Form 10-Q
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

OR

 

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

Commission File Number: 001-35538

 

 

The Carlyle Group L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   45-2832612
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

1001 Pennsylvania Avenue, NW

Washington, D.C.

  20004-2505
(Address of principal executive offices)   (Zip Code)

(202) 729-5626

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

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

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

 

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

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

The number of the Registrant’s common units representing limited partner interests outstanding as of May 21, 2012 was 43,221,452.

 

 

 


Table of Contents

TABLE OF CONTENTS

Page

 

PART I – FINANCIAL INFORMATION

  

Item 1.

  Financial Statements      3   
  Unaudited Condensed Combined and Consolidated Financial Statements – March 31, 2012 and 2011:   
  Condensed Combined and Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011      3   
  Condensed Combined and Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011      4   
  Condensed Combined and Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011      5   
  Condensed Combined and Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011      6   
  Notes to the Condensed Combined and Consolidated Financial Statements      7   

Item 1A.

  Unaudited Pro Forma Financial Information      61   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      79   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      143   

Item 4.

  Controls and Procedures      143   

PART II – OTHER INFORMATION

  

Item 1.

  Legal Proceedings      144   

Item 1A.

  Risk Factors      144   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      144   

Item 3.

  Defaults Upon Senior Securities      144   

Item 4.

  Mine Safety Disclosures      144   

Item 5.

  Other Information      145   

Item 6.

  Exhibits      145   

SIGNATURE

     146   

INDEX TO EXHIBITS

     147   

 

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Forward-Looking Statements

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

 

 

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Condensed Combined and Consolidated Balance Sheets

(Dollars in millions)

 

      March 31,
2012
    December 31,
2011
 
     (Unaudited)        

Assets

    

Cash and cash equivalents

   $ 523.2      $ 509.6   

Cash and cash equivalents held at Consolidated Funds

     1,435.8        566.6   

Restricted cash

     24.9        24.6   

Restricted cash and securities of Consolidated Funds

     95.3        89.2   

Accrued performance fees

     2,489.6        2,189.1   

Investments

     411.5        454.9   

Investments of Consolidated Funds

     22,929.9        19,507.3   

Due from affiliates and other receivables, net

     220.5        287.0   

Due from affiliates and other receivables of Consolidated Funds, net

     288.5        287.6   

Fixed assets, net

     52.4        52.7   

Deposits and other

     75.4        70.2   

Intangible assets, net

     619.0        594.9   

Deferred tax assets

     17.0        18.0   
  

 

 

   

 

 

 

Total assets

   $ 29,183.0      $ 24,651.7   
  

 

 

   

 

 

 

Liabilities and equity

    

Loans payable

   $ 1,108.1      $ 860.9   

Subordinated loan payable to affiliate

     —          262.5   

Loans payable of Consolidated Funds

     12,454.6        9,689.9   

Accounts payable, accrued expenses and other liabilities

     180.6        203.4   

Accrued compensation and benefits

     480.1        577.9   

Due to Carlyle partners

     1,169.0        1,015.9   

Due to affiliates

     84.6        108.5   

Deferred revenue

     202.2        89.2   

Deferred tax liabilities

     54.9        48.3   

Other liabilities of Consolidated Funds

     1,279.9        568.1   

Accrued giveback obligations

     89.2        136.5   
  

 

 

   

 

 

 

Total liabilities

     17,103.2        13,561.1   

Commitments and contingencies

    

Redeemable non-controlling interests in consolidated entities

     2,231.5        1,923.4   

Members’ equity

     1,007.7        873.1   

Accumulated other comprehensive loss

     (69.1     (55.8
  

 

 

   

 

 

 

Total members’ equity

     938.6        817.3   

Equity appropriated for Consolidated Funds

     1,339.0        853.7   

Non-controlling interests in consolidated entities

     7,570.7        7,496.2   
  

 

 

   

 

 

 

Total equity

     9,848.3        9,167.2   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 29,183.0      $ 24,651.7   
  

 

 

   

 

 

 

See accompanying notes.

