 4% | (3)% | 10% | 5% | |
Total | 3% | 2% | 12% | 14% | |
Net performance revenues for the three months ended September 30, 2018 were $34.6 million, representing a decrease of $15.8 million from $50.4 million in net performance revenues for the three months ended September 30, 2017. The decrease was primarily due to lower performance revenues generated by certain natural resources funds and the NGP funds, partially offset by increased performance revenues from the U.S. real estate funds. Net performance revenues for the nine months ended September 30, 2018 were $160.5 million, representing a decline of $19.7 million from $180.2 million in net performance revenues for the nine months ended September 30, 2017. The decline was primarily due to decreased performance revenues from the U.S. real estate funds and the NGP funds, partially offset by an increase in performance revenues generated by certain natural resources funds.
Performance revenues earned from the Legacy Energy funds and from NGP funds are primarily allocated to Carlyle and are not otherwise shared or allocated with our investment professionals, except in limited circumstances, since the investment teams are employed by Riverstone and NGP, respectively, and not Carlyle. Accordingly, performance revenues compensation as a percentage of performance revenues is generally not a comparable measurement for Real Assets from period to period.
Principal Investment Income (Loss). Principal investment income (realized and unrealized) for the three months ended September 30, 2018 was $4.8 million as compared to principal investment loss of $52.2 million for the three months ended September 30, 2017 and principal investment income (realized and unrealized) for the nine months ended September 30, 2018 was $28.9 million as compared to principal investment loss of $48.0 million for the nine months ended September 30, 2017. The increase was primarily related to the absence in 2018 of $65.0 million of realized principal investment losses recognized in the three months ended September 30, 2017 associated with Urbplan. In the third quarter of 2017, we disposed of our interests in Urbplan in a transaction in which a third party acquired operational control and all of the economic interests in Urbplan. With this transaction,we deconsolidated Urbplan from our financial results. See Note 15 of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for more information. Additionally, we recognized higher realized principal investment income related to our investments in U.S. and Asia real estate funds, partially offset by lower appreciation on investments in our Europe real estate funds for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.
Equity-based Compensation. Equity-based compensation was $12.0 million for the three months ended September 30, 2018, an increase of $3.3 million from $8.7 million for the three months ended September 30, 2017. Equity-based compensation was $38.0 million for the nine months ended September 30, 2018, an increase of $11.2 million from $26.8 million for the nine months ended September 30, 2017. The increase for both periods primarily relates to the ongoing grants of deferred restricted common units to new and existing employees during 2017 and 2018, as well as the probable vesting of certain awards containing performance conditions.
Reserve for Litigation and Contingencies. Real Assets' share of the reserve for litigation and contingencies decreased $5.8 million for both the three and nine months ended September 30, 2018. The decrease was related to Real Assets' share of the $25 million reserve reversal related to the CCC litigation recognized in 2017.
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Fee-earning AUM as of and for the Three and Nine Months Ended September 30, 2018 and 2017
Fee-earning AUM is presented below for each period together with the components of change during each respective period.
The table below breaks out Fee-earning AUM by its respective components at each period.
As of September 30, | |||||||
2018 | 2017 | ||||||
Real Assets | (Dollars in millions) | ||||||
Components of Fee-earning AUM (1) | |||||||
Fee-earning AUM based on capital commitments | $ | 13,426 | $ | 17,714 | |||
Fee-earning AUM based on invested capital (2) | 16,568 | 11,154 | |||||
Fee-earning AUM based on net asset value | 1,240 | 622 | |||||
Fee-earning AUM based on lower of cost or fair value and other (3) | 353 | 330 | |||||
Total Fee-earning AUM (4) | $ | 31,587 | $ | 29,820 | |||
Weighted Average Management Fee Rates (5) | |||||||
All Funds | 1.22 | % | 1.21 | % | |||
Funds in Investment Period | 1.31 | % | 1.30 | % | |||
(1) | For additional information concerning the components of Fee-earning AUM, See “—Fee-earning Assets under Management.” |
(2) | Includes amounts committed to or reserved for investments for certain real estate funds. |
(3) | Includes certain funds that are calculated on gross asset value. |
(4) | Energy II, Energy III, Energy IV, and Renew II (collectively, the “Legacy Energy Funds”), are managed with Riverstone Holdings LLC and its affiliates. Affiliates of both Carlyle and Riverstone act as investment advisers to each of the Legacy Energy Funds. Carlyle has a minority representation on the management committees of Energy IV and Renew II. Carlyle and Riverstone each hold half of the seats on the management committees of Energy II and Energy III, but the investment period for these funds has expired and the remaining investments in such funds are being disposed of in the ordinary course of business. As of September 30, 2018, the Legacy Energy Funds had, in the aggregate, approximately $4.6 billion in AUM and $3.4 billion in Fee-earning AUM. We are no longer raising capital for the Legacy Energy Funds and expect these balances to continue to decrease over time as the funds wind down. NGP VII, NGP VIII, NGP IX, or in the case of NGP M&R, NGP ETP I, and NGP ETP II, certain affiliated entities (collectively, the “NGP management fee funds”) and NGP X, NGP GAP, NGP XI, and NGP XII (referred to herein as “carry funds”), are managed by NGP Energy Capital Management. As of September 30, 2018, the NGP management fee funds and carry funds had, in the aggregate, approximately $14.6 billion in AUM and $11.2 billion in Fee-earning AUM. |
(5) | Represents the aggregate effective management fee rate of each fund in the segment, weighted by each fund’s Fee-earning AUM, as of the end of each period presented. Calculation reflects Carlyle’s 10% interest in management fees earned by the Legacy Energy funds and 55% interest in management fees earned by the NGP management fee funds and carry funds. Accounts based on gross asset base generally have an effective management fee rate of 0.5% or less. |
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The table below provides the period to period rollforward of Fee-earning AUM.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Real Assets | (Dollars in millions) | ||||||||||||||
Fee-earning AUM Rollforward | |||||||||||||||
Balance, Beginning of Period | $ | 31,541 | $ | 26,236 | $ | 31,599 | $ | 27,487 | |||||||
Inflows, including Fee-paying Commitments (1) | 775 | 5,033 | 2,420 | 5,504 | |||||||||||
Outflows, including Distributions (2) | (702 | ) | (1,315 | ) | (2,307 | ) | (3,153 | ) | |||||||
Market Appreciation/(Depreciation) (3) | (9 | ) | 20 | 38 | 45 | ||||||||||
Foreign Exchange and other (4) | (18 | ) | (154 | ) | (163 | ) | (63 | ) | |||||||
Balance, End of Period | $ | 31,587 | $ | 29,820 | $ | 31,587 | $ | 29,820 | |||||||
(1) | Inflows represent limited partner capital raised and capital invested by funds outside the investment period. |
(2) | Outflows represent distributions from funds outside the investment period and changes in fee basis for our carry funds where the investment period has expired. |
(3) | Market Appreciation/(Depreciation) represents realized and unrealized gains (losses) on portfolio investments in our carry funds based on the lower of cost or fair value and net asset value. |
(4) | Represents the impact of foreign exchange rate fluctuations on the translation of our non-U.S. dollar denominated funds. Activity during the period is translated at the average rate for the period. Ending balances are translated at the spot rate as of the period end. |
Fee-earning AUM was $31.6 billion at September 30, 2018, an increase of $0.1 billion compared to $31.5 billion at June 30, 2018. The increase was driven by inflows of $0.8 billion primarily related to new fee-paying commitments in CRP VIII and CER, and new limited partner capital invested in CPI. This was largely offset by outflows of $0.7 billion, primarily related to distribution and step-down activity in our US real estate and NGP management fee funds. Changes in fair value have no material impact on Fee-earning AUM for Real Assets as substantially all of the funds generate management fees based on either commitments or invested capital at cost, neither of which is impacted by fair value movements. Investment and distribution activity by funds still in the original investment period do not impact Fee-earning AUM as these funds are based on commitments and not invested capital.
Fee-earning AUM was $31.6 billion at September 30, 2018 and December 31, 2017. Inflows of $2.4 billion were driven by new fee-paying commitments in CER, CRP VIII, and NGP XII, and new limited partner invested capital in CPI. This was offset by outflows of $2.3 billion primarily related to distribution and step-down activity in the US real estate funds, NGP management fee funds, and Legacy Energy funds.
Fee-earning AUM was $31.6 billion at September 30, 2018, an increase of $1.8 billion, or approximately 6%, compared to $29.8 billion at September 30, 2017. This increase was driven by inflows of $5.7 billion, primarily related to new fee-paying commitments in NGP XII, CRP VIII, CER, and CGIOF, and new limited partner invested capital in CPI. The increase was partially offset by outflows of $4.1 billion primarily related to distribution activity in the US real estate funds, NGP management fee and carry funds, and Legacy Energy funds, as well as other funds outside the original investment period.
Fee-earning AUM was $29.8 billion at September 30, 2017, an increase of $3.6 billion, or approximately 14%, compared to $26.2 billion at June 30, 2017. The increase was driven by inflows of $5.0 billion, primarily from new fee-paying commitments raised in CRP VIII. The increase was partially offset by outflows of $1.3 billion, primarily related to distribution activity in the Legacy Energy funds and other funds outside the original investment period.
Fee-earning AUM was $29.8 billion at September 30, 2017, an increase of $2.3 billion, or approximately 8%, compared to $27.5 billion at December 31, 2016. This increase was driven by inflows of $5.5 billion, primarily related to new limited partner capital invested in CPI and new fee-paying commitments to CRP VIII. The increase was partially offset by outflows of $3.2 billion primarily related to distribution activity in the Legacy Energy funds, NGP management fee funds, and US real estate funds, as well as other funds outside the original investment period.
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Total AUM as of and for the Three and Nine Months Ended September 30, 2018
The table below provides the period to period rollforward of Total AUM.
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||
(Dollars in millions) | |||||||
Real Assets | |||||||
Total AUM Rollforward | |||||||
Balance, Beginning of Period | $ | 45,418 | $ | 42,888 | |||
New Commitments (1) | 1,114 | 3,087 | |||||
Outflows (2) | (1,359 | ) | (3,481 | ) | |||
Market Appreciation/(Depreciation) (3) | 878 | 3,218 | |||||
Foreign Exchange Gain/(Loss) (4) | (23 | ) | (108 | ) | |||
Other (5) | (41 | ) | 383 | ||||
Balance, End of Period | $ | 45,987 | $ | 45,987 | |||
(1) | New Commitments reflects the impact of gross fundraising during the period. For funds or vehicles denominated in foreign currencies, this reflects translation at the average quarterly rate, while the separately reported Fundraising metric is translated at the spot rate for each individual closing. |
(2) | Outflows includes distributions in our carry funds and related co-investment vehicles, NGP management fee funds and separately managed accounts. |
(3) | Market Appreciation/(Depreciation) generally represents realized and unrealized gains (losses) on portfolio investments in our carry funds and related co-investment vehicles, the NGP management fee funds and separately managed accounts. |
(4) | Represents the impact of foreign exchange rate fluctuations on the translation of our non-U.S. dollar denominated funds. Activity during the period is translated at the average rate for the period. Ending balances are translated at the spot rate as of the period end. |
(5) | Includes expiring available capital, the impact of capital calls for fees and expenses and other changes in AUM. |
Total AUM was $46.0 billion at September 30, 2018, an increase of $0.6 billion, or approximately 1%, compared to $45.4 billion at June 30, 2018. The increase was driven by new commitments of $1.1 billion primarily from fundraising in CER, CRP VIII, and CPI, as well as market appreciation of $0.9 billion. Carry fund market appreciation of 3% was driven by $0.2 billion attributable to CRP VII, $0.2 billion attributable to Energy IV, and $0.1 billion attributable to NGP XI . This was partially offset by outflows of $1.4 billion primarily related to distributions in the US real estate funds and Legacy Energy funds.
Total AUM was $46.0 billion at September 30, 2018, an increase of $3.1 billion, or approximately 7%, compared to $42.9 billion at December 31, 2017. The increase was driven by market appreciation of $3.2 billion. Carry fund market appreciation of 12% was driven by $0.7 billion attributable to NGP XI, $0.6 billion attributable to CRP VII, and $0.4 billion attributable to CIEP . Also driving the increase were new commitments of $3.1 billion from new funds raised primarily in CPI, CRP VIII, CER, NGP XII, and CGIOF. This was partially offset by outflows of $3.5 billion primarily related to distributions in the US real estate funds, Legacy Energy funds, and NGP management fee funds.
Fund Performance Metrics
Fund performance information for our carry funds that generally have at least $1.0 billion in capital commitments, cumulative equity invested or total value as of September 30, 2018, which we refer to as our “significant funds,” is included throughout this discussion and analysis to facilitate an understanding of our results of operations for the periods presented. The fund return information reflected in this discussion and analysis is not indicative of the performance of The Carlyle Group L.P. and is also not necessarily indicative of the future performance of any particular fund. An investment in The Carlyle Group L.P. is not an investment in any of our funds. There can be no assurance that any of our funds or our other existing and future funds will achieve similar returns. The following tables reflect the performance of our significant funds in our Real Assets business. Please see “— Our Family of Funds” for a legend of the fund acronyms listed below.
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TOTAL INVESTMENTS | REALIZED/PARTIALLY REALIZED INVESTMENTS(5) | ||||||||||||||||||||||||
As of September 30, 2018 | As of September 30, 2018 | ||||||||||||||||||||||||
Fund Inception Date(1) | Committed Capital | Cumulative Invested Capital(2) | Total Fair Value(3) | MOIC(4) | Gross IRR (7)(12) | Net IRR (8)(12) | Cumulative Invested Capital(2) | Total Fair Value(3) | MOIC(4) | Gross IRR (7)(12) | |||||||||||||||
Real Assets | (Reported in Local Currency, in Millions) | (Reported in Local Currency, in Millions) | |||||||||||||||||||||||
Fully Invested/Committed Funds(6) | |||||||||||||||||||||||||
CRP III | 11/2000 | $ | 564.1 | $ | 522.5 | $ | 1,851.1 | 3.5x | 44 | % | 30 | % | $ | 522.5 | $ | 1,851.1 | 3.5x | 44 | % | ||||||
CRP IV | 12/2004 | $ | 950.0 | $ | 1,270.0 | $ | 2,005.0 | 1.6x | 7 | % | 4 | % | $ | 1,213.7 | $ | 1,966.1 | 1.6x | 7 | % | ||||||
CRP V | 11/2006 | $ | 3,000.0 | $ | 3,385.4 | $ | 5,654.1 | 1.7x | 12 | % | 9 | % | $ | 3,029.1 | $ | 5,043.4 | 1.7x | 13 | % | ||||||
CRP VI | 9/2010 | $ | 2,340.0 | $ | 2,199.6 | $ | 4,021.7 | 1.8x | 28 | % | 19 | % | $ | 1,659.5 | $ | 3,334.5 | 2.0x | 33 | % | ||||||
CRP VII | 3/2014 | $ | 4,161.6 | $ | 3,529.5 | $ | 5,177.7 | 1.5x | 22 | % | 14 | % | $ | 742.9 | $ | 1,475.7 | 2.0x | 33 | % | ||||||
CEREP I | 3/2002 | € | 426.6 | € | 517.0 | € | 698.6 | 1.4x | 0.14 | 7 | % | € | 517.0 | € | 698.6 | 1.4x | 0.14 | ||||||||
CEREP II | 4/2005 | € | 762.7 | € | 833.8 | € | 128.1 | 0.2x | Neg | Neg | € | 826.7 | € | 132.3 | 0.2x | Neg | |||||||||
CEREP III | 5/2007 | € | 2,229.5 | € | 2,052.4 | € | 2,463.7 | 1.2x | 4 | % | 1 | % | € | 1,911.5 | € | 2,368.3 | 1.2x | 5 | % | ||||||
CIP | 9/2006 | $ | 1,143.7 | $ | 1,069.8 | $ | 1,434.4 | 1.3x | 6 | % | 3 | % | $ | 1,013.4 | $ | 1,386.3 | 1.4x | 6 | % | ||||||
NGP X | 1/2012 | $ | 3,586.0 | $ | 3,278.6 | $ | 4,346.5 | 1.3x | 9 | % | 6 | % | $ | 1,382.9 | $ | 2,520.3 | 1.8x | 25 | % | ||||||
NGP XI | 6/2014 | $ | 5,325.0 | $ | 4,485.9 | $ | 6,871.5 | 1.5x | 31 | % | 22 | % | $ | 385.3 | $ | 576.3 | 1.5x | 41 | % | ||||||
Energy II | 7/2002 | $ | 1,100.0 | $ | 1,334.8 | $ | 3,130.0 | 2.3x | 81 | % | 55 | % | $ | 1,334.8 | $ | 3,130.0 | 2.3x | 81 | % | ||||||
Energy III | 10/2005 | $ | 3,800.0 | $ | 3,569.7 | $ | 5,573.5 | 1.6x | 10 | % | 6 | % | $ | 3,096.4 | $ | 5,044.8 | 1.6x | 12 | % | ||||||
Energy IV | 12/2007 | $ | 5,979.1 | $ | 6,314.8 | $ | 8,604.4 | 1.4x | 9 | % | 5 | % | $ | 4,880.3 | $ | 6,946.9 | 1.4x | 11 | % | ||||||
Renew II | 3/2008 | $ | 3,417.5 | $ | 2,833.5 | $ | 4,257.8 | 1.5x | 8 | % | 5 | % | $ | 1,479.3 | $ | 2,353.0 | 1.6x | 12 | % | ||||||
All Other Funds (9) | Various | $ | 2,941.1 | $ | 3,309.8 | 1.1x | 4 | % | Neg | $ | 2,662.1 | $ | 3,022.6 | 1.1x | 5 | % | |||||||||
Coinvestments and Other (10) | Various | $ | 6,390.2 | $ | 10,701.3 | 1.7x | 17 | % | 13 | % | $ | 4,368.5 | $ | 7,559.4 | 1.7x | 19 | % | ||||||||
Total Fully Invested Funds | $ | 47,078.4 | $ | 70,761.0 | 1.5x | 13 | % | 8 | % | $ | 31,552.1 | $ | 49,926.6 | 1.6x | 14 | % | |||||||||
Funds in the Investment Period(6) | |||||||||||||||||||||||||
CRP VIII | 5/2017 | $ | 5,505.1 | $ | 709.6 | $ | 722.7 | 1.0x | NM | NM | |||||||||||||||
CIEP I | 9/2013 | $ | 2,500.0 | $ | 1,410.5 | $ | 2,369.4 | 1.7x | 32 | % | 17 | % | |||||||||||||
NGP XII | 7/2017 | $ | 3,213.3 | $ | 769.5 | $ | 853.1 | 1.1x | NM | NM | |||||||||||||||
CPP II | 6/2014 | $ | 1,526.9 | $ | 676.0 | $ | 843.1 | 1.2x | 12% | 4% | |||||||||||||||
CPI | 5/2016 | $ | 1,787.2 | $ | 1,260.7 | $ | 1,451.7 | 1.2x | NM | NM | |||||||||||||||
All Other Funds (11) | Various | $ | 460.3 | $ | 393.4 | 0.9x | NM | NM | |||||||||||||||||
Total Funds in the Investment Period | $ | 5,286.6 | $ | 6,633.3 | 1.3x | 19 | % | 8 | % | $ | — | $ | — | n/a | n/a | ||||||||||
TOTAL Real Assets(13) | $ | 52,365.0 | $ | 77,394.3 | 1.5x | 13 | % | 8 | % | $ | 31,552.1 | $ | 49,926.6 | 1.6x | 14 | % | |||||||||
(1) | The data presented herein that provides “inception to date” performance results of our segments relates to the period following the formation of the first fund within each segment. For our Corporate Private Equity segment our first fund was formed in 1990. For our Real Assets segment our first fund was formed in 1997. |
(2) | Represents the original cost of investments since inception of the fund. |
(3) | Represents all realized proceeds combined with remaining fair value, before management fees, expenses and carried interest. |
(4) | Multiple of invested capital (“MOIC”) represents total fair value, before management fees, expenses and carried interest, divided by cumulative invested capital. |
(5) | An investment is considered realized when the investment fund has completely exited, and ceases to own an interest in, the investment. An investment is considered partially realized when the total amount of proceeds received in respect of such investment, including dividends, interest or other distributions and/or return of capital, represents at least 85% of invested capital and such investment is not yet fully realized. Because part of our value creation strategy involves pursuing best exit alternatives, we believe information regarding Realized/Partially Realized MOIC and Gross IRR, when considered together with the other investment performance metrics presented, provides investors with meaningful information regarding our investment performance by removing the impact of investments where significant realization activity has not yet occurred. Realized/Partially Realized MOIC and Gross IRR have limitations as measures of investment performance, and should not be considered in isolation. Such limitations include the fact that these measures do not include the performance of earlier stage and other investments that do not satisfy the criteria provided above. The exclusion of such investments will have a positive impact on Realized/Partially Realized MOIC and Gross IRR in instances when the MOIC and Gross IRR in respect of such investments are less than the aggregate MOIC and Gross IRR. Our measurements of Realized/Partially Realized MOIC and |
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Gross IRR may not be comparable to those of other companies that use similarly titled measures. We do not present Realized/Partially Realized performance information separately for funds that are still in the investment period because of the relatively insignificant level of realizations for funds of this type. However, to the extent such funds have had realizations, they are included in the Realized/Partially Realized performance information presented for Total Real Assets.
(6) | Fully Invested funds are past the expiration date of the investment period as defined in the respective limited partnership agreement. In instances where a successor fund has had its first capital call, the predecessor fund is categorized as fully invested. |
(7) | Gross Internal Rate of Return (“Gross IRR”) represents the annualized IRR for the period indicated on Limited Partner invested capital based on contributions, distributions and unrealized value before management fees, expenses and carried interest. |
(8) | Net Internal Rate of Return (“Net IRR”) represents the annualized IRR for the period indicated on Limited Partner invested capital based on contributions, distributions and unrealized value after management fees, expenses and carried interest. Fund level IRRs are based on aggregate Limited Partner cash flows, and this blended return may differ from that of individual Limited Partners. As a result, certain funds may generate accrued performance revenues with a blended Net IRR that is below the preferred return hurdle for that fund. |
(9) | Aggregate includes the following funds: CRP I, CRP II, CAREP I, CAREP II, CRCP I, CPOCP, Renew I and Energy I. |
(10) | Includes coinvestments and certain other stand-alone investments arranged by us. |
(11) | Aggregate, which is not meaningful, includes NGP GAP, CCR, and CER. The investment period commenced in December 2013 for NGP GAP, October 2016 for CCR, and December 2017 for CER. |
(12) | For funds marked “NM,” IRR may be positive or negative, but is not considered meaningful because of the limited time since initial investment and early stage of capital deployment. For funds marked “Neg,” IRR is negative as of reporting period end. |
(13) | For purposes of aggregation, funds that report in foreign currency have been converted to U.S. dollars at the reporting period spot rate. |
Remaining Fair Value(1) | Unrealized MOIC(2) | Total MOIC(3) | % Invested(4) | In Accrued Carry/ (Clawback) (5) | LTM Realized Carry (6) | Catch-up Rate | Fee Initiation Date(7) | Quarters Since Fee Initiation | Original Investment Period End Date | |||||
As of September 30, 2018 | ||||||||||||||
Real Assets | (Reported in Local Currency, in Millions) | |||||||||||||
NGP XI | $ | 6,052.8 | 1.5x | 1.5x | 84 | % | X | 80 | % | Feb-15 | 15 | Oct-19 | ||
CRP VII | $ | 3,603.2 | 1.3x | 1.5x | 85 | % | X | X | 80 | % | Jun-14 | 18 | Mar-19 | |
Energy IV | $ | 2,578.6 | 1.2x | 1.4x | 106 | % | (X) | 80 | % | Feb-08 | 43 | Dec-13 | ||
CIEP I | $ | 2,152.8 | 1.5x | 1.7x | 56 | % | X | 80 | % | Oct-13 | 20 | Sep-19 | ||
NGP X | $ | 1,878.3 | 1.1x | 1.3x | 91 | % | 80 | % | Jan-12 | 27 | May-17 | |||
Renew II | $ | 1,514.5 | 0.7x | 1.5x | 83 | % | (X) | 80 | % | Mar-08 | 43 | May-14 | ||
CPI | $ | 1,355.1 | 1.1x | 1.2x | n/a | X | 50 | % | May-16 | 10 | Apr-21 | |||
CRP V | $ | 1,188.1 | 2.5x | 1.7x | 113 | % | X | 50 | % | Nov-06 | 48 | Nov-11 | ||
NGP XII | $ | 853.1 | 1.1x | 1.1x | 24 | % | 80 | % | Nov-17 | 4 | Oct-19 | |||
CRP VIII | $ | 722.6 | 1.0x | 1.0x | 13 | % | 80 | % | Aug-17 | 5 | May-22 | |||
CPP II | $ | 642.0 | 1.3x | 1.2x | 44 | % | 80 | % | Sep-14 | 17 | Apr-21 | |||
CRP VI | $ | 596.0 | 1.3x | 1.8x | 94 | % | X | X | 50 | % | Mar-11 | 31 | Mar-16 | |
CRP IV | $ | 340.0 | 4.5x | 1.6x | 134 | % | 50 | % | Jan-05 | 55 | Dec-09 | |||
Energy III | $ | 325.0 | 0.7x | 1.6x | 94 | % | (X) | 80 | % | Nov-05 | 52 | Oct-11 | ||
CRP III | $ | 324.2 | 97.9x | 3.5x | 93 | % | X | X | 50 | % | Mar-01 | 71 | May-05 | |
CEREP III | € | 127.7 | 0.9x | 1.2x | 92 | % | 67 | % | Jun-07 | 46 | May-11 | |||
All Other Funds (8) | $ | 683.0 | 0.9x | 1.3x | NM | NM | ||||||||
Coinvestment and Other (9) | $ | 2,742.0 | 1.2x | 1.7x | NM | NM | ||||||||
Total Real Assets (10) | $ | 27,699.6 | 1.3x | 1.5x | ||||||||||
(1) | Remaining Fair Value reflects the unrealized carrying value of investments for Corporate Private Equity, Real Assets and Global Credit carry funds and related co-investment vehicles. Significant funds with remaining fair value of greater than $100 million are listed individually. |
(2) | Unrealized multiple of invested capital (“MOIC”) represents remaining fair market value, before management fees, expenses and carried interest, divided by remaining investment cost. |
(3) | Total MOIC represents total fair value (realized proceeds combined with remaining fair value), before management fees, expenses and carried interest, divided by cumulative invested capital. For certain funds, represents the original cost of investments net of investment-level recallable proceeds, which is adjusted to reflect recyclability of invested capital for the purpose of calculating the fund MOIC. |
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(4) | Represents cumulative invested capital as of the reporting period divided by total commitments. Amount can be greater than 100% due to the re-investment of recallable distributions to fund investors. |
(5) | Fund has a net accrued performance revenue balance/(giveback obligation) as of the current quarter end, driven by a significant portion of the fund’s asset base. |
(6) | Fund has generated realized net performance revenues/(realized giveback) in the last twelve months. |
(7) | Represents the date of the first capital contribution for management fees. |
(8) | Aggregate includes the following funds: CRP I, CRP II, CRCP I, CEREP I, CEREP II, CER, CAREP I, CAREP II, CCR, CPOCP, CGIOF, NGP GAP, Energy I, Energy II and Renew I. In Accrued Carry/(Clawback) and LTM Realized Carry not indicated because the indicator does not apply to each fund within the aggregate. |
(9) | Includes co-investments, prefund investments and certain other stand-alone investments arranged by us. In Accrued Carry/(Clawback) and LTM Realized Carry not indicated because the indicator does not apply to each fund within the aggregate. |
(10) | For purposes of aggregation, funds that report in foreign currency have been converted to U.S. dollars at the reporting period spot rate. |
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Global Credit
We continue to invest in growing our Global Credit business. In the near to mid term, this segment will incur additional expenses to build the credit business and raise additional capital. The following table presents our results of operations for our Global Credit segment:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Segment Revenues | |||||||||||||||
Fund level fee revenues | |||||||||||||||
Fund management fees | $ | 60.4 | $ | 47.6 | $ | 178.9 | $ | 140.8 | |||||||
Portfolio advisory fees, net | 0.1 | 0.1 | 0.2 | 0.5 | |||||||||||
Transaction fees, net | — | — | 0.1 | — | |||||||||||
Total fund level fee revenues | 60.5 | 47.7 | 179.2 | 141.3 | |||||||||||
Performance revenues | |||||||||||||||
Realized | 0.1 | 15.0 | 5.9 | 37.8 | |||||||||||
Unrealized | (0.6 | ) | 2.6 | 10.8 | 15.5 | ||||||||||
Total performance revenues | (0.5 | ) | 17.6 | 16.7 | 53.3 | ||||||||||
Principal investment income | |||||||||||||||
Realized | 2.2 | 4.7 | 7.1 | 8.6 | |||||||||||
Unrealized | 1.6 | — | 1.9 | 4.3 | |||||||||||
Total principal investment income | 3.8 | 4.7 | 9.0 | 12.9 | |||||||||||
Interest income | 4.2 | 2.0 | 11.4 | 4.6 | |||||||||||
Other income | 1.1 | 1.1 | 3.7 | 5.6 | |||||||||||
Total revenues | 69.1 | 73.1 | 220.0 | 217.7 | |||||||||||
Segment Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | 36.6 | 29.7 | 101.1 | 76.2 | |||||||||||
Equity-based compensation | 9.8 | 5.1 | 22.8 | 16.9 | |||||||||||
Performance revenues related compensation | |||||||||||||||
Realized | — | 7.3 | 2.7 | 18.2 | |||||||||||
Unrealized | (0.2 | ) | 0.8 | 4.9 | 6.9 | ||||||||||
Total compensation and benefits | 46.2 | 42.9 | 131.5 | 118.2 | |||||||||||
General, administrative, and other indirect expenses | 14.2 | (63.6 | ) | 47.3 | (18.6 | ) | |||||||||
Depreciation and amortization expense | 1.5 | 1.3 | 4.5 | 3.8 | |||||||||||
Interest expense | 5.8 | 4.2 | 16.9 | 10.0 | |||||||||||
Total expenses | 67.7 | (15.2 | ) | 200.2 | 113.4 | ||||||||||
Economic Income | $ | 1.4 | $ | 88.3 | $ | 19.8 | $ | 104.3 | |||||||
(-) Net Performance Revenues | (0.3 | ) | 9.5 | 9.1 | 28.2 | ||||||||||
(-) Principal Investment Income | 3.8 | 4.7 | 9.0 | 12.9 | |||||||||||
(+) Equity-based Compensation | 9.8 | 5.1 | 22.8 | 16.9 | |||||||||||
(+) Net Interest | 1.6 | 2.2 | 5.5 | 5.4 | |||||||||||
(+) Reserve for Litigation and Contingencies | — | (4.1 | ) | — | (4.1 | ) | |||||||||
(=) Fee Related Earnings | $ | 9.3 | $ | 77.3 | $ | 30.0 | $ | 81.4 | |||||||
(+) Realized Net Performance Revenues | 0.1 | 7.7 | 3.2 | 19.6 | |||||||||||
(+) Realized Principal Investment Income | 2.2 | 4.7 | 7.1 | 8.6 | |||||||||||
(+) Net Interest | (1.6 | ) | (2.2 | ) | (5.5 | ) | (5.4 | ) | |||||||
(=) Distributable Earnings | $ | 10.0 | $ | 87.5 | $ | 34.8 | $ | 104.2 | |||||||
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Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017 and Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Distributable earnings and fee related earnings decreased for both the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 primarily due to net incremental insurance recoveries of $74.0 million and $68.1 million recognized during the three and nine months ended September 30, 2017, respectively, for litigation and contingencies attributable to the Vermillion matter (see Note 7 to the unaudited condensed consolidated financial statements).
Distributable Earnings
Distributable earnings decreased $77.5 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $69.4 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in distributable earnings for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Distributable earnings, September 30, 2017 | $ | 87.5 | $ | 104.2 | |||
Increases (decreases): | |||||||
Decrease in fee related earnings | (68.0 | ) | (51.4 | ) | |||
Decrease in realized net performance revenues | (7.6 | ) | (16.4 | ) | |||
Decrease in realized principal investment income | (2.5 | ) | (1.5 | ) | |||
Decrease (increase) in net interest | 0.6 | (0.1 | ) | ||||
Total decrease | (77.5 | ) | (69.4 | ) | |||
Distributable earnings, September 30, 2018 | $ | 10.0 | $ | 34.8 | |||
Realized Net Performance Revenues. Realized net performance revenues decreased $7.6 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $16.4 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The decrease in realized net performance revenues for both the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 was primarily due to lower realizations from our distressed credit carry funds and lower incentive fees from our CLOs.