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Condensed Combined and Consolidated Statements of Operations

(Unaudited)

(Dollars in millions)

 

     Three Months Ended
March 31,
 
      2012     2011  

Revenues

    

Fund management fees

   $ 234.4      $ 228.0   

Performance fees

    

Realized

     280.6        402.4   

Unrealized

     360.2        472.3   
  

 

 

   

 

 

 

Total performance fees

     640.8        874.7   

Investment income (loss)

    

Realized

     (0.8     33.1   

Unrealized

     22.3        8.3   
  

 

 

   

 

 

 

Total investment income (loss)

     21.5        41.4   

Interest and other income

     2.7        5.9   

Interest and other income of Consolidated Funds

     211.5        167.3   
  

 

 

   

 

 

 

Total revenues

     1,110.9        1,317.3   

Expenses

    

Compensation and benefits

    

Base compensation

     106.1        86.7   

Performance fee related

    

Realized

     34.3        53.0   

Unrealized

     54.8        35.5   
  

 

 

   

 

 

 

Total compensation and benefits

     195.2        175.2   

General, administrative and other expenses

     91.2        66.5   

Interest

     10.4        17.0   

Interest and other expenses of Consolidated Funds

     184.5        86.6   

Other non-operating (income) expenses

     (4.1     15.4   
  

 

 

   

 

 

 

Total expenses

     477.2        360.7   

Other income (loss)

    

Net investment gains (losses) of Consolidated Funds

     872.1        (184.3
  

 

 

   

 

 

 

Income before provision for income taxes

     1,505.8        772.3   

Provision for income taxes

     11.7        6.1   
  

 

 

   

 

 

 

Net income

     1,494.1        766.2   

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

     864.9        (130.0
  

 

 

   

 

 

 

Net income attributable to Carlyle Group

   $ 629.2      $ 896.2   
  

 

 

   

 

 

 

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

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Condensed Combined and Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in millions)

 

     Three Months Ended
March 31,
 
      2012     2011  

Net income

   $ 1,494.1      $ 766.2   

Other comprehensive income (loss)

    

Foreign currency translation adjustments

     (258.6     31.5   

Cash flow hedges

    

Unrealized losses for the period

     (1.6     —     

Less: reclassification adjustment for losses included in net income

     1.9        1.5   
  

 

 

   

 

 

 

Total cash flow hedges

     0.3        1.5   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (258.3     33.0   
  

 

 

   

 

 

 

Comprehensive income

     1,235.8        799.2   

Less: Comprehensive (income) loss attributable to equity appropriated for Consolidated Funds

     (115.6     162.4   

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

     (525.1     (17.9

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

     20.8        (35.7
  

 

 

   

 

 

 

Comprehensive income attributable to Carlyle Group

   $ 615.9      $ 908.0   
  

 

 

   

 

 

 

See accompanying notes.

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Condensed Combined and Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in millions)

 

     Three Months Ended March 31,  
     2012     2011  
  

 

 

   

 

 

 

Cash flows from operating activities

    

Net income

   $ 1,494.1      $ 766.2   

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

    

Depreciation and amortization

     24.2        18.2   

Amortization of deferred financing fees

     0.4        0.1   

Non-cash performance fees

     (478.1     (517.8

Other non-cash amounts

     (4.1     15.4   

Consolidated Funds related:

    

Realized/unrealized gain on investments of Consolidated Funds

     (1,019.4     (339.8

Realized/unrealized loss from loans payable of Consolidated Funds

     158.6        522.2   

Purchases of investments by Consolidated Funds

     (1,586.4     (1,703.3

Proceeds from sale and settlements of investments by Consolidated Funds

     2,000.5        1,976.7   

Non-cash interest income, net

     (16.5     (31.2

Change in cash and cash equivalents held at Consolidated Funds

     (226.1     (193.0

Change in other receivables held at Consolidated Funds

     25.6        68.7   

Change in other liabilities held at Consolidated Funds

     43.1        86.0   

Investment income

     (19.6     (37.5

Purchases of investments

     (15.0     (1.7

Proceeds from the sale of investments

     145.7        241.6   

Change in deferred taxes

     7.6        4.3   

Change in due from affiliates and other receivables

     (11.9     (3.2

Change in deposits and other

     (8.7     (8.3

Change in accounts payable, accrued expenses and other liabilities

     (22.4     (49.1

Change in accrued compensation and benefits

     (95.8     (108.3

Change in due to affiliates

     (27.5     3.8   

Change in deferred revenue

     111.6        62.7   
  

 

 

   

 

 

 

Net cash provided by operating activities

     479.9        772.7   

Cash flows from investing activities

    

Change in restricted cash

     —          (7.5

Purchases of fixed assets, net

     (5.1     (7.1

Purchases of intangible assets

     (43.1     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (48.2     (14.6

Cash flows from financing activities

    

Borrowings under credit facility

     313.1        —     

Repayments under credit facility

     (55.9     —     

Payments on loans payable

     (270.0     —     

Net payments on loans payable of Consolidated Funds

     (182.9     (417.8

Contributions from members

     1.1        4.5   

Distributions to members

     (199.1     (540.2

Contributions from non-controlling interest holders

     631.4        205.0   

Distributions to non-controlling interest holders

     (800.8     (80.9

Change in due to/from affiliates financing activities

     31.2        30.8   

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

     107.1        —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (424.8     (798.6

Effect of foreign exchange rate changes

     6.7        20.4   

Increase (decrease) in cash and cash equivalents

     13.6        (20.1

Cash and cash equivalents, beginning of period

     509.6        616.9   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 523.2      $ 596.8   
  

 

 

   

 

 

 

Supplemental non-cash disclosures

    

Net assets related to consolidation of the CLOs

   $ 357.3      $ —     
  

 

 

   

 

 

 

Non-cash distributions to members

   $ 296.6      $ 206.1   
  

 

 

   

 

 

 

Non-cash contributions from non-controlling interest holders

   $ 73.0      $ 68.2   
  

 

 

   

 

 

 

Non-cash distributions to non-controlling interest holders

   $ 12.9      $ 28.3   
  

 

 

   

 

 

 

See accompanying notes.

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

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

Carlyle provides investment management services to, and has transactions with, various private equity funds, real estate funds, collateralized loan obligations (“CLOs”), hedge funds and other investment products sponsored by the Company for the investment of client assets in the normal course of business. Carlyle serves as the general partner, investment manager or collateral manager, making day-to-day investment decisions concerning the assets of these products. Carlyle operates its business through four reportable segments: Corporate Private Equity, Global Market Strategies, Real Assets, and Fund of Funds Solutions (see Note 13).

Basis of Presentation

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

Net income is determined in accordance with U.S. GAAP for partnerships and is not comparable to net income of a corporation. All distributions and compensation for services rendered by Carlyle’s individual partners have been reflected as distributions from equity rather than compensation expense in the accompanying condensed combined and consolidated financial statements. Subsequent to its reorganization and initial public offering in May 2012, all compensation attributable to Carlyle’s partners will be recognized as an expense rather than as distributions from equity.

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

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Reorganization

Pursuant to a reorganization agreement effective on May 2, 2012, Carlyle’s individual partners, CalPERS, and Mubadala contributed all of their interests in Carlyle Group to Carlyle Holdings I L.P., Carlyle Holdings II L.P. and Carlyle Holdings III L.P. (collectively, “Carlyle Holdings”) in exchange for an aggregate of 274,000,000 Carlyle Holdings partnership units. Carlyle Holdings did not conduct any activity prior to the contribution of Carlyle Group on May 2, 2012.

The Carlyle Group L.P. (the “Partnership”) is a Delaware limited partnership formed on July 18, 2011. Pursuant to a reorganization into a holding partnership structure, the Partnership became a holding partnership and its sole assets are equity interests through wholly-owned subsidiary entities representing 30,500,000 Carlyle Holdings partnership units that the Partnership acquired using proceeds from the Partnership’s initial public offering on May 8, 2012. Beginning on May 8, 2012, through wholly-owned subsidiary entities, the Partnership is the sole general partner of Carlyle Holdings and operates and controls all of the business and affairs of Carlyle Holdings and, through Carlyle Holdings and its subsidiaries, continues to conduct the business now conducted by these subsidiaries. Carlyle Group Management L.L.C. is the general partner of the Partnership.

The accompanying condensed combined and consolidated financial statements of Carlyle Group reflect the predecessor financial statements of the Partnership, and do not reflect the effect of the reorganization, the initial public offering and the related transactions occurring in May 2012.