Fee Related Earnings
Fee related earnings decreased $68.0 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $51.4 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in fee related earnings for the three and nine months ended September 30, 2018:
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Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Fee related earnings, September 30, 2017 | $ | 77.3 | $ | 81.4 | |||
Increases (decreases): | |||||||
Increase in fee revenues | 12.8 | 37.9 | |||||
Increase in cash-based compensation and benefits | (6.9 | ) | (24.9 | ) | |||
Decrease in general, administrative and other indirect expenses | 0.3 | 6.3 | |||||
Decrease in net insurance recoveries | (74.0 | ) | (68.1 | ) | |||
All other changes | (0.2 | ) | (2.6 | ) | |||
Total decrease | (68.0 | ) | (51.4 | ) | |||
Fee related earnings, September 30, 2018 | $ | 9.3 | $ | 30.0 | |||
Fee Revenues. Fee revenues increased $12.8 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. Contributing to the increase in fund management fees were the CLOs that originated in 2017 and 2018 as well as increased management fees from our business development companies as a result of increased assets under management.
Fee revenues increased $37.9 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. Contributing to the increase in fund management fees were the CLOs that originated in 2017 and 2018 as well as increased management fees from our business development companies as result of increased assets under management. The increase was partially offset by the absence in the nine months ended September 30, 2018 of $2.8 million of catch-up fund management fees related to CSP IV that were recognized in the nine months ended September 30, 2017.
The weighted average management fee rate on our carry funds decreased from 1.36% at September 30, 2017 to 1.35% at September 30, 2018. The rate decreased slightly due to new funds being raised with slightly lower effective rates.
Cash-based compensation and benefits expense. Cash-based compensation and benefits expense increased $6.9 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $24.9 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to increased headcount and higher projected year-end bonuses.
We expect that as we add new talent to our growing Global Credit business, our cash compensation and benefits expense will increase. However, as this strategy raises incremental capital, we expect the positive impact from additional fee revenue to more than offset our increased compensation levels.
General, administrative and other indirect expenses. General, administrative and other indirect expenses increased $73.7 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $61.8 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to the aforementioned net incremental insurance recoveries of $74.0 million and $68.1 million recognized during the three and nine months ended September 30, 2017, respectively.
Economic Income
Economic income decreased $86.9 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and decreased $84.5 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in economic income for the three and nine months ended September 30, 2018:
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Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Economic income, September 30, 2017 | $ | 88.3 | $ | 104.3 | |||
Increases (decreases): | |||||||
Decrease in net performance revenues | (9.8 | ) | (19.1 | ) | |||
Decrease in principal investment income | (0.9 | ) | (3.9 | ) | |||
Increase in equity-based compensation | (4.7 | ) | (5.9 | ) | |||
Decrease in fee related earnings | (68.0 | ) | (51.4 | ) | |||
Decrease (increase) in net interest | 0.6 | (0.1 | ) | ||||
Change in reserve for litigation and contingencies (1) | (4.1 | ) | (4.1 | ) | |||
Total decrease | (86.9 | ) | (84.5 | ) | |||
Economic income, September 30, 2018 | $ | 1.4 | $ | 19.8 | |||
(1) Global Credit's share of the $25 million reserve reversal related to the CCC litigation recognized in 2017.
Performance Revenues. Performance revenues (realized and unrealized) for the three and nine months ended September 30, 2018 and 2017 are from the following types of funds:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Carry funds | $ | (3.5 | ) | $ | 6.0 | $ | 8.0 | $ | 21.8 | ||||||
CLOs and business development companies | 3.0 | 11.6 | 8.7 | 31.5 | |||||||||||
Total performance revenues | $ | (0.5 | ) | $ | 17.6 | $ | 16.7 | $ | 53.3 | ||||||
The $(0.5) million of performance revenues for the three months ended September 30, 2018 was driven primarily by performance revenues recognized from the following funds:
•CSP IV of $(3.5) million, and
•CLOs and other credit-oriented carry funds of $3.0 million.
The $17.6 million of performance revenues for the three months ended September 30, 2017 was driven by performance revenues recognized from the following funds:
•Business development companies and CLOs of $11.6 million, and
•CSP IV of $5.9 million.
The $16.7 million of performance revenues for the nine months ended September 30, 2018 was driven primarily by performance revenues recognized from the following funds:
•CLOs and other credit-oriented carry funds of $8.7 million,
•CSP III of $5.1 million,
•CSP II $1.7 million, and
•CSP IV of $1.2 million.
The $53.3 million of performance revenues for the nine months ended September 30, 2017 was driven by performance revenues recognized from the following funds:
•Business development companies and CLOs of $31.5 million,
•CSP III of $12.2 million,
•CSP IV of $11.2 million,
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•CSP II of $4.1 million, and
•CMP II of $(5.8) million.
Performance revenues of $(0.5) million and $17.6 million are inclusive of performance revenues reversed of approximately $3.6 million and $0.5 million for the three months ended September 30, 2018 and 2017, respectively. Performance revenues of $16.7 million and $53.3 million are inclusive of performance revenues reversed of approximately $5.8 million for the nine months ended September 30, 2017. There were no performance revenues reversed during the nine months ended September 30, 2018.
The appreciation (depreciation) in remaining value of assets for this segment's carry funds are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||
2018 | 2017 | 2018 | 2017 | ||
Carry funds | 1% | 0% | 7% | 9% | |
Net performance revenues as a percentage of total performance revenues are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2018 | 2017 | 2018 | 2017 | ||||
(Dollars in millions) | |||||||
Net Performance Revenues | $(0.3) | $9.5 | $9.1 | $28.2 | |||
Percentage of Total Performance Revenues | 60% | 54% | 54% | 53% | |||
The decrease in net performance revenues for both the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily due to decreased performance revenues generated from our carry funds and business development companies.
Principal Investment Income. Principal investment income (realized and unrealized) for the three months ended September 30, 2018 was $3.8 million compared to principal investment income of $4.7 million for the three months ended September 30, 2017. Principal investment income (realized and unrealized) for the nine months ended September 30, 2018 was $9.0 million compared to principal investment income of $12.9 million for the nine months ended September 30, 2017. The decrease for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 related primarily to depreciation on our carry funds for the nine months ended September 30, 2018 as compared to appreciation on our carry funds for the nine months ended September 30, 2017, partially offset by higher appreciation on our European CLOs for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.
Equity-based Compensation. Equity-based compensation was $9.8 million for the three months ended September 30, 2018, an increase of $4.7 million from $5.1 million for the three months ended September 30, 2017. Equity-based compensation was $22.8 million for the nine months ended September 30, 2018, an increase of $5.9 million from $16.9 million for the nine months ended September 30, 2017. The increase for both periods primarily relates to the ongoing grants of deferred restricted common units to new and existing employees during 2017 and 2018, as well as the probable vesting of certain awards containing performance conditions.
Reserve for Litigation and Contingencies. Global Credit's share of the reserve for litigation and contingencies decreased $4.1 million for both the three and nine months ended September 30, 2018. The decrease was related to Global Credit's share of the $25 million reserve reversal related to the CCC litigation recognized in 2017.
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Fee-earning AUM as of and for the Three and Nine Months Ended September 30, 2018 and 2017
Fee-earning AUM is presented below for each period together with the components of change during each respective period.
The table below breaks out Fee-earning AUM by its respective components at each period.
As of September 30, | |||||||
2018 | 2017 | ||||||
Global Credit | (Dollars in millions) | ||||||
Components of Fee-earning AUM (1) | |||||||
Fee-earning AUM based on capital commitments | $ | 5,026 | $ | 5,026 | |||
Fee-earning AUM based on invested capital | 1,643 | 1,202 | |||||
Fee-earning AUM based on collateral balances, at par | 21,013 | 17,647 | |||||
Fee-earning AUM based on net asset value | 235 | 41 | |||||
Fee-earning AUM based on other (2) | 2,133 | 2,096 | |||||
Total Fee-earning AUM | $ | 30,050 | $ | 26,012 | |||
Weighted Average Management Fee Rates (3) | |||||||
All Funds, excluding CLOs | 1.35 | % | 1.36 | % | |||
(1) | For additional information concerning the components of Fee-earning AUM, see “—Fee-earning Assets under Management.” |
(2) | Includes funds with fees based on gross asset value. |
(3) Represents the aggregate effective management fee rate for carry funds, weighted by each fund’s Fee-earning AUM, as of the end of each period presented. Management fees for CLOs are based on the total par amount of the assets (collateral) and principal balance of the notes in the fund and are not calculated as a percentage of equity and are therefore not included.
The table below provides the period to period rollforward of Fee-earning AUM.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Global Credit | (Dollars in millions) | ||||||||||||||
Fee-earning AUM Rollforward | |||||||||||||||
Balance, Beginning of Period | $ | 28,795 | $ | 25,214 | $ | 27,262 | $ | 24,126 | |||||||
Inflows, including Fee-paying Commitments (1) | 218 | 29 | 498 | 1,138 | |||||||||||
Outflows, including Distributions (2) | (84 | ) | (15 | ) | (309 | ) | (161 | ) | |||||||
Changes in CLO collateral balances (3) | 1,001 | 332 | 2,601 | (17 | ) | ||||||||||
Market Appreciation/(Depreciation) (4) | 6 | 2 | 5 | 3 | |||||||||||
Foreign Exchange and other (5) | 114 | 450 | (7 | ) | 923 | ||||||||||
Balance, End of Period | $ | 30,050 | $ | 26,012 | $ | 30,050 | $ | 26,012 | |||||||
(1) | Inflows represent limited partner capital raised and capital invested by our carry funds outside the investment period. |
(2) | Outflows represent limited partner distributions from our carry funds, changes in fee basis for our carry funds where the investment period has expired, and reductions for funds that are no longer calling fees. |
(3) | Represents the change in the aggregate Fee-earning collateral balances and principal balances at par of our CLOs/structured products, as of the quarterly cut-off dates. |
(4) | Market Appreciation/ (Depreciation) represents changes in the net asset value of certain carry funds. |
(5) | Represents the impact of foreign exchange rate fluctuations on the translation of our non-U.S. dollar denominated funds and other changes in Total AUM. Activity during the period is translated at the average rate for the period. Ending balances are translated at the spot rate as of the period end. |
Fee-earning AUM was $30.1 billion at September 30, 2018, an increase of $1.3 billion, or approximately 5%, compared to $28.8 billion at June 30, 2018. The difference was driven by increases in our CLO collateral balances of $1.0 billion and
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inflows of $0.2 billion . Distributions from carry funds still in the investment period do not impact Fee-earning AUM as these funds are based on commitments and not invested capital.
Fee-earning AUM was $30.1 billion at September 30, 2018, an increase of $2.8 billion, or approximately 10%, compared to $27.3 billion at December 31, 2017. The increase was driven by increases in our CLO collateral balances of $2.6 billion and $0.5 billion of inflows primarily from purchases in CCOF and CSC. This was partially offset by outflows of $0.3 billion primarily in CEMOF I, CSC, and CCOF.
Fee-earning AUM was $30.1 billion at September 30, 2018, an increase of $4.1 billion, or approximately 16%, compared to $26.0 billion at September 30, 2017. The increase was driven by increases in our CLO collateral balances of $3.5 billion and inflows of $0.8 billion primarily related to new and follow-on purchases in CCOF, CEMOF I, and CSC. This was partially offset by outflows of $0.4 billion primarily related to distributions in funds which charge fees based on invested equity.
Fee-earning AUM was $26.0 billion at September 30, 2017, an increase of $0.8 billion, or approximately 3%, compared to $25.2 billion at June 30, 2017. The difference was driven by foreign exchange gains of $0.5 billion primarily due to the translation of Fee-earning AUM in our European CLOs from EUR to USD and increases in our CLO collateral balances of $0.3 billion.
Fee-earning AUM was $26.0 billion at September 30, 2017, an increase of $1.9 billion, or approximately 8%, compared to $24.1 billion at December 31, 2016. The increase was driven by net inflows of $1.1 billion primarily due to new limited partner commitments raised in CSP IV and foreign exchange gains of $0.9 billion primarily due to the translation of Fee-earning AUM in our European CLOs from EUR to USD. This increase was partially offset by $0.2 billion of distributions primarily in our distressed debt carry funds.
Total AUM as of and for the Three and Nine Months Ended September 30, 2018.
The table below provides the period to period rollforward of Total AUM.
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||
(Dollars in millions) | |||||||
Global Credit | |||||||
Total AUM Rollforward | |||||||
Balance, Beginning of Period | $ | 35,531 | $ | 33,324 | |||
New Commitments (1) | 1,964 | 4,832 | |||||
Outflows (2) | (261 | ) | (786 | ) | |||
Market Appreciation/(Depreciation) (3) | 46 | 250 | |||||
Foreign Exchange Gain/(Loss) (4) | (36 | ) | (229 | ) | |||
Other (5) | 161 | 14 | |||||
Balance, End of Period | $ | 37,405 | $ | 37,405 | |||
(1) | New Commitments reflects the impact of gross fundraising during the period. For funds or vehicles denominated in foreign currencies, this reflects translation at the average quarterly rate, while the separately reported Fundraising metric is translated at the spot rate for each individual closing. |
(2) | Outflows includes distributions in our carry funds, related co-investment vehicles and separately managed accounts, as well as runoff of CLO collateral balances. |
(3) | Market Appreciation/(Depreciation) generally represents realized and unrealized gains (losses) on portfolio investments in our carry funds, related co-investment vehicles and separately managed accounts. |
(4) | Represents the impact of foreign exchange rate fluctuations on the translation of our non-U.S. dollar denominated funds. Activity during the period is translated at the average rate for the period. Ending balances are translated at the spot rate as of the period end. |
(5) | Includes expiring available capital, the impact of capital calls for fees and expenses, change in gross asset value for our business development companies and other changes in AUM. |
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Total AUM was $37.4 billion at September 30, 2018, an increase of $1.9 billion, or approximately 5%, compared to $35.5 billion at June 30, 2018. The increase was driven by new commitments of $2.0 billion primarily in our CLO's and direct lending products. This increase was partially offset by outflows of $0.3 billion primarily related to runoff in our CLO collateral balances.
Total AUM was $37.4 billion at September 30, 2018, an increase of $4.1 billion, or approximately 12%, compared to $33.3 billion at December 31, 2017. The increase was driven by new commitments of $4.8 billion primarily related to new funds raised in our CLO's and direct lending products. This increase was partially offset by $0.8 billion of outflows primarily related to runoff in our CLO collateral balances and $0.2 billion of foreign exchange losses primarily related to the translation of our Euro-denominated CLO's to USD.
Fund Performance Metrics
Fund performance information for certain of our Global Credit funds is included throughout this discussion and analysis to facilitate an understanding of our results of operations for the periods presented. The fund return information reflected in this discussion and analysis is not indicative of the performance of The Carlyle Group L.P. and is also not necessarily indicative of the future performance of any particular fund. An investment in The Carlyle Group L.P. is not an investment in any of our funds. There can be no assurance that any of our funds or our other existing and future funds will achieve similar returns.
The following table reflects the performance of carry funds in our Global Credit business. These tables separately present carry funds that, as of September 30, 2018, had at least $1.0 billion in capital commitments, cumulative equity invested or total equity value. Please see “— Our Family of Funds” for a legend of the fund acronyms listed below.