Initial Public Offering

On May 8, 2012, the Partnership completed an initial public offering of 30,500,000 common units priced at $22.00 per unit (the “Offering”). The common units are listed on the NASDAQ Global Select Market under the symbol “CG”. The net proceeds to the Partnership from the Offering were approximately $619.9 million, after deducting underwriting discounts and offering expenses. As a result of this transaction, the Partnership owned approximately 10% of Carlyle Holdings, including the general partner interest in Carlyle Holdings. Carlyle’s individual partners, other individuals engaged in Carlyle’s business, Mubadala, and CalPERS collectively owned approximately 90% of Carlyle Holdings after the completion of the transactions described above. The underwriters’ option to purchase up to an additional 4,575,000 common units will expire on June 1, 2012.

After completion of the Offering, Carlyle Holdings repaid all outstanding indebtedness under Carlyle Group’s revolving credit facility of its senior secured credit facility, and approximately $40.0 million of outstanding indebtedness under a loan agreement Carlyle Group entered into in connection with the acquisition of Claren Road Asset Management, LLC, its subsidiaries, and Claren Road Capital, LLC (collectively, “Claren Road”).

2. Summary of Significant Accounting Policies

Principles of Consolidation

In addition to the four affiliated entities described in Note 1, the accompanying condensed combined and consolidated financial statements consolidate: 1) Carlyle-affiliated funds and co-investment entities, for which the Company is the sole general partner and the presumption of control by the general partner has not been overcome and 2) variable interest entities (VIEs), including certain CLOs, for which the Company is deemed to be the primary beneficiary; consolidation of these entities is a requirement under U.S. GAAP. All significant inter-entity transactions and balances have been eliminated.

For entities that are determined to be VIEs, the Company consolidates those entities where it is deemed to be the primary beneficiary. An entity is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The revised consolidation rules require an

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

analysis to (a) determine whether an entity in which the Company holds a variable interest is a VIE and (b) whether the Company’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related fees), would give it a controlling financial interest. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly or indirectly by the Company. The consolidation analysis is generally performed qualitatively. This analysis, which requires judgment, is performed at each reporting date.

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

As of March 31, 2012, assets and liabilities of consolidated VIEs reflected in the condensed combined and consolidated balance sheets were $22.3 billion and $13.6 billion, respectively. Except to the extent of the assets of the VIEs which are consolidated, the holders of the consolidated VIEs’ liabilities do not have recourse to the Company. The assets and liabilities of the consolidated VIEs are comprised primarily of investments and loans payable, respectively.

The loans payable issued by the CLOs are backed by diversified collateral asset portfolios consisting primarily of loans or structured debt. In exchange for managing the collateral for the CLOs, the Company earns investment management fees, including in some cases subordinated management fees and contingent incentive fees. In cases where the Company consolidates the CLOs, those management fees have been eliminated as intercompany transactions. As of March 31, 2012, the Company held $34.7 million of investments in these CLOs which represents its maximum risk of loss. The Company’s investments in these CLOs are generally subordinated to other interests in the entities and entitle the Company 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 Company for any losses sustained in the CLO structure.

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

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Investments in Unconsolidated Variable Interest Entities

The Company holds variable interests in certain VIEs which are not consolidated because the Company is not the primary beneficiary. The Company’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 Company relating to these unconsolidated entities. The assets recognized in the Company’s condensed combined and consolidated balance sheets related to the Company’s interests in these non-consolidated VIEs and the Company’s maximum exposure to loss relating to non-consolidated VIEs were as follows:

 

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

Investments

   $ 2.1          $ 2.3   

Receivables

     14.6            100.0   
  

 

 

    

 

  

 

 

 

Maximum Exposure to Loss

   $ 16.7          $ 102.3   
  

 

 

    

 

  

 

 

 

Basis of Accounting

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

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

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 Company’s accounting policies. Assumptions and estimates regarding the valuation of investments and their resulting impact on performance fees involve a higher degree of judgment and complexity and these assumptions and estimates may be significant to the condensed combined and consolidated financial statements and the resulting impact on performance fees. Actual results could differ from these estimates and such differences could be material.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Business Combinations

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

Revenue Recognition

Fund Management Fees

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

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

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

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

The Company also provides transaction advisory and portfolio advisory services to the Portfolio Companies, and where covered by separate contractual agreements, recognizes fees for these services when the service has been provided and collection is reasonably assured. Fund management fees includes transaction and portfolio advisory fees of $10.7 million and $31.1 million for the three months ended March 31, 2012 and 2011, respectively, net of any offsets as defined in the respective partnership agreements.

Performance Fees

Performance fees consist principally of the allocation of profits from certain of the funds to which the Company is entitled (commonly known as carried interest). The Company is generally entitled to a 20% allocation

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

(or approximately 2% to 10% in the case of most of the Company’s fund of funds vehicles) of the net realized income or gain as a carried interest after returning the invested capital, the allocation of preferred returns and return of certain fund costs (subject to catch-up provisions) from its corporate private equity and real assets funds. Carried interest is recognized upon appreciation of the funds’ investment values above certain return hurdles set forth in each respective partnership agreement. The Company recognizes revenues attributable to performance fees based upon the amount that would be due pursuant to the fund partnership agreement at each period end as if the funds were terminated at that date. Accordingly, the amount recognized as unrealized performance fees reflects the Company’s share of the gains and losses of the associated funds’ underlying investments measured at their then-current fair values.

Carried interest is ultimately realized when: (i) an underlying investment is profitably disposed of, (ii) the fund’s cumulative returns are in excess of the preferred return and (iii) the Company has decided to collect carry rather than return additional capital to limited partner investors. Realized carried interests may be required to be returned by the Company in future periods if the funds’ investment values decline below certain levels. When the fair value of a fund’s investments falls below certain return hurdles, previously recognized performance fees are reversed. In all cases, each fund is considered separately in this regard, and for a given fund, performance fees can never be negative over the life of a fund. If upon a hypothetical liquidation of a fund’s investments at their then current fair values, previously recognized and distributed carried interest would be required to be returned, a liability is established for the potential giveback obligation. As of March 31, 2012 and December 31, 2011, the Company has recognized $89.2 million and $136.5 million, respectively, for giveback obligations.

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

Investment Income (Loss)

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

Interest Income

Interest income is recognized when earned. Interest income earned by the Company was $1.4 million and $3.8 million for the three months ended March 31, 2012 and 2011, respectively, and is included in interest and other income in the accompanying condensed combined and consolidated statements of operations. Interest income of the Consolidated Funds was $184.0 million and $137.8 million for the three months ended March 31, 2012 and 2011, respectively, and is included in interest and other income of Consolidated Funds in the accompanying condensed combined and consolidated statements of operations.

Compensation and Benefits — Base Compensation

Compensation includes salaries, bonuses (discretionary awards and guaranteed amounts) and performance payment arrangements. Bonuses are accrued over the service period to which they relate. All payments made to Carlyle partners are accounted for as distributions from equity rather than as employee compensation.

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Compensation and Benefits — Performance Fee Related

A portion of the performance fees earned is due to employees and advisors of the Company. These amounts are accounted for as compensation expense in conjunction with the recognition of the related performance fee revenue and, until paid, are recognized as a component of the accrued compensation and benefits liability. Accordingly, upon any reversal of performance fee revenue, the related compensation expense is also reversed. The Company recorded $89.1 million and $88.5 million of expense related to these arrangements for the three months ended March 31, 2012 and 2011, respectively. The Company had a liability of $369.4 million and $293.2 million in accrued compensation related to the portion of accrued performance fees due to employees and advisors as of March 31, 2012 and December 31, 2011, respectively.

Income Taxes

No provision has been made for U.S. federal income taxes in the accompanying condensed combined and consolidated financial statements since the Company is a group of pass-through entities for U.S. income tax purposes and its profits and losses are allocated to the partners who are individually responsible for reporting such amounts. Based on applicable foreign, state and local tax laws, the Company records a provision for income taxes for certain entities. The Company’s AlpInvest subsidiary is subject to entity level income taxes in the Netherlands. Tax positions taken by the Company are subject to periodic audit by U.S. federal, state, local and foreign taxing authorities.

The Company uses the liability method of accounting for deferred income taxes pursuant to U.S. GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the statutory tax rates expected to be applied in the periods in which those temporary differences are settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. A valuation allowance is recorded on the Company’s net deferred tax assets when it is more likely than not that such assets will not be realized.