TOTAL INVESTMENTS | |||||||||||||||
As of September 30, 2018 | |||||||||||||||
Fund Inception Date(1) | Committed Capital | Cumulative Invested Capital(2) | Total Fair Value(3) | MOIC(4) | Gross IRR (5)(10) | Net IRR (6)(10) | |||||||||
Global Credit (Carry Funds Only) | (Reported in Local Currency, in Millions) | ||||||||||||||
Fully Invested/Committed Funds (7) | |||||||||||||||
CSP II | 6/2007 | $ | 1,352.3 | $ | 1,352.3 | $ | 2,474.6 | 1.8x | 17 | % | 11 | % | |||
CSP III | 8/2011 | $ | 702.8 | $ | 702.8 | $ | 1,197.3 | 1.7x | 30 | % | 20 | % | |||
CEMOF I | 12/2010 | $ | 1,382.5 | $ | 1,600.9 | $ | 1,423.7 | 0.9x | Neg | Neg | |||||
All Other Funds(8) | $ | 1,446.5 | $ | 1,991.3 | 1.4x | 12 | % | 7 | % | ||||||
Coinvestments and Other(9) | $ | 1,029.6 | $ | 1,027.7 | 1.0x | NM | NM | ||||||||
Total Fully Invested Funds | $ | 6,132.1 | $ | 8,114.6 | 1.3x | 12 | % | 6 | % | ||||||
Funds in the Investment Period (7) | |||||||||||||||
CSP IV | 3/2016 | $ | 2,500.0 | $ | 913.0 | $ | 1,083.4 | 1.2x | NM | NM | |||||
CEMOF II | 2/2015 | $ | 2,819.2 | $ | 966.7 | $ | 1,104.2 | 1.1x | NM | NM | |||||
All Other Funds | $ | 544.6 | $ | 584.3 | 1.1x | NM | NM | ||||||||
Total Funds in the Investment Period | $ | 2,424.3 | $ | 2,771.9 | 1.1x | NM | NM | ||||||||
TOTAL Global Credit | $ | 8,556.4 | $ | 10,886.5 | 1.3x | 12 | % | 6 | % | ||||||
(1) | The data presented herein that provides “inception to date” performance results of our segments relates to the period following the formation of the first fund within each segment. For our Global Credit segment our first carry fund was formed in 2004. |
(2) | Represents the original cost of all capital called for investments since inception of the fund. |
(3) | Represents all realized proceeds combined with remaining fair value, before management fees, expenses and carried interest. |
(4) | Multiple of invested capital (“MOIC”) represents total fair value, before management fees, expenses and carried interest, divided by cumulative invested capital. |
(5) | Gross Internal Rate of Return (“Gross IRR”) represents the annualized IRR for the period indicated on Limited Partner invested capital based on contributions, distributions and unrealized value before management fees, expenses and carried interest. |
(6) | Net Internal Rate of Return (“Net IRR”) represents the annualized IRR for the period indicated on Limited Partner invested capital based on contributions, distributions and unrealized value after management fees, expenses and carried interest. Fund level IRRs are based on aggregate Limited Partner cash flows, and this blended return may differ from that of individual |
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Limited Partners. As a result, certain funds may generate accrued performance revenues with a blended Net IRR that is below the preferred return hurdle for that fund.
(7) | Fully Invested funds are past the expiration date of the investment period as defined in the respective limited partnership agreement. In instances where a successor fund has had its first capital call, the predecessor fund is categorized as fully invested. |
(8) | Aggregate includes the following funds: CMP I, CMP II, CSP I, and CASCOF. |
(9) | Includes coinvestments and certain other stand-alone investments arranged by us. |
(10) | For funds marked “NM,” IRR may be positive or negative, but is not considered meaningful because of the limited time since initial investment and early stage of capital deployment. For funds marked “Neg,” IRR is negative as of reporting period end. |
Remaining Fair Value(1) | Unrealized MOIC(2) | Total MOIC(3) | % Invested(4) | In Accrued Carry/ (Clawback) (5) | LTM Realized Carry (6) | Catch-up Rate | Fee Initiation Date(7) | Quarters Since Fee Initiation | Original Investment Period End Date | |||||
As of September 30, 2018 | ||||||||||||||
Global Credit | (Reported in Local Currency, in Millions) | |||||||||||||
CEMOF II | $ | 991.0 | 1.0x | 1.1x | 34 | % | 100 | % | Dec-15 | 12 | Feb-20 | |||
CSP IV | $ | 808.6 | 1.1x | 1.2x | 37 | % | X | 100 | % | Feb-17 | 7 | Dec-20 | ||
CEMOF I | $ | 707.6 | 0.5x | 0.9x | 116 | % | 100 | % | Dec-10 | 32 | Dec-15 | |||
CSP III | $ | 349.8 | 1.2x | 1.7x | 100 | % | X | X | 80 | % | Dec-11 | 28 | Aug-15 | |
All Other Funds (8) | $ | 619.0 | 1.0x | 1.5x | NM | NM | ||||||||
Coinvestment and Other (9) | $ | 845.9 | 0.8x | 1.0x | NM | NM | ||||||||
Total Global Credit | $ | 4,322.0 | 0.8x | 1.3x | ||||||||||
(1) | Remaining Fair Value reflects the unrealized carrying value of investments for Corporate Private Equity, Real Assets and Global Credit carry funds and related co-investment vehicles. Significant funds with remaining fair value of greater than $100 million are listed individually. |
(2) | Unrealized multiple of invested capital (“MOIC”) represents remaining fair market value, before management fees, expenses and carried interest, divided by remaining investment cost. |
(3) | Total MOIC represents total fair value (realized proceeds combined with remaining fair value), before management fees, expenses and carried interest, divided by cumulative invested capital. For certain funds, represents the original cost of investments net of investment-level recallable proceeds, which is adjusted to reflect recyclability of invested capital for the purpose of calculating the fund MOIC. |
(4) | Represents cumulative invested capital as of the reporting period divided by total commitments. Amount can be greater than 100% due to the re-investment of recallable distributions to fund investors. |
(5) | Fund has a net accrued performance revenue balance/(giveback obligation) as of the current quarter end, driven by a significant portion of the fund’s asset base. |
(6) | Fund has generated realized net performance revenues/(realized giveback) in the last twelve months. |
(7) | Represents the date of the first capital contribution for management fees. |
(8) | Aggregate includes the following funds: CSP I, CSP II, CMP I, CMP II, CSC, CCOF, and CASCOF. In Accrued Carry/(Clawback) and LTM Realized Carry not indicated because the indicator does not apply to each fund within the aggregate. |
(9) | Includes co-investments, prefund investments and certain other stand-alone investments arranged by us. In Accrued Carry/(Clawback) and LTM Realized Carry not indicated because the indicator does not apply to each fund within the aggregate. |
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Investment Solutions
The following table presents our results of operations for our Investment Solutions segment:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Segment Revenues | |||||||||||||||
Fund level fee revenues | |||||||||||||||
Fund management fees | $ | 42.7 | $ | 41.1 | $ | 124.6 | $ | 113.1 | |||||||
Portfolio advisory fees, net | — | — | — | — | |||||||||||
Transaction fees, net | — | — | — | — | |||||||||||
Total fund level fee revenues | 42.7 | 41.1 | 124.6 | 113.1 | |||||||||||
Performance revenues | |||||||||||||||
Realized | 42.8 | 30.2 | 66.1 | 66.5 | |||||||||||
Unrealized | 61.6 | 4.2 | 152.8 | 32.1 | |||||||||||
Total performance revenues | 104.4 | 34.4 | 218.9 | 98.6 | |||||||||||
Principal investment income | |||||||||||||||
Realized | — | — | — | — | |||||||||||
Unrealized | 0.9 | 1.6 | 4.2 | 3.1 | |||||||||||
Total principal investment income | 0.9 | 1.6 | 4.2 | 3.1 | |||||||||||
Interest income | 0.4 | 0.6 | 1.2 | 0.9 | |||||||||||
Other income | 0.1 | 0.1 | 0.4 | 0.3 | |||||||||||
Total revenues | 148.5 | 77.8 | 349.3 | 216.0 | |||||||||||
Segment Expenses | |||||||||||||||
Compensation and benefits | |||||||||||||||
Cash-based compensation and benefits | 22.2 | 24.7 | 67.4 | 63.8 | |||||||||||
Equity-based compensation | 4.7 | 2.1 | 11.7 | 6.2 | |||||||||||
Performance revenues related compensation | |||||||||||||||
Realized | 38.4 | 29.9 | 59.8 | 65.4 | |||||||||||
Unrealized | 58.9 | (2.0 | ) | 130.3 | 18.4 | ||||||||||
Total compensation and benefits | 124.2 | 54.7 | 269.2 | 153.8 | |||||||||||
General, administrative, and other indirect expenses | 10.1 | 6.1 | 27.3 | 21.6 | |||||||||||
Depreciation and amortization expense | 1.2 | 0.9 | 3.4 | 2.6 | |||||||||||
Interest expense | 1.6 | 1.6 | 4.7 | 4.6 | |||||||||||
Total expenses | 137.1 | 63.3 | 304.6 | 182.6 | |||||||||||
Economic Income | $ | 11.4 | $ | 14.5 | $ | 44.7 | $ | 33.4 | |||||||
(-) Net Performance Revenues | 7.1 | 6.5 | 28.8 | 14.8 | |||||||||||
(-) Principal Investment Income | 0.9 | 1.6 | 4.2 | 3.1 | |||||||||||
(+) Equity-based Compensation | 4.7 | 2.1 | 11.7 | 6.2 | |||||||||||
(+) Net Interest | 1.2 | 1.0 | 3.5 | 3.7 | |||||||||||
(+) Reserve for Litigation and Contingencies | — | (2.6 | ) | — | (2.6 | ) | |||||||||
(=) Fee Related Earnings | $ | 9.3 | $ | 6.9 | $ | 26.9 | $ | 22.8 | |||||||
(+) Realized Net Performance Revenues | 4.4 | 0.3 | 6.3 | 1.1 | |||||||||||
(+) Realized Principal Investment Income | — | — | — | — | |||||||||||
(+) Net Interest | (1.2 | ) | (1.0 | ) | (3.5 | ) | (3.7 | ) | |||||||
(=) Distributable Earnings | $ | 12.5 | $ | 6.2 | $ | 29.7 | $ | 20.2 | |||||||
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Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017 and Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Distributable Earnings
Distributable earnings increased $6.3 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $9.5 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in distributable earnings for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Distributable earnings, September 30, 2017 | $ | 6.2 | $ | 20.2 | |||
Increases (decreases): | |||||||
Increase in fee related earnings | 2.4 | 4.1 | |||||
Increase in realized net performance revenues | 4.1 | 5.2 | |||||
(Increase) decrease in net interest | (0.2 | ) | 0.2 | ||||
Total increase | 6.3 | 9.5 | |||||
Distributable earnings, September 30, 2018 | $ | 12.5 | $ | 29.7 | |||
Fee Related Earnings
Fee related earnings increased $2.4 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $4.1 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in fee related earnings for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Fee related earnings, September 30, 2017 | $ | 6.9 | $ | 22.8 | |||
Increases (decreases): | |||||||
Increase in fee revenues | 1.6 | 11.5 | |||||
Decrease (increase) in cash-based compensation and benefits | 2.5 | (3.6 | ) | ||||
Increase in general, administrative and other indirect expenses | (1.4 | ) | (3.1 | ) | |||
All other changes | (0.3 | ) | (0.7 | ) | |||
Total increase | 2.4 | 4.1 | |||||
Fee related earnings, September 30, 2018 | $ | 9.3 | $ | 26.9 | |||
Fee Revenues. Total fee revenues increased $1.6 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, primarily due to increased management fees from our private equity fund vehicles as a result of closings of new fund vehicles, which have a higher average management fee rate than older fund vehicles as well as $2.6 million of catch-up management fees related to certain of our real estate fund vehicles recognized in the three months ended September 30, 2018.
Total fee revenues increased $11.5 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to increased management fees from our private equity fund vehicles as a result of closings of new fund vehicles, which have a higher average management fee rate than older fund vehicles as well as $3.0 million of catch-up management fees related to certain of our real estate fund vehicles recognized in the nine months ended September 30, 2018.
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Cash-based compensation and benefits expense. Cash-based compensation and benefits expense decreased $2.5 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, primarily due to decreased compensation associated with fundraising activities of approximately $2.4 million.
Cash-based compensation and benefits expense increased $3.6 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to an increase in headcount and higher projected year-end bonuses. These increases were partially offset by decreased compensation associated with fundraising activities of approximately $4.4 million.
General, administrative and other indirect expenses. General, administrative and other indirect expenses increased $1.4 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, primarily due to increased professional fees, partially offset by positive foreign currency adjustments during the three months ended September 30, 2018 as compared to negative foreign currency adjustments during the three months ended September 30, 2017.
General, administrative and other indirect expenses increased $3.1 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to increased professional fees, partially offset by lower negative foreign currency adjustments during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.
Economic Income
Economic income decreased $3.1 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and increased $11.3 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The following table provides the components of the changes in economic income for the three and nine months ended September 30, 2018:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in Millions) | |||||||
Economic income, September 30, 2017 | $ | 14.5 | $ | 33.4 | |||
Increases (decreases): | |||||||
Increase in net performance revenues | 0.6 | 14.0 | |||||
(Decrease) increase in principal investment income | (0.7 | ) | 1.1 | ||||
Increase in equity-based compensation | (2.6 | ) | (5.5 | ) | |||
Increase in fee related earnings | 2.4 | 4.1 | |||||
(Increase) decrease in net interest | (0.2 | ) | 0.2 | ||||
Change in reserve for litigation and contingencies(1) | (2.6 | ) | (2.6 | ) | |||
Total (decrease) increase | (3.1 | ) | 11.3 | ||||
Economic income, September 30, 2018 | $ | 11.4 | $ | 44.7 | |||
(1) Investment Solution's share of the $25 million reserve reversal related to the CCC litigation recognized in 2017.
Performance Revenues. Performance revenues (realized and unrealized) for the three and nine months ended September 30, 2018 and 2017 are from the following types of funds:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Private equity fund vehicles | $ | 103.2 | $ | 34.0 | $ | 215.2 | $ | 96.7 | |||||||
Real estate fund vehicles | 1.2 | 0.4 | 3.7 | 1.9 | |||||||||||
Total performance revenues | $ | 104.4 | $ | 34.4 | $ | 218.9 | $ | 98.6 | |||||||
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Under our arrangements with the historical owners and management team of AlpInvest, we generally do not retain any carried interest with respect to the historical investments and commitments to our AlpInvest fund vehicles that existed as of July 1, 2011 (including any options to increase any such commitments exercised after such date). We are entitled to 15% of the carried interest with respect to commitments from the historical owners of AlpInvest for the period between 2011 and 2020, except in certain instances, and 40% of the carried interest in respect of all other commitments (including all future commitments from third parties).
As funds that have launched since our acquisition of AlpInvest in 2011 begin to accrue performance revenues, an increasing share of net performance revenues are for our benefit. The increase in performance revenues for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 was primarily due to higher appreciation in our carry funds in 2018. Overall, our carry funds appreciated 5% in the three months ended September 30, 2018 (excluding the impact of foreign currency, appreciation remained 5% for the three months ended September 30, 2018) while appreciating 3% in the three months ended September 30, 2017. Overall, our carry funds appreciated 17% in the nine months ended September 30, 2018 (excluding the impact of foreign currency, appreciation was 15% for the nine months ended September 30, 2018) while appreciating 6% in the nine months ended September 30, 2017.
The $104.4 million of performance revenues for the three months ended September 30, 2018 was driven primarily by performance revenues recognized from the following funds:
•Main Fund III - Secondary Investments of $24.9 million,
•Main Fund III - Fund Investments of $22.3 million,
•Main Fund III - Co-Investments of $21.4 million,
•Main Fund V - Secondary Investments of $8.9 million,
•Main Fund V - Fund Investments of $6.5 million,
•Main Fund IV - Fund Investments of $6.4 million,
•Main Fund VI - Co-Investments of $6.3 million, and
•Main Fund VII - Co-Investments of $2.9 million.
The $34.4 million of performance revenues for the three months ended September 30, 2017 was driven primarily by performance revenues recognized from the following funds:
•Main Fund V - Secondary Investments of $6.7 million,
•Main Fund IV - Fund Investments of $6.0 million,
•Main Fund V - Co-Investments of $4.9 million,
•Main Fund III - Fund Investments of $2.3 million, and
•Main Fund V - Fund Investments of $2.3 million.
The $218.9 million of performance revenues for the nine months ended September 30, 2018 was driven primarily by performance revenues recognized from the following funds:
•Main Fund V - Secondary Investments of $51.7 million,
•Main Fund III - Fund Investments of $32.4 million,
•Main Fund III - Secondary Investments of $25.6 million,
•Main Fund VI - Co-Investments of $24.4 million,
•Main Fund III - Co-Investments of $22.5 million,
•Main Fund V - Fund Investments of $19.9 million, and
•Main Fund IV - Fund Investments of $15.4 million.