The Company 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 Company determines that uncertainties in tax positions exist, a liability is established. The Company recognizes accrued interest and penalties related to uncertain tax positions in the provision for income taxes within the condensed combined and consolidated statements of operations.

Non-controlling Interests in Consolidated Entities

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

Investments

Investments include (i) the Company’s ownership interests (typically general partner interests) in the Funds, (ii) the investments held by the Consolidated Funds (all of which are presented at fair value in the Company’s condensed combined and consolidated financial statements) and (iii) certain credit-oriented investments. The valuation procedures utilized for investments of the Funds vary depending on the nature of the investment. The

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

fair value of investments in publicly-traded securities is based on the closing price of the security with adjustments to reflect appropriate discounts if the securities are subject to restrictions. Upon the sale of a security, the realized net gain or loss is computed on a weighted average cost basis, with the exception of the CLOs, which compute the realized net gain or loss on a first in, first out basis. Securities transactions are recorded on a trade date basis.

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

When valuing private securities or assets without readily determinable market prices, the Company 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 Company will realize the values presented herein.

Equity-Method Investments

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

Cash and Cash Equivalents

Cash and cash equivalents include cash held at banks and cash held for distributions, including temporary investments with original maturities of less than three months when purchased. Included in cash and cash equivalents is cash withheld from carried interest distributions for potential giveback obligations of $68.9 million and $76.6 million at March 31, 2012 and December 31, 2011, respectively.

Cash and Cash Equivalents Held at Consolidated Funds

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

Restricted Cash

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

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Restricted Cash and Securities of Consolidated Funds

Certain CLOs receive cash from various counterparties to satisfy collateral requirements on derivative transactions. Cash received to satisfy these collateral requirements of $40.2 million and $31.7 million is included in restricted cash and securities of Consolidated Funds at March 31, 2012 and December 31, 2011, respectively.

Certain CLOs hold U.S. Treasury notes, Obligation Assimilable du Tresor Securities (“OATS”) Strips, French government securities, guaranteed investment contracts and other highly liquid asset-backed securities as collateral for specific classes of loans payable in the CLOs. As of March 31, 2012 and December 31, 2011, securities of $55.1 million and $57.5 million, respectively, are included in restricted cash and securities of Consolidated Funds.

Derivative Instruments

Derivative instruments are recognized at fair value in the condensed combined and consolidated balance sheets with changes in fair value recognized in the condensed combined and consolidated statements of operations for all derivatives not designated as hedging instruments. For all derivatives where hedge accounting is applied, effectiveness testing and other procedures to assess the ongoing validity of the hedges are performed at least quarterly. For instruments designated as cash flow hedges, the Company records changes in the estimated fair value of the derivative, to the extent that the hedging relationship is effective, in other comprehensive income (loss). If the hedging relationship for a derivative is determined to be ineffective, due to changes in the hedging instrument or the hedged items, the fair value of the portion of the hedging relationship determined to be ineffective will be recognized as a gain or loss in the condensed combined and consolidated statements of operations.

Fixed Assets

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

Intangible Assets and Goodwill

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

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

Due to Carlyle Partners

The Company recognizes a distribution from capital and distribution payable to the individual Carlyle partners when services are rendered and carried interest allocations are earned. Also included are certain amounts due to partners related to business acquisitions in 2011 and 2010. Any unpaid distributions, which reflect the Company’s obligation to those partners, are presented as due to Carlyle partners in the accompanying condensed combined and consolidated balance sheets.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Deferred Revenue

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

Comprehensive Income

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

Foreign Currency Translation

Non-U.S. dollar denominated assets and liabilities are translated at period-end rates of exchange, and the condensed combined and consolidated statements of operations are translated at rates of exchange in effect throughout the period. Foreign currency losses resulting from transactions outside of the functional currency of an entity of $3.7 million and $1.1 million for the three months ended March 31, 2012 and 2011, respectively, are included in general, administrative and other expenses in the condensed combined and consolidated statements of operations.

Recent Accounting Pronouncements

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

In June 2011, the FASB amended its guidance on the presentation of comprehensive income. This guidance eliminates the option to report other comprehensive income and its components in the consolidated statement of changes in equity. An entity may elect to present items of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements. Each component of net income and of other comprehensive income needs to be displayed under either alternative. In December 2011, the FASB issued a final standard to defer the new requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The Company adopted this guidance as of January 1, 2012, and has included a separate statement of comprehensive income for the periods ended March 31, 2012 and 2011 in the accompanying condensed combined and consolidated financial statements.