The $98.6 million of performance revenues for the nine months ended September 30, 2017 was driven primarily by performance revenues recognized from the following funds:
• | Main Fund V - Secondary Investments of $23.1 million, |
• | Main Fund IV - Fund Investments of $15.2 million, |
• | Main Fund III - Fund Investments of $9.5 million, |
• | Main Fund IV - Co-Investments of $8.3 million, |
• | Main Fund V - Co-Investments of $6.7 million, and |
• | Main Fund VI - Co-Investments of $6.0 million. |
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There were approximately $3.7 million and $6.2 million of performance revenues reversed for the three and nine months ended September 30, 2018, respectively. There were no significant performance revenues reversed for the three months and nine months ended September 30, 2017.
The appreciation in remaining value of our Investment Solutions carry funds for this segment are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||
2018 | 2017 | 2018 | 2017 | ||
Carry funds | 5% | 3% | 17% | 6% | |
Note: The appreciation presented is a weighted average blend of the remaining investments in the respective carry funds within Investment Solutions. These carry funds include private equity and real estate investments in primary fund, co-investment and secondary strategies, which have different return profiles. Additionally, appreciation excluding the impact of foreign currency is 5% and 15% for the three and nine months ended September 30, 2018.
Net performance revenues for the three months ended September 30, 2018 were $7.1 million, representing an increase of $0.6 million from $6.5 million in net performance revenues for the three months ended September 30, 2017. Net performance revenues for the nine months ended September 30, 2018 were $28.8 million, representing an increase of $14.0 million from $14.8 million in net performance revenues for the nine months ended September 30, 2017. The increase in net performance revenues for both periods was due to the higher appreciation of the carry funds in each period.
Equity-based Compensation. Equity-based compensation was $4.7 million for the three months ended September 30, 2018, an increase of $2.6 million from $2.1 million for the three months ended September 30, 2017. Equity-based compensation was $11.7 million for the nine months ended September 30, 2018, an increase of $5.5 million from $6.2 million for the nine months ended September 30, 2017. The increase for both periods primarily relates to the ongoing grants of deferred restricted common units to new and existing employees during 2017 and 2018, as well as the probable vesting of certain awards containing performance conditions.
Reserve for Litigation and Contingencies. Investment Solutions' share of the reserve for litigation and contingencies decreased $2.6 million for both the three and nine months ended September 30, 2018. The decrease was related to Investment Solutions' share of the $25 million reserve reversal related to the CCC litigation recognized in 2017.
Fee-earning AUM as of and for the Three and Nine Months Ended September 30, 2018 and 2017
Fee-earning AUM is presented below for each period together with the components of change during each respective period.
As of September 30, | |||||||
2018 | 2017 | ||||||
Investment Solutions | (Dollars in millions) | ||||||
Components of Fee-earning AUM (1) | |||||||
Fee-earning AUM based on capital commitments | $ | 11,363 | $ | 11,145 | |||
Fee-earning AUM based on invested capital (2) | 1,567 | 1,170 | |||||
Fee-earning AUM based on net asset value | 1,010 | 855 | |||||
Fee-earning AUM based on lower of cost or fair market value | 15,524 | 17,176 | |||||
Total Fee-earning AUM | $ | 29,464 | $ | 30,346 | |||
(1) | For additional information concerning the components of Fee-earning AUM, see “—Fee-earning Assets under Management.” |
(2) | Includes amounts committed to or reserved for certain AlpInvest and Metropolitan carry funds. |
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The table below provides the period to period rollforward of Fee-earning AUM.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Investment Solutions | (Dollars in millions) | ||||||||||||||
Fee-earning AUM Rollforward | |||||||||||||||
Balance, Beginning of Period | $ | 29,831 | $ | 28,468 | $ | 30,150 | $ | 27,054 | |||||||
Inflows, including Fee-paying Commitments (1) | 1,028 | 2,343 | 3,758 | 5,275 | |||||||||||
Outflows, including Distributions (2) | (1,391 | ) | (1,093 | ) | (3,717 | ) | (4,138 | ) | |||||||
Market Appreciation/(Depreciation) (3) | 121 | (108 | ) | 31 | (280 | ) | |||||||||
Foreign Exchange and other (4) | (125 | ) | 736 | (758 | ) | 2,435 | |||||||||
Balance, End of Period | $ | 29,464 | $ | 30,346 | $ | 29,464 | $ | 30,346 | |||||||
(1) | Inflows represent mandates where commitment fee period was activated and capital invested by carry fund vehicles outside the commitment fee period or weighted-average investment period. |
(2) | Outflows represent distributions from carry fund vehicles outside the commitment fee period or weighted-average investment period and changes in fee basis for carry fund vehicles where the commitment fee period or weighted-average investment period has expired. |
(3) | Market Appreciation/(Depreciation) represents realized and unrealized gains (losses) on our carry fund vehicles based on the lower of cost or fair value. |
(4) | Represents the impact of foreign exchange rate fluctuations on the translation of our non-U.S. dollar denominated funds. Activity during the period is translated at the average rate for the period. Ending balances are translated at the spot rate as of the period end. |
Fee-earning AUM was $29.5 billion at September 30, 2018, a decrease of $0.3 billion, or approximately 1%, compared to $29.8 billion at June 30, 2018. This was driven by outflows, including distributions, of $1.4 billion which were primarily attributable to our AlpInvest carry funds. This was partially offset by inflows, including fee-paying commitments, of $1.0 billion primarily due to activation of previously raised mandates and purchases in our AlpInvest vehicles. Distributions from funds still in the commitment or weighted-average investment period do not impact Fee-earning AUM as these funds are based on commitments and not invested capital. Increases in fair value have an impact on Fee-earning AUM for Investment Solutions as fully committed funds are based on the lower of cost or fair value of the underlying investments.
Fee-earning AUM was $29.5 billion at September 30, 2018, a decrease of $0.7 billion, or approximately 2%, compared to $30.2 billion at December 31, 2017. The decrease was driven by outflows, including distributions, of $3.7 billion which were primarily attributable to our AlpInvest carry funds and foreign exchange losses of $0.8 billion from translating our Euro-denominated AlpInvest Fee-earning AUM to USD. This was largely offset by inflows, including fee-paying commitments, of $3.8 billion primarily due to activation of previously raised mandates and purchases in our AlpInvest vehicles.
Fee-earning AUM was $29.5 billion at September 30, 2018, a decrease of $0.8 billion, or approximately 3%, compared to $30.3 billion at September 30, 2017. The decrease was driven by outflows, including distributions, of $5.4 billion primarily in our AlpInvest carry funds. This was offset by inflows, including fee-paying commitments, of $4.7 billion primarily due to activation of previously raised mandates and purchases in our AlpInvest vehicles.
Fee-earning AUM was $30.3 billion at September 30, 2017, an increase of $1.8 billion, or approximately 6%, compared to $28.5 billion at June 30, 2017. This was driven by inflows, including fee-paying commitments of $2.3 billion, due to activation of previously raised mandates in our AlpInvest vehicles, and foreign exchange gains of $0.7 billion from translating our Euro-denominated AlpInvest Fee-earning AUM to USD. Partially offsetting this increase were outflows, including distributions, of $1.1 billion which were primarily attributable to our AlpInvest carry funds.
Fee-earning AUM was $30.3 billion at September 30, 2017, an increase of $3.2 billion, or approximately 12%, compared to $27.1 billion at December 31, 2016. The increase was driven by inflows, including fee-paying commitments, of $5.3 billion due to activation of previously raised mandates in our AlpInvest vehicles, and foreign exchange gains of $2.4 billion from translating our Euro-denominated AlpInvest Fee-earning AUM to USD. This was partially offset by outflows, including distributions, of $4.1 billion primarily in our AlpInvest carry funds.
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Total AUM as of and for the Three and Nine Months Ended September 30, 2018
The table below provides the period to period rollforward of Total AUM.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
(Dollars in millions) | |||||||
Investment Solutions | |||||||
Total AUM Rollforward | |||||||
Balance, Beginning of Period | $ | 47,625 | $ | 46,291 | |||
New Commitments (1) | 1,138 | 3,444 | |||||
Outflows (2) | (3,298 | ) | (7,402 | ) | |||
Market Appreciation/(Depreciation) (3) | 2,054 | 6,082 | |||||
Foreign Exchange Gain/(Loss) (4) | (186 | ) | (1,255 | ) | |||
Other (5) | (59 | ) | 114 | ||||
Balance, End of Period | $ | 47,274 | $ | 47,274 | |||
(1) | New Commitments reflects the impact of gross fundraising during the period. For funds or vehicles denominated in foreign currencies, this reflects translation at the average quarterly rate, while the separately reported Fundraising metric is translated at the spot rate for each individual closing. |
(2) | Outflows includes distributions in our carry funds, related co-investment vehicles and separately managed accounts. |
(3) | Market Appreciation/(Depreciation) generally represents realized and unrealized gains (losses) on portfolio investments in our carry funds and related co-investment vehicles and separately managed accounts. The fair market values for our Investment Solutions carry funds are based on the latest available valuations of the underlying limited partnership interests (in most cases as of March 31, 2018) as provided by their general partners, plus the net cash flows since the latest valuation, up to June 30, 2018. |
(4) | Represents the impact of foreign exchange rate fluctuations on the translation of our non-U.S. dollar denominated funds. Activity during the period is translated at the average rate for the period. Ending balances are translated at the spot rate as of the period end. |
(5) | Includes expiring available capital, the impact of capital calls for fees and expenses other changes in AUM. |
Total AUM was $47.3 billion at September 30, 2018, a decrease of $0.3 billion or approximately 1%, compared to $47.6 billion at June 30, 2018. The decrease was driven by $3.3 billion of outflows primarily related to distributions in our AlpInvest carry funds. This was partially offset by $2.1 billion of market appreciation primarily in our AlpInvest carry funds and $1.1 billion of new commitments raised in our AlpInvest and MRE carry funds.
Total AUM was $47.3 billion at September 30, 2018, an increase of $1.0 billion or approximately 2%, compared to $46.3 billion at December 31, 2017. This increase was driven by $6.1 billion of market appreciation primarily in our AlpInvest carry funds and $3.4 billion of new commitments raised in our AlpInvest and MRE carry funds. This was partially offset by $7.4 billion of outflows primarily related to distributions in our AlpInvest carry funds, and $1.3 billion of foreign exchange losses resulting from the translation of our Euro-denominated AlpInvest AUM to USD.
Fund Performance Metrics
Fund performance information for our AlpInvest funds that have at least $1.0 billion in capital commitments, cumulative equity invested or total value as of September 30, 2018, which we refer to as our “significant funds” is included throughout this discussion and analysis to facilitate an understanding of our results of operations for the periods presented. The fund return information reflected in this discussion and analysis is not indicative of the performance of The Carlyle Group L.P. and is also not necessarily indicative of the future performance of any particular fund. An investment in The Carlyle Group L.P. is not an investment in any of our funds. There can be no assurance that any of our funds or our other existing and future funds will achieve similar returns.
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The following tables reflect the performance of our significant funds in our Investment Solutions business.
TOTAL INVESTMENTS | ||||||||||||||||
As of September 30, 2018 | ||||||||||||||||
Investment Solutions (1) | Vintage Year | Fund Size | Cumulative Invested Capital (2)(8) | Total Fair Value (3)(8) | MOIC (4) | Gross IRR (6) (10) | Net IRR (7) (10) | |||||||||
(Reported in Local Currency, in Millions) | ||||||||||||||||
AlpInvest | ||||||||||||||||
Fully Committed Funds (5) | ||||||||||||||||
Main Fund I - Fund Investments | 2000 | € | 5,174.6 | € | 4,247.3 | € | 6,999.0 | 1.6x | 12 | % | 11 | % | ||||
Main Fund II - Fund Investments | 2003 | € | 4,545.0 | € | 4,823.1 | € | 7,712.9 | 1.6x | 10 | % | 9 | % | ||||
Main Fund III - Fund Investments | 2005 | € | 11,500.0 | € | 12,804.4 | € | 21,049.5 | 1.6x | 10 | % | 10 | % | ||||
Main Fund IV - Fund Investments | 2009 | € | 4,877.3 | € | 5,171.9 | € | 8,871.9 | 1.7x | 17 | % | 16 | % | ||||
Main Fund V - Fund Investments | 2012 | € | 5,080.0 | € | 4,459.8 | € | 6,203.4 | 1.4x | 15 | % | 14 | % | ||||
Main Fund VI - Fund Investments | 2015 | € | 1,106.4 | € | 596.6 | € | 705.6 | 1.2x | 16 | % | 14 | % | ||||
Main Fund I - Secondary Investments | 2002 | € | 519.4 | € | 476.1 | € | 899.4 | 1.9x | 58 | % | 54 | % | ||||
Main Fund II - Secondary Investments | 2003 | € | 998.4 | € | 1,006.2 | € | 1,841.5 | 1.8x | 27 | % | 26 | % | ||||
Main Fund III - Secondary Investments | 2006 | € | 2,250.0 | € | 2,348.7 | € | 3,601.3 | 1.5x | 11 | % | 10 | % | ||||
Main Fund IV - Secondary Investments | 2010 | € | 1,859.1 | € | 1,933.1 | € | 3,329.1 | 1.7x | 20 | % | 19 | % | ||||
Main Fund V - Secondary Investments | 2011 | € | 4,272.8 | € | 3,957.5 | € | 6,608.2 | 1.7x | 23 | % | 21 | % | ||||
Main Fund II - Co-Investments | 2003 | € | 1,090.0 | € | 903.2 | € | 2,514.4 | 2.8x | 44 | % | 42 | % | ||||
Main Fund III - Co-Investments | 2006 | € | 2,760.0 | € | 2,770.5 | € | 3,914.0 | 1.4x | 6 | % | 5 | % | ||||
Main Fund IV - Co-Investments | 2010 | € | 1,475.0 | € | 1,335.4 | € | 3,556.0 | 2.7x | 24 | % | 22 | % | ||||
Main Fund V - Co-Investments | 2012 | € | 1,122.2 | € | 1,023.0 | € | 2,452.1 | 2.4x | 31 | % | 28 | % | ||||
Main Fund VI - Co-Investments | 2014 | € | 1,114.6 | € | 924.9 | € | 1,821.2 | 2.0x | 31 | % | 28 | % | ||||
Main Fund II - Mezzanine Investments | 2004 | € | 700.0 | € | 755.8 | € | 1,043.3 | 1.4x | 8 | % | 7 | % | ||||
Main Fund III - Mezzanine Investments | 2006 | € | 2,000.0 | € | 1,958.5 | € | 2,658.0 | 1.4x | 10 | % | 9 | % | ||||
All Other Funds (9) | Various | € | 2,335.1 | € | 3,198.5 | 1.4x | 14 | % | 11 | % | ||||||
Total Fully Committed Funds | € | 53,831.2 | € | 88,979.4 | 1.7x | 13 | % | 12 | % | |||||||
Funds in the Commitment Period (5) | ||||||||||||||||
Main Fund VI - Secondary Investments | 2017 | € | 5,007.6 | € | 1,435.8 | € | 1,581.1 | 1.1x | NM | NM | ||||||
Main Fund VII - Co-Investments | 2017 | € | 2,484.7 | € | 550.3 | € | 623.0 | 1.1x | NM | NM | ||||||
All Other Funds (9) | Various | € | 799.1 | € | 1,027.1 | 1.3x | 21 | % | 18 | % | ||||||
Total Funds in the Commitment Period | € | 2,785.2 | € | 3,231.2 | 1.2x | 16 | % | 12 | % | |||||||
TOTAL ALPINVEST | € | 56,616.4 | € | 92,210.6 | 1.6x | 13 | % | 12 | % | |||||||
TOTAL ALPINVEST (USD) (11) | $ | 65,764.2 | $ | 107,109.5 | 1.6x | |||||||||||
Metropolitan Real Estate | ||||||||||||||||
Fully Committed Funds (5) | Various | $ | 3,018.3 | $ | 3,948.8 | 1.3x | 7 | % | 4 | % | ||||||
Funds in the Commitment Period (5) | Various | $ | 174.7 | $ | 202.6 | 1.2x | NM | NM | ||||||||
TOTAL METROPOLITAN REAL ESTATE | $ | 3,193.0 | $ | 4,151.4 | 1.3x | 7 | % | 4 | % | |||||||
(1) | Includes private equity and mezzanine primary fund investments, secondary fund investments and co-investments originated by the AlpInvest team, as well as real estate primary fund investments, secondary fund investments and co-investments originated by the Metropolitan Real Estate team. Excluded from the performance information shown are a) investments that were not originated by AlpInvest, and b) Direct Investments, which was spun off from AlpInvest in 2005. As of September 30, 2018, these excluded investments represent $0.2 billion of AUM at AlpInvest. |
(2) | Represents the original cost of investments since inception of the fund. |
(3) | Represents all realized proceeds combined with remaining fair value, before management fees, expenses and carried interest. |
(4) | Multiple of invested capital (“MOIC”) represents total fair value, before management fees, expenses and carried interest, divided by cumulative invested capital. |
(5) | Fully Committed funds are past the expiration date of the commitment period as defined in the respective limited partnership agreement. |
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(6) | Gross Internal Rate of Return ("Gross IRR") represents the annualized IRR for the period indicated on Limited Partner invested capital based on investment contributions, distributions and unrealized value of the underlying investments, before management fees, expenses and carried interest at the AlpInvest/Metropolitan Real Estate level. |
(7) | Net Internal Rate of Return (“Net IRR”) represents the annualized IRR for the period indicated on Limited Partner invested capital based on contributions, distributions and unrealized value after management fees, expenses and carried interest. Fund level IRRs are based on aggregate Limited Partner cash flows, and this blended return may differ from that of individual Limited Partners. As a result, certain funds may generate accrued performance revenues with a blended Net IRR that is below the preferred return hurdle for that fund. |
(8) | To exclude the impact of FX, all AlpInvest foreign currency cash flows have been converted to Euro at the reporting period spot rate. |
(9) | Aggregate includes Main Fund VII - Fund Investments, Main Fund VIII - Fund Investments, Main Fund IX - Fund Investments, Main Fund I - Co-Investments, Main Fund I - Mezzanine Investments, Main Fund IV - Mezzanine Investments, Main Fund V - Mezzanine Investments, AlpInvest CleanTech Funds and funds which are not included as part of a main fund. |
(10) | For funds marked “NM,” IRR may be positive or negative, but is not considered meaningful because of the limited time since initial investment and early stage of capital deployment. For funds marked “Neg,” IRR is negative as of reporting period end. |
(11) | Represents the U.S. dollar equivalent balance translated at the spot rate as of period end. |
Liquidity and Capital Resources
Historical Liquidity and Capital Resources
We have historically required limited capital resources to support the working capital and operating needs of our business. Our management fees have largely covered our operating costs and all realized performance allocations, after covering the related compensation, are available for distribution to equityholders. Historically, approximately 95% of all capital commitments to our funds have been provided by our fund investors, with the remaining amount typically funded by our senior Carlyle professionals, advisors and other professionals.
Our Sources of Liquidity
We have multiple sources of liquidity to meet our capital needs, including cash on hand, annual cash flows, accumulated earnings and funds from our senior credit facility, including a term loan facility and a revolving credit facility with $750.0 million available as of September 30, 2018. We believe these sources will be sufficient to fund our capital needs for at least the next twelve months. If we determine that market conditions are favorable after taking into account our liquidity requirements, including the amounts available under our senior credit facility, we may seek to issue and sell common units in a registered public offering or a privately negotiated transaction, or we may issue additional senior notes, other debt or preferred equity. In September 2018, we issued $350 million of 5.650% senior notes due September 15, 2048 and used the net proceeds from that issuance to repurchase $250 million of the $500 million outstanding 3.875% senior notes due February due February 1, 2023 and prepay the $108.8 million promissory note to BNRI due January 1, 2022. In September 2017, we issued 16 million of our 5.875% Series A Preferred Units for net proceeds of $387.5 million.
Cash and cash equivalents. Cash and cash equivalents were approximately $1,238.2 million at September 30, 2018. However, a portion of this cash is allocated for specific business purposes, including, but not limited to, (i) performance allocations and incentive fee-related cash that has been received but not yet distributed as performance allocations and incentive fee-related compensation and amounts owed to non-controlling interests; (ii) proceeds received from realized investments that are allocable to non-controlling interests; and (iii) regulatory capital.
Corporate Treasury Investments. Corporate treasury investments were approximately $224.0 million at September 30, 2018. These investments represent investments in U.S. Treasury and government agency obligations, commercial paper, certificates of deposit, other investment grade securities and other investments with original maturities of greater than three months when purchased.
After deducting cash amounts allocated to specific requirements mentioned above, the remaining cash and cash equivalents, including corporate treasury investments, is approximately $1.3 billion as of September 30, 2018. This remaining amount will be used towards our primary liquidity needs, as outlined in the next section. This amount does not take into consideration ordinary course of business payables and reserves for specific business purposes.
Senior Credit Facility. The senior credit facility includes $25.0 million in a term loan and $750.0 million in a revolving credit facility. The term loan and revolving credit facility mature on May 5, 2020. Principal amounts outstanding under the
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amended term loan and revolving credit facility accrue interest, at the option of the borrowers, either (a) at an alternate base rate plus an applicable margin not to exceed 0.75%, or (b) at LIBOR plus an applicable margin not to exceed 1.75% (3.33% at September 30, 2018). Our balance sheet at September 30, 2018 reflects $25.0 million of term loan balance outstanding under our senior credit facility.
The senior credit facility is unsecured. We are required to maintain management fee earning assets (as defined in the amended senior credit facility) of at least $65.3 billion and a total leverage ratio of less than 3.0 to 1.0, in each case, tested on a quarterly basis. Non-compliance with any of the financial or non-financial covenants without cure or waiver would constitute an event of default under the senior credit facility. An event of default resulting from a breach of certain financial or non-financial covenants may result, at the option of the lenders, in an acceleration of the principal and interest outstanding, and a termination of the revolving credit facility. The senior credit facility also contains other customary events of default, including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due, breach of specified covenants, change in control and material inaccuracy of representations and warranties.
CLO Term Loans. For certain of our CLOs, the Partnership finances a portion of its investment in the CLOs through the proceeds received from term loans with financial institutions. The Partnership's outstanding CLO term loans were $311.2 million and $294.5 million at September 30, 2018 and December 31, 2017, respectively. The CLO term loans are secured by the Partnership's investments in the respective CLO, have a general unsecured interest in the Carlyle entity that manages the CLO, and generally do not have recourse to any other Carlyle entity. As of September 30, 2018, $292.7 million of these loans are secured by investments attributable to Carlyle Holdings. See Note 5 of our unaudited condensed consolidated financial statements for more information on our CLO term loans.
5.650% Senior Notes. In September 2018, Carlyle Finance L.L.C., an indirect finance subsidiary of the Partnership, issued $350.0 million of 5.650% senior notes due September 15, 2048 at 99.914% of par. Interest is payable semi-annually on March 15 and September 15, beginning March 15, 2019. The notes are unsecured and unsubordinated obligations of Carlyle Finance L.L.C. and are fully and unconditionally guaranteed, jointly and severally, by The Carlyle Group L.P. and each of the Carlyle Holdings partnerships. The indenture governing the notes contains customary covenants that, among other things, limit Carlyle Finance L.L.C. and the guarantors’ ability, subject to certain exceptions, to incur indebtedness secured by liens on voting stock or profit participating equity interests of their subsidiaries or merge, consolidate or sell, transfer or lease assets. The notes also contain customary events of default. All or a portion of the notes may be redeemed at our option, in whole or in part, at any time and from time to time, prior to their stated maturity, at the make-whole redemption price set forth in the notes. If a change of control repurchase event occurs, the notes are subject to repurchase at the repurchase price as set forth in the notes.
3.875% Senior Notes. In January 2013, Carlyle Holdings Finance L.L.C., an indirect finance subsidiary of the Partnership, issued $500.0 million of 3.875% senior notes due February 1, 2023 at 99.966% of par. Interest is payable semi-annually on February 1 and August 1, beginning August 1, 2013. The notes are unsecured and unsubordinated obligations of Carlyle Holdings Finance L.L.C. and are fully and unconditionally guaranteed, jointly and severally, by The Carlyle Group L.P. and each of the Carlyle Holdings partnerships. The indenture governing the notes contains customary covenants that, among other things, limit Carlyle Holdings Finance L.L.C. and the guarantors’ ability, subject to certain exceptions, to incur indebtedness secured by liens on voting stock or profit participating equity interests of their subsidiaries or merge, consolidate or sell, transfer or lease assets. The notes also contain customary events of default. All or a portion of the notes may be redeemed at our option, in whole or in part, at any time and from time to time, prior to their stated maturity, at the make-whole redemption price set forth in the notes. If a change of control repurchase event occurs, the notes are subject to repurchase at the repurchase price as set forth in the notes.
In September 2018, we completed a tender offer to purchase $250.0 million in aggregate principal amount of the 3.875% Senior Notes due 2023. As of September 30, 2018, $250.0 million of these notes remain outstanding.
5.625% Senior Notes. In March 2013, Carlyle Holdings II Finance L.L.C., an indirect finance subsidiary of the Partnership, issued $400.0 million of 5.625% Senior Notes due March 30, 2043 at 99.583% of par. Interest is payable semi-annually on March 30 and September 30, beginning September 30, 2013. The notes are unsecured and unsubordinated obligations of Carlyle Holdings II Finance L.L.C. and are fully and unconditionally guaranteed, jointly and severally, by The Carlyle Group L.P. and each of the Carlyle Holdings partnerships. The indenture governing the notes contains customary covenants and financial restrictions that, among other things, limit Carlyle Holdings Finance II L.L.C. and the guarantors’ ability, subject to certain exceptions, to incur indebtedness secured by liens on voting stock or profit participating equity interests of their subsidiaries or merge, consolidate or sell, transfer or lease assets. The notes also contain customary events of default. All or a portion of the notes may be redeemed at our option, in whole or in part, at any time and from time to time, prior
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to their stated maturity, at the make-whole redemption price set forth in the notes. If a change of control repurchase event occurs, the notes are subject to repurchase at the repurchase price as set forth in the notes.
In March 2014, Carlyle Holdings II Finance L.L.C. issued $200.0 million of 5.625% Senior Notes due March 30, 2043 at 104.315% of par. These notes were issued as additional 5.625% Senior Notes due March 30, 2043 and are treated as a single class with the already outstanding $400.0 million aggregate principal amount of these senior notes.
Promissory Notes. On January 1, 2016, the Partnership issued a $120.0 million promissory note to BNRI as part of the Partnership's strategic investment in NGP. Interest on the promissory note accrues at the three month LIBOR plus 2.50%. The Partnership may prepay the promissory note in whole or in part at any time without penalty. The promissory note was scheduled to mature on January 1, 2022. In September 2018, the Partnership prepaid the $108.8 million remaining balance outstanding under the promissory note, along with $1.2 million of accrued but unpaid interest.
Additionally, in June 2017, as part of the settlement with investors in two commodities investment vehicles managed by an affiliate of the Partnership (discussed in Note 7 to the unaudited condensed consolidated financial statements), the Partnership issued a series of promissory notes, aggregating to $53.9 million, to the investors of these commodities investment vehicles. Interest on these promissory notes accrues at the three month LIBOR plus 2% (4.34% at September 30, 2018). The Partnership may prepay these promissory notes in whole or in part at any time without penalty. Accordingly, as a result of repayments, $26.9 million of these promissory notes are outstanding at September 30, 2018. These promissory notes are scheduled to mature on July 15, 2019.
Obligations of CLOs. Loans payable of the Consolidated Funds represent amounts due to holders of debt securities issued by the CLOs. We are not liable for any loans payable of the CLOs. Several of the CLOs issued preferred shares representing the most subordinated interest, however these tranches are mandatorily redeemable upon the maturity dates of the senior secured loans payable, and as a result have been classified as liabilities under U.S. GAAP, and are included in loans payable of Consolidated Funds in our unaudited condensed consolidated balance sheets. Loans payable of the CLOs are collateralized by the assets held by the CLOs and the assets of one CLO may not be used to satisfy the liabilities of another. This collateral consists of cash and cash equivalents, corporate loans, corporate bonds and other securities.
Preferred Units. On September 13, 2017, we issued 16 million of our Preferred Units for net proceeds of approximately $387.5 million. We plan to use these proceeds for general corporate purposes, including to fund investments. Distributions on the Preferred Units are discretionary and non-cumulative. The Preferred Units may be redeemed at our option, in whole or in part, at any time on or after September 15, 2022 at a price of $25 per Preferred Unit, plus declared and unpaid distributions. In addition, the Preferred Units may be redeemed at our option prior to September 15, 2022, upon the occurrence of change of control, tax redemption or rating agency events. Holders of the Preferred Units will generally have no voting rights and have none of the voting rights given to holders of our common units, except as otherwise provided in Carlyle's limited partnership agreement. Holders of the Preferred Units have no right to require the redemption of the Preferred Units and the Preferred Units do not have a maturity date. See Note 12 of our unaudited condensed consolidated financial statements for more information on our Preferred Units.
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Our accrued performance allocations by segment as of September 30, 2018, gross and net of accrued giveback obligations, are set forth below:
Asset Class | Accrued Performance Allocations | Accrued Giveback Obligation | Net Accrued Performance Revenues | ||||||||
(Dollars in millions) | |||||||||||
Corporate Private Equity | $ | 2,289.9 | $ | (5.0 | ) | $ | 2,284.9 | ||||
Real Assets | 768.1 | (58.2 | ) | 709.9 | |||||||
Global Credit | 58.7 | — | 58.7 | ||||||||
Investment Solutions | 836.0 | — | 836.0 | ||||||||
Total | $ | 3,952.7 | $ | (63.2 | ) | $ | 3,889.5 | ||||
Plus: Accrued performance allocations from NGP | 205.3 | ||||||||||
Less: Accrued performance allocation-related compensation | (2,083.7 | ) | |||||||||
Plus: Receivable for giveback obligations from current and former employees | 1.0 | ||||||||||
Less: Deferred taxes on accrued performance allocations | (68.6 | ) | |||||||||
Less: Net accrued performance allocations attributable to non-controlling interests in consolidated entities | 10.8 | ||||||||||
Net accrued performance revenues before timing differences | 1,954.3 | ||||||||||
Less/Plus: Timing differences between the period when accrued performance allocations are realized and the period they are collected/distributed | (42.2 | ) | |||||||||
Net accrued performance revenues attributable to Carlyle Holdings | $ | 1,912.1 | |||||||||
As of September 30, 2018, the net accrued performance revenues attributable to Carlyle Holdings, excluding realized amounts, related to our carry funds and our other vehicles by segment were as follows (dollars in millions):
Corporate Private Equity: | |||
Buyout | $ | 1,160.3 | |
Growth Capital | 55.0 | ||
Total Corporate Private Equity | 1,215.3 | ||
Real Assets: | |||
Real Estate | 314.6 | ||
Natural Resources | 274.9 | ||
Legacy Energy | (19.0 | ) | |
Total Real Assets | 570.5 | ||
Global Credit | 33.2 | ||
Investment Solutions | 93.1 | ||
Net accrued performance revenues attributable to Carlyle Holdings | $ | 1,912.1 | |
Realized principal investment income. Another source of liquidity we may use to meet our capital needs is the realized principal investment income generated by our equity method investments and other principal investments. Principal investment income is realized when we redeem all or a portion of our investment or when we receive or are due cash income, such as dividends or distributions. Certain of the investments attributable to Carlyle Holdings (excluding certain general partner interests, strategic investments, and investments in certain CLOs) may be sold at our discretion as a source of liquidity.
Realized performance allocations revenue. Realized performance allocations revenue generated by our investment funds may be used to meet our capital needs. Performance allocations are generally realized when an underlying investment is profitably disposed of and the fund's cumulative returns are in excess of the preferred return. For certain funds, performance allocations are realized once all invested capital and expenses have been returned to the fund’s investors and the fund’s cumulative returns are in excess of the preferred return.
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Our Liquidity Needs
We generally use our working capital and cash flows to invest in growth initiatives, service our debt, fund the working capital needs of our business and investment funds and pay distributions to our unitholders.
In the future, we expect that our primary liquidity needs will be to:
• | provide capital to facilitate the growth of our existing business lines; |
• | provide capital to facilitate our expansion into new, complementary business lines, including acquisitions; |
• | pay operating expenses, including compensation and compliance costs and other obligations as they arise; |
• | fund costs of litigation and contingencies, including related legal costs; |
• | fund the capital investments of Carlyle in our funds; |
• | fund capital expenditures; |
• | repay borrowings and related interest costs and expenses; |
• | pay earnouts and contingent cash consideration associated with our acquisitions and strategic investments; |
• | pay income taxes; |
• | make distributions to our common and preferred unitholders and the holders of the Carlyle Holdings partnership units in accordance with our distribution policy, and; |
• | repurchase our units. |
Preferred Unit Distributions. With respect to distribution year 2018, the Board of Directors of our general partner has declared a quarterly distribution to preferred unitholders totaling approximately $23.6 million, or $1.468752 per preferred unit, consisting of the following:
Preferred Unit Distributions | ||||||||
Distribution per Preferred Unit | Distribution to Common Unitholders | Distribution Year | Record Date | Payment Date | ||||
(Dollars in millions, except per unit data) | ||||||||
$ | 0.367188 | $ | 5.9 | 2018 | March 1, 2018 | March 15, 2018 | ||
0.367188 | 5.9 | 2018 | June 1, 2018 | June 15, 2018 | ||||
0.367188 | 5.9 | 2018 | September 1, 2018 | September 17, 2018 | ||||
0.367188 | 5.9 | 2018 | December 1, 2018 | December 17, 2018 | ||||
$ | 1.468752 | $ | 23.6 | |||||
Distributions to preferred unitholders paid during the nine months ended September 30, 2018 totaled $17.7 million, representing the amount paid in March 2018 in respect of the first quarter of 2018, the amount paid in June 2018 in respect of the second quarter of 2018, and the amount paid in September 2018 in respect of the third quarter of 2018. Distributions on the preferred units are discretionary and non-cumulative.
Common Unit Distributions. With respect to distribution year 2018, the Board of Directors of our general partner has declared a distribution to common unitholders totaling approximately $96.6 million, or $0.91 per common unit, consisting of the following:
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Common Unit Distributions - Distribution Year 2018 | ||||||||
Quarter | Distribution per Common Unit | Distribution to Common Unitholders | Record Date | Payment Date | ||||
(Dollars in millions, except per unit data) | ||||||||
Q1 2018 | $ | 0.27 | $ | 27.8 | May 11, 2018 | May 17, 2018 | ||
Q2 2018 | 0.22 | 23.3 | August 13, 2018 | August 17, 2018 | ||||
Q3 2018 | 0.42 | 45.5 | November 13, 2018 | November 20, 2018 | ||||
Total | $ | 0.91 | $ | 96.6 | ||||
With respect to distribution year 2017, the Board of Directors of our general partner declared a distribution of approximately $137.6 million to common unitholders, consisting of the following:
Common Unit Distributions - Distribution Year 2017 | ||||||||
Quarter | Distribution per Common Unit | Distribution to Common Unitholders | Record Date | Payment Date | ||||
(Dollars in millions, except per unit data) | ||||||||
Q1 2017 | $ | 0.10 | $ | 9.0 | May 15, 2017 | May 22, 2017 | ||
Q2 2017 | 0.42 | 40.3 | August 14, 2017 | August 21, 2017 | ||||
Q3 2017 | 0.56 | 55.1 | November 10, 2017 | November 16, 2017 | ||||
Q4 2017 | 0.33 | 33.2 | February 20, 2018 | February 27, 2018 | ||||
Total | $ | 1.41 | $ | 137.6 | ||||
Distributions to common unitholders paid during the nine months ended September 30, 2018 totaled $84.3 million, representing the amount paid in February 2018 of $0.33 per common unit in respect of the fourth quarter of 2017, the amount paid in May 2018 of $0.27 per common unit in respect of the first quarter of 2018, and the amount paid in August 2018 of $0.22 per common unit in respect of the second quarter of 2018. Distributions to common unitholders paid during the nine months ended September 30, 2017 totaled $63.0 million, representing the amount paid in February 2017 of $0.16 per common unit in respect of the fourth quarter of 2016, the amount paid in May 2017 of $0.10 per common unit in respect of the first quarter of 2017 and the amount paid in August 2017 of $0.42 per common unit in respect of the second quarter of 2017.
It is Carlyle’s intention to cause Carlyle Holdings to make quarterly distributions to its partners, including The Carlyle Group L.P.’s wholly owned subsidiaries, that will enable The Carlyle Group L.P. to pay a quarterly distribution of approximately 75% of Distributable Earnings Attributable to Common Unitholders for the quarter. “Distributable Earnings Attributable to Common Unitholders” refers to The Carlyle Group L.P.'s share of Distributable Earnings, after an implied provision for current corporate income taxes (other than corporate income taxes attributable to The Carlyle Group L.P.) and preferred unit distributions, net of corporate income taxes attributable to The Carlyle Group L.P. and amounts payable under the tax receivable agreement. Carlyle’s general partner may adjust the distribution for amounts determined to be necessary or appropriate to provide for the conduct of its business, to make appropriate investments in its business and its funds or to comply with applicable law or any of its financing agreements, or to provide for future cash requirements such as tax-related payments, giveback obligations and distributions to unitholders for any ensuing quarter. The amount to be distributed could also be adjusted upward in any one quarter.
Notwithstanding the foregoing, the declaration and payment of any distributions will be at the sole discretion of our general partner, which may change our distribution policy at any time. Our general partner will take into account general economic and business conditions, our strategic plans and prospects, our business and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations, legal, tax and regulatory restrictions, other constraints on the payment of distributions by us to our common unitholders or by our subsidiaries to us, and such other factors as our general partner may deem relevant.
Because our wholly owned subsidiaries must pay taxes and make payments under the tax receivable agreement, the amounts ultimately distributed by us to our common unitholders are expected to be less, on a per unit basis, than the amounts
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distributed by the Carlyle Holdings partnerships to the other limited partners of the Carlyle Holdings partnerships in respect of their Carlyle Holdings partnership units.
Fund Commitments. Generally, we intend to have Carlyle commit to fund approximately 0.75% to 1% of the capital commitments to our future carry funds, although we may elect to invest additional amounts in funds focused on new investment areas. We may, from time to time, exercise our right to purchase additional interests in our investment funds that become available in the ordinary course of their operations. We expect our senior Carlyle professionals and employees to continue to make significant capital contributions to our funds based on their existing commitments, and to make capital commitments to future funds consistent with the level of their historical commitments. We also intend to make investments in our open-end funds and our CLO vehicles. Our investments in our U.S. and European CLO vehicles will comply with the risk retention rules as discussed in “Risk Retention Rules” later in this section.
Since our inception through September 30, 2018, we and our senior Carlyle professionals, operating executives and other professionals have invested or committed to invest in or alongside our funds. Approximately 3% to 5% of all capital commitments to our funds are funded collectively by us and our senior Carlyle professionals, operating executives and other professionals. The current unfunded commitment of Carlyle and our senior Carlyle professionals, operating executives and other professionals to our investment funds as of September 30, 2018, consisted of the following (Dollars in millions):
Asset Class | Unfunded Commitment | ||
Corporate Private Equity | $ | 2,601.1 | |
Real Assets | 818.2 | ||
Global Credit | 475.3 | ||
Investment Solutions | 148.9 | ||
Total | $ | 4,043.5 | |
A substantial majority of the remaining commitments are expected to be funded by senior Carlyle professionals, operating executives and other professionals through our internal co-investment program. Of the $4.0 billion of unfunded commitments, approximately $3.5 billion is subscribed individually by senior Carlyle professionals, operating executives and other professionals, with the balance funded directly by the Partnership.
Investments as of September 30, 2018 consist of the following (dollars in millions):
Investments, excluding accrued performance allocations | $ | 1,855.6 | |
Less: Amounts attributable to non-controlling interests in consolidated entities | (354.6 | ) | |
Less: Strategic equity method investments in NGP Management | (390.0 | ) | |
Less: Investment in NGP accrued performance allocations | (205.3 | ) | |
Investments excluding non-controlling interests and NGP | 905.7 | ||
Plus: Investments in Consolidated Funds, eliminated in consolidation | 242.8 | ||
Total investments attributable to Carlyle Holdings, exclusive of NGP Management | $ | 1,148.5 | |
Of the $1,148.5 million of total investments attributable to Carlyle Holdings, approximately $292.7 million are financed with loans attributable to Carlyle Holdings (see Sources of Liquidity earlier in this section). The financing of our CLO investments within the last year has caused our total investments to increase at a faster rate than in prior periods. We expect this trend to continue in the near term as it relates to our European CLOs.
Repurchase Program. In February 2016, the Board of Directors of the general partner of the Partnership authorized the repurchase of up to $200 million of common units and/or Carlyle Holdings units. Under this unit repurchase program, units may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. No units will be repurchased from our executive officers under this program. The timing and actual number of common units and/or Carlyle Holdings units repurchased will depend on a variety of factors, including legal requirements, price, and economic and market conditions. This unit repurchase program may be suspended or discontinued at any time and does not have a specified expiration date. For the nine months ended September 30, 2018, we have paid an aggregate of $87.5 million to repurchase and
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retire approximately 3.9 million units with all of the repurchases done via open market transactions. Since inception of the program, we have paid an aggregate of $146.6 million to repurchase and retire approximately 7.6 million units.
Cash Flows
The significant captions and amounts from our consolidated statements of cash flows which include the effects of our Consolidated Funds and CLOs in accordance with U.S. GAAP are summarized below.
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
(Dollars in millions) | |||||||
Statements of Cash Flows Data | |||||||
Net cash provided by operating activities | $ | 95.0 | $ | 571.8 | |||
Net cash used in investing activities | (20.1 | ) | (26.0 | ) | |||
Net cash provided by financing activities | 150.3 | 73.7 | |||||
Effect of foreign exchange rate changes | (14.4 | ) | 61.8 | ||||
Net change in cash, cash equivalents and restricted cash | $ | 210.8 | $ | 681.3 | |||
Net Cash Provided by Operating Activities. Net cash (used in) provided by operating activities was primarily driven by our earnings in the respective periods after adjusting for significant non-cash activity, including non-cash performance allocations and incentive fees, the related non-cash performance allocations and incentive fee related compensation, non-cash equity-based compensation, and depreciation, amortization and impairments, all of which are included in earnings.
Operating cash inflows primarily include the receipt of management fees, realized performance allocations and incentive fees, while operating cash outflows primarily include payments for operating expenses, including compensation and general, administrative, and other expenses. During the nine months ended September 30, 2018 and 2017, net cash provided by operating activities primarily included the receipt of management fees and realized performance allocations and incentive fees, totaling approximately $1.5 billion and $1.6 billion, respectively. These inflows were offset by payments for compensation and general, administrative and other expenses of approximately $1.4 billion and $1.5 billion for the nine months ended September 30, 2018 and 2017, respectively.
Cash used to purchase investments as well as the proceeds from the sale of such investments are also reflected in our operating activities as investments are a normal part of our operating activities. During the nine months ended September 30, 2018, investment proceeds were $571.9 million while investment purchases were $371.8 million. During the nine months ended September 30, 2017, investment proceeds were $297.7 million as compared to purchases of $412.4 million.
The net cash provided by operating activities for the nine months ended September 30, 2018 and 2017 also reflects the investment activity of our Consolidated Funds. For the nine months ended September 30, 2018, purchases of investments by the Consolidated Funds were $2,914.4 million, while proceeds from the sales and settlements of investments by the Consolidated Funds were $2,159.8 million. For the nine months ended September 30, 2017, purchases of investments by the Consolidated Funds were $2,129.7 million, while proceeds from the sales and settlements of investments by the Consolidated Funds were $2,135.6 million.
Net Cash Used In Investing Activities. Our investing activities generally reflect cash used for acquisitions, fixed assets and software for internal use. For the nine months ended September 30, 2018, cash used in investing activities principally reflects purchases of fixed assets. Purchases of fixed assets were $20.1 million and $26.0 million for the nine months ended September 30, 2018 and 2017, respectively.
Net Cash Provided by Financing Activities. Financing activities are a net source of cash in both the nine months ended September 30, 2018 and 2017. For the nine months ended September 30, 2018, the Partnership received net proceeds of $346.6 million from the issuance of $350 million of 5.650% senior notes, paid $254.8 million to repurchase $250 million of 3.875% senior notes, and paid $108.8 million to prepay the remaining balance outstanding under a promissory note to BNRI. For the nine months ended September 30, 2018, the Partnership received net proceeds of $40.8 million from the issuance of various CLO term loans, while $202.6 million was received for the nine months ended September 30, 2017. For the nine months ended September 30, 2018, the Partnership repaid a $20.6 million CLO term loan. See Note 5 to the unaudited condensed consolidated financial statements for more information on these borrowings.
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Proceeds from issuance of preferred units, net of offering costs and expenses was $387.6 million for the nine months ended September 30, 2017. See Note 12 to the unaudited condensed consolidated financial statements for more information on the preferred units.
Distributions to our common unitholders were $84.3 million and $63.0 million for the nine months ended September 30, 2018 and 2017, respectively. Distributions to the non-controlling interest holders in Carlyle Holdings were $191.7 million and $163.1 million for the nine months ended September 30, 2018 and 2017, respectively. Distributions to our preferred unitholders were $17.7 million for the nine months ended September 30, 2018.
The net borrowings (payments) on loans payable by our Consolidated Funds during the nine months ended September 30, 2018 and 2017 were $662.3 million and $(312.7) million, respectively. Contributions from non-controlling interest holders were $17.6 million and $87.7 million for the nine months ended September 30, 2018 and 2017, respectively, which relate primarily to contributions from the non-controlling interest holders in Consolidated Funds. For the nine months ended September 30, 2018 and 2017, distributions to non-controlling interest holders were $72.7 million and $74.0 million, respectively, which relate primarily to distributions to the non-Carlyle interests in majority-owned subsidiaries.
Our Balance Sheet
Total assets were $13.4 billion at September 30, 2018, an increase of $1.2 billion from December 31, 2017. The increase in total assets was primarily attributable to increases in investments of Consolidated Funds and investments, including accrued performance allocations, of $561.1 million, and $519.7 million, respectively. Cash and cash equivalents, including corporate treasury investments, were approximately $1.5 billion and $1.4 billion at September 30, 2018 and December 31, 2017, respectively.
Total liabilities were $10.4 billion at September 30, 2018, an increase of $1.0 billion from December 31, 2017. The increase in liabilities was primarily attributable to increases in loans payable of Consolidated Funds, accrued compensation and benefits and accounts payable, accrued expenses and other liabilities of $470.8 million, $309.4 million and $120.6 million respectively, from December 31, 2017 to September 30, 2018.
The assets and liabilities of the Consolidated Funds are generally held within separate legal entities and, as a result, the assets of the Consolidated Funds are not available to meet our liquidity requirements and similarly the liabilities of the Consolidated Funds are non-recourse to us. For example, as previously discussed, the CLO term loans generally are secured by the Partnership's investment in the CLO, have a general unsecured interest in the Carlyle entity that manages the CLO, and do not have recourse to any other Carlyle entity.
Our balance sheet without the effect of the Consolidated Funds can be seen in Note 15 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. At September 30, 2018, our total assets were $8.2 billion, including cash and cash equivalents, including corporate treasury investments, of $1.5 billion and net accrued performance revenues of $1.9 billion.
Unconsolidated Entities
Our corporate private equity funds and certain of our real estate funds have entered into lines of credit secured by their investors’ unpaid capital commitments or by a pledge of the equity of the underlying investment. These lines of credit are used primarily to reduce the overall number of capital calls to investors or for working capital needs. In certain instances, however, they may be used for other investment related activities, including serving as bridge financing for investments. The degree of leverage employed varies among our funds.
Off-balance Sheet Arrangements
In the normal course of business, we enter into various off-balance sheet arrangements including sponsoring and owning limited or general partner interests in consolidated and non-consolidated funds, entering into derivative transactions, entering into operating leases and entering into guarantee arrangements. We also have ongoing capital commitment arrangements with certain of our consolidated and non-consolidated funds. We do not have any other off-balance sheet arrangements that would require us to fund losses or guarantee target returns to investors in any of our other investment funds.
For further information regarding our off-balance sheet arrangements, see Note 2 and Note 7 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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Contractual Obligations
The following table sets forth information relating to our contractual obligations as of September 30, 2018 on a consolidated basis and on a basis excluding the obligations of the Consolidated Funds:
October 1, 2018 to December 31, 2018 | 2019-2020 | 2021-2022 | Thereafter | Total | |||||||||||||||
(Dollars in millions) | |||||||||||||||||||
Debt obligations (including senior notes)(a) | $ | 6.7 | $ | 69.6 | $ | 119.4 | $ | 1,367.4 | $ | 1,563.1 | |||||||||
Interest payable(b) | 19.3 | 150.0 | 144.9 | 1,197.4 | 1,511.6 | ||||||||||||||
Other consideration(c) | 1.0 | 11.7 | — | — | 12.7 | ||||||||||||||
Operating lease obligations(d) | 12.8 | 111.8 | 85.5 | 454.9 | 665.0 | ||||||||||||||
Capital commitments to Carlyle funds(e) | 4,043.5 | — | — | — | 4,043.5 | ||||||||||||||
Tax receivable agreement payments(f) | — | — | 22.6 | 78.4 | 101.0 | ||||||||||||||
Loans payable of Consolidated Funds(g) | 23.5 | 186.9 | 186.6 | 5,427.5 | 5,824.5 | ||||||||||||||
Unfunded commitments of the CLOs(h) | 5.0 | — | — | — | 5.0 | ||||||||||||||
Consolidated contractual obligations | 4,111.8 | 530.0 | 559.0 | 8,525.6 | 13,726.4 | ||||||||||||||
Loans payable of Consolidated Funds(g) | (23.5 | ) | (186.9 | ) | (186.6 | ) | (5,427.5 | ) | (5,824.5 | ) | |||||||||
Capital commitments to Carlyle funds(e) | (3,531.2 | ) | — | — | — | (3,531.2 | ) | ||||||||||||
Unfunded commitments of the CLOs(h) | (5.0 | ) | — | — | — | (5.0 | ) | ||||||||||||
Carlyle Operating Entities contractual obligations | $ | 552.1 | $ | 343.1 | $ | 372.4 | $ | 3,098.1 | $ | 4,365.7 | |||||||||
(a) | The table above assumes that no prepayments are made on the promissory notes or senior notes and that the outstanding balance on the senior credit facility term loan is repaid on the maturity date of the senior credit facility, which is May 5, 2020. The CLO term loans are included in the table above based on the earlier of the stated maturity date or the date the CLO is expected to be dissolved. See Note 5 to the unaudited condensed consolidated financial statements for the various maturity dates of the CLO term loans, promissory notes and senior notes. |
(b) | The interest rate on the debt obligations as of September 30, 2018 consist of: 5.650% on $350.0 million of senior notes, 3.875% on $250.0 million of senior notes, 5.625% on $600.0 million of senior notes, approximately 3.33% on $25.0 million remaining term loan under our senior credit facility, a range of approximately 1.75% to 4.28% for our CLO term loans, and approximately 4.34% on $26.9 million of our outstanding settlement promissory notes. Interest payments assume that no prepayments are made and loans are held until maturity with the exception of the CLO term loans, which are based on the earlier of the stated maturity date or the date the CLO is expected to be dissolved. |
(c) | These obligations represent our estimate of amounts to be paid associated with our business acquisitions and other obligations. |
(d) | We lease office space in various countries around the world and maintain our headquarters in Washington, D.C., where in June 2018, we entered into an amended non-cancelable lease agreement expiring on March 31, 2030. In July 2018, we entered into a new non-cancelable lease agreement expiring in 2036 for new office space in New York City. Our office leases in other locations expire in various years from 2018 through 2032. The amounts in this table represent the minimum lease payments required over the term of the lease. |
(e) | These obligations generally represent commitments by us to fund a portion of the purchase price paid for each investment made by our funds. These amounts are generally due on demand and are therefore presented in the less than one year category. A substantial majority of these investments is expected to be funded by senior Carlyle professionals and other professionals through our internal co-investment program. Of the $4.0 billion of unfunded commitments, approximately $3.5 billion is subscribed individually by senior Carlyle professionals, advisors and other professionals, with the balance funded directly by the Partnership. |
(f) | Represents obligations by the Partnership’s corporate taxpayers to make payments under the tax receivable agreement. Holders of partnership units in Carlyle Holdings may exchange their Carlyle Holdings partnership units for common units in The Carlyle Group L.P. on a one-for-one basis. These exchanges may reduce the amount of tax that the corporate taxpayers would be required to pay in the future. The corporate taxpayers will pay to the limited partner of Carlyle Holdings making the exchange 85% of the amount of cash savings that the corporate taxpayers realize upon an exchange. See “Tax Receivable Agreement” below. Further, the amount and timing of payments is subject to change as we continue to analyze the 2017 Tax Cuts and Jobs Act. |
(g) | These obligations represent amounts due to holders of debt securities issued by the consolidated CLO vehicles. These obligations include interest to be paid on debt securities issued by the consolidated CLO vehicles. Interest payments assume that no prepayments are made and loans are held until maturity. For debt securities with rights only to the residual value of the CLO and no stated interest, no interest payments were included in this calculation. Interest payments on variable-rate debt securities are based on interest rates in effect as of September 30, 2018, at spreads to market rates pursuant to the debt agreements, and range from 0.40% to 9.96%. |
(h) | These obligations represent commitments of the CLOs to fund certain investments. These amounts are generally due on demand and are therefore presented in the less than one year category. |
Excluded from the table above are liabilities for uncertain tax positions of $13.0 million at September 30, 2018 as we are unable to estimate when such amounts may be paid. Also, the table above does not include amounts related to the Fortitude Holdings and AAG transactions (see Notes 4 and 14 to the unaudited condensed consolidated financial statements).
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Risk Retention Rules
The Dodd-Frank Act requires sponsors of asset-backed securities, including CLOs, to retain at least 5% of the credit risk related to the assets that underlie asset-backed securities (referred to herein as the U.S. Risk Retention Rules). The U.S. Risk Retention Rules became effective in December 2016, at which time we began to comply by holding 5% of the credit risk for our U.S. CLOs. On February 9, 2018, the U.S. Court of Appeals for the District of Columbia ruled that the U.S. Risk Retention Rules do not apply to managers of open-market CLOs - CLOs for which the underlying assets are not transferred by the manager to the CLO issuer via a sale. This ruling went into effect on April 5, 2018, ending the need for managers of open-market CLOs to comply with the U.S. Risk Retention Rules. As a result, going forward, the manager of our U.S. open-market CLOs will not obtain or hold 5% of the credit risk that previously would have been necessary to satisfy the U.S. Risk Retention Rules, though we will continue to hold 5% of the credit risk of our U.S., non-open-market CLOs . In addition, other Carlyle entities may continue to hold positions in our U.S. open-market CLOs independent of the U.S. Risk Retention Rules.
Further, we will continue to comply with the risk retention rules governing CLOs issued in Europe for which we are a sponsor, which require a combination of capital from our balance sheet, commitments from senior Carlyle professionals, and/or third party financing.
Guarantees
See Note 7 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for information related to our material guarantees.
Indemnifications
In many of our service contracts, we agree to indemnify the third-party service provider under certain circumstances. The terms of the indemnities vary from contract to contract, and the amount of indemnification liability, if any, cannot be determined and has not been included in the table above or recorded in our consolidated financial statements as of September 30, 2018.
Tax Receivable Agreement
Holders of partnership units in Carlyle Holdings (other than The Carlyle Group L.P.’s wholly-owned subsidiaries), subject to the vesting and minimum retained ownership requirements and transfer restrictions applicable to such holders as set forth in the partnership agreements of the Carlyle Holdings partnerships, may (subject to the terms of the exchange agreement) exchange their Carlyle Holdings partnership units for The Carlyle Group L.P. common units on a one-for-one basis. A Carlyle Holdings limited partner must exchange one partnership unit in each of the three Carlyle Holdings partnerships to effect an exchange for a common unit. The exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Carlyle Holdings. These increases in tax basis may increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of tax that Carlyle Holdings I GP Inc. and any other corporate taxpayers would otherwise be required to pay in the future, although the IRS may challenge all or part of that tax basis increase, and a court could sustain such a challenge.
We have entered into a tax receivable agreement with the limited partners of the Carlyle Holdings partnerships that will provide for the payment by the corporate taxpayers to such parties of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the corporate taxpayers realize as a result of these increases in tax basis and of certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. This payment obligation is an obligation of the corporate taxpayers and not of Carlyle Holdings. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of our common units at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of our income, we expect that as a result of the size of the transfers and increases in the tax basis of the tangible and intangible assets of Carlyle Holdings, the payments that we may make under the tax receivable agreement will be substantial.
See Note 2 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information related to our tax receivable agreement.
Contingent Obligations (Giveback)
Carried interest is ultimately realized when: (1) an underlying investment is profitably disposed of, (2) certain costs borne by the limited partner investors have been reimbursed, (3) the fund's cumulative returns are in excess of the preferred return,
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and (4) we have decided to collect carry rather than return additional capital to limited partner investors. Realized carried interest may be required to be returned by us 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 allocations are reversed.
See Note 7 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information related to our contingent obligations (giveback).
Other Contingencies
In the ordinary course of business, we are a party to litigation, investigations, inquiries, employment-related matters, disputes and other potential claims. We discuss certain of these matters in Note 7 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Carlyle Common Units and Carlyle Holdings Partnership Units
A rollforward of the outstanding Carlyle Group L.P. common units and Carlyle Holdings partnership units from December 31, 2017 through September 30, 2018 is as follows:
Units as of December 31, 2017 | Units Issued - DRUs | Units Forfeited | Units Exchanged | Units Repurchased / Retired | Units as of September 30, 2018 | ||||||||||||
The Carlyle Group L.P. common units | 100,100,650 | 8,213,111 | — | 3,305,299 | (3,870,965 | ) | 107,748,095 | ||||||||||
Carlyle Holdings partnership units | 234,813,858 | — | — | (3,305,299 | ) | — | 231,508,559 | ||||||||||
Total | 334,914,508 | 8,213,111 | — | — | (3,870,965 | ) | 339,256,654 | ||||||||||
The Carlyle Group L.P. common units issued during the period from December 31, 2017 through September 30, 2018 relate to the vesting of the Partnership’s deferred restricted common units during the nine months ended September 30, 2018.
The Carlyle Holdings partnership units exchanged relate to the exchange of Carlyle Holdings partnership units held by NGP and certain limited partners for common units on a one-for-one basis. Senior Carlyle professionals can exchange their Carlyle Holdings partnership units for common units on a quarterly basis, subject to the terms of the Exchange Agreement and the Carlyle Holdings partnership agreements. We intend to facilitate an orderly exchange process to seek to minimize the impact on the trading price of our common units. During the three and nine months ended September 30, 2018, senior Carlyle professionals exchanged approximately 1.6 million and 3.3 million of their Carlyle Holdings partnership units for common units.
The total units as of September 30, 2018 as shown above exclude approximately 0.5 million common units in connection with the vesting of deferred restricted common units subsequent to September 30, 2018 that will participate in the common unitholder distribution that will be paid in November 2018.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risk is related to our role as general partner or investment advisor to our investment funds and the sensitivities to movements in the fair value of their investments, including the effect on management fees, incentive fees and investment income, including performance allocations. Although our investment funds share many common themes, each of our alternative asset management asset classes runs its own investment and risk management processes, subject to our overall risk tolerance and philosophy. The investment process of our investment funds involves a comprehensive due diligence approach, including review of reputation of shareholders and management, company size and sensitivity of cash flow generation, business sector and competitive risks, portfolio fit, exit risks and other key factors highlighted by the deal team. Key investment decisions are subject to approval by both the fund-level managing directors, as well as the investment committee, which is generally comprised of one or more of the three founding partners, one “sector” head, one or more operating executives and senior investment professionals associated with that particular fund. Once an investment in a portfolio company has been made, our fund teams closely monitor the performance of the portfolio company, generally through frequent contact with management and the receipt of financial and management reports.
There was no material change in our market risks during the three months ended September 30, 2018. For additional information, refer to our Annual Report on Form 10-K for the year ended December 31, 2017.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our co-principal executive officers and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
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Our management, with the participation of our co-principal executive officers and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation and subject to the foregoing, our co-principal executive officers and principal financial officer concluded that, as of the end of the period covered by this report, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2018 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information required with respect to this item can be found under “Legal Matters” in Note 7, Commitments and Contingencies, of the notes to the Partnership’s unaudited condensed consolidated financial statements contained in this quarterly report, and such information is incorporated by reference into this Item 1.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, see the information under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, which is accessible on the SEC’s website at sec.gov.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table sets forth repurchases of our common units during the three months ended September 30, 2018 for the periods indicated:
Period | (a) Total number of units purchased | (b) Average price paid per unit | (c) Total number of units purchased as part of publicly announced plans or programs | (d) Maximum number (or approximate dollar value) of units that may yet be purchased under the plans or programs | ||||||
(Dollars in millions, except unit and per unit data) | ||||||||||
July 1, 2018 to July 30, 2018 (1)(2) | 299,865 | $ | 21.84 | 299,865 | $ | 83.3 | ||||
August 1, 2018 to August 31, 2018 (1)(2) | 1,230,177 | 24.32 | 1,230,177 | $ | 53.4 | |||||
September 1, 2018 to September 30, 2018 (1) | — | — | — | $ | 53.4 | |||||
Total | 1,530,042 | 1,530,042 | ||||||||
(1) In February 2016, the Board of Directors of the general partner of the Partnership authorized the repurchase of up to $200 million of common units and/or Carlyle Holdings units. Under this unit repurchase program, units may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. We expect that the majority of repurchases under this program will be done via open market transactions. No units will be repurchased from our executive officers under this program. The timing and actual number of common units and/or Carlyle Holdings units repurchased will depend on a variety of factors, including legal requirements, price, and economic and market conditions. This unit repurchase program may be suspended or discontinued at any time and does not have a specified expiration date.
(2) For the period from July 1, 2018 to July 31, 2018 and from August 1, 2018 to August 31, 2018, all of the units purchased were common units purchased in open market and brokered transactions. All units purchased during these periods were subsequently retired.
Item 3. Defaults Upon Senior Securities
Not applicable.
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Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
None.
Item 6. Exhibits
The following is a list of all exhibits filed or furnished as part of this report:
Exhibit No. | Description |
3.1 | |
3.2 | |
4.1 | |
4.2 | |
4.3 | |
31.1 * | |
31.2 * | |
31.3 * | |
32.1 * | |
32.2 * | |
32.3 * | |
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Filed herewith. |
+ | Management contract or compensatory plan or arrangement in which directors and/or executive officers are eligible to participate. |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Carlyle Group L.P. | ||||
By: | Carlyle Group Management L.L.C., its general partner | |||
Date: October 31, 2018 | By: | /s/ Curtis L. Buser | ||
Name: | Curtis L. Buser | |||
Title: | Chief Financial Officer | |||
(Principal Financial Officer and Authorized Officer) | ||||
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Exhibit 31.1
I, Kewsong Lee, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 of The Carlyle Group L.P.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 31, 2018 |
/s/ Kewsong Lee |
Kewsong Lee |
Co-Chief Executive Officer |
Carlyle Group Management L.L.C. |
(Co-Principal Executive Officer) |
Exhibit 31.2
I, Glenn A. Youngkin, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 of The Carlyle Group L.P.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 31, 2018 |
/s/ Glenn A. Youngkin |
Glenn A. Youngkin |
Co-Chief Executive Officer |
Carlyle Group Management L.L.C. |
(Co-Principal Executive Officer) |
Exhibit 31.3
I, Curtis L. Buser, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 of The Carlyle Group L.P.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 31, 2018 |
/s/ Curtis L. Buser |
Curtis L. Buser |
Chief Financial Officer |
Carlyle Group Management L.L.C. |
(Principal Financial Officer) |
Exhibit 32.1
Certification of the Co-Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of The Carlyle Group L.P. (the “Company”) on Form 10-Q for the quarter ended September 30, 2018 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kewsong Lee, Co-Chief Executive Officer of Carlyle Group Management L.L.C., the general partner of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Kewsong Lee |
Kewsong Lee |
Co-Chief Executive Officer |
Carlyle Group Management L.L.C. |
Date: October 31, 2018
* | The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. |
Exhibit 32.2
Certification of the Co-Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of The Carlyle Group L.P. (the “Company”) on Form 10-Q for the quarter ended September 30, 2018 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Glenn A. Youngkin, Co-Chief Executive Officer of Carlyle Group Management L.L.C., the general partner of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Glenn A. Youngkin |
Glenn A. Youngkin |
Co-Chief Executive Officer |
Carlyle Group Management L.L.C. |
Date: October 31, 2018
* | The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. |
Exhibit 32.3
Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of The Carlyle Group L.P. (the “Company”) on Form 10-Q for the quarter ended September 30, 2018 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Curtis L. Buser, Chief Financial Officer of Carlyle Group Management L.L.C., the general partner of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Curtis L. Buser |
Curtis L. Buser |
Chief Financial Officer |
Carlyle Group Management L.L.C. |
Date: October 31, 2018
* | The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. |