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

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

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

3. Acquisitions and Acquired Intangible Assets

Acquisition of CLO Management Contracts

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

Acquisition of AlpInvest

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

As of March 31, 2012 and December 31, 2011, the fair value of contingent consideration payable to non-Carlyle partners was $7.0 million and $7.1 million, respectively, and has been included in accounts payable, accrued expenses and other liabilities in the accompanying condensed combined and consolidated balance sheets. Changes in the fair value of the contingent consideration payable to non-Carlyle partners of $0.6 million for the three months ended March 31, 2012 are recorded in other non-operating expenses in the condensed combined and consolidated statements of operations. Refer to Note 4 for additional disclosures related to the fair value of these instruments as of March 31, 2012 and December 31, 2011.

Acquisition of ESG

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

The fair value of the contingent consideration included in this acquisition was based on probability-weighted discounted cash flow models. These fair value measurements are based on significant inputs not observable in the market and thus represent Level III measurements as defined in the accounting guidance for fair value measurement. As of March 31, 2012 and December 31, 2011, the fair value of the contingent and other consideration payable to the ESG sellers who are now partners of the Company was $69.5 million and $69.7 million, respectively, and has been included in due to Carlyle partners in the accompanying condensed combined and consolidated balance sheets. Changes in the fair value of these amounts of $(0.2) million for the three months ended March 31, 2012 are recorded in members’ equity in the condensed combined and consolidated balance sheets. As of March 31, 2012 and December 31, 2011, the fair value of contingent consideration payable to non-Carlyle partners was $5.0 million and has been included in accounts payable, accrued expenses and other liabilities in the accompanying condensed combined and consolidated balance sheets. Changes in the fair value of the contingent

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

consideration payable to non-Carlyle partners are recorded in other non-operating expenses in the condensed combined and consolidated statements of operations. Refer to Note 4 for additional disclosures related to the fair value of these instruments as of March 31, 2012 and December 31, 2011.

Acquisition of Claren Road

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

The fair value of the contingent consideration included in this acquisition was based on probability-weighted discounted cash flow models. These fair value measurements are based on significant inputs not observable in the market and thus represent Level III measurements as defined in the accounting guidance for fair value measurement. At March 31, 2012 and December 31, 2011, the fair value of the contingently issuable equity interests of $36.1 million and $36.9 million, respectively, and the fair value of the contingent and other consideration payable to the Claren Road sellers who are now partners of the Company of $96.3 million and $91.5 million, respectively, have been recorded as due to Carlyle partners in the accompanying condensed combined and consolidated financial statements. Changes in the fair value of these amounts of $4.0 million for the three months ended March 31, 2012 are recorded in members’ equity in the condensed combined and consolidated balance sheets. At March 31, 2012 and December 31, 2011, the fair value of contingent consideration payable to non-Carlyle partners of $20.1 million and $21.5 million, respectively, is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed combined and consolidated balance sheets. Changes in the fair value of the contingent consideration payable to non-Carlyle partners of $(1.4) million and $0.7 million for the three months ended March 31, 2012 and 2011, respectively, are recorded in other non-operating expenses in the condensed combined and consolidated statements of operations. Refer to Note 4 for additional disclosures related to the fair value of these instruments as of March 31, 2012 and December 31, 2011.

Intangible Assets

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

 

      March 31,
2012
    December 31,
2011
 
     (Dollars in millions)  

Acquired contractual rights

   $ 658.4      $ 615.8   

Acquired trademarks

     6.8        6.8   

Accumulated amortization

     (83.3     (64.5
  

 

 

   

 

 

 

Finite-lived intangible assets, net

     581.9        558.1   

Goodwill

     37.1        36.8   
  

 

 

   

 

 

 

Intangible assets, net

   $ 619.0      $ 594.9   
  

 

 

   

 

 

 

 

18


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the changes in the carrying amount of goodwill, by segment as of March 31, 2012. There was no goodwill associated with the Company’s Corporate Private Equity and Real Assets segments.

 

      Global Market
Strategies
     Fund of Funds
Solutions
     Total  
    

(Dollars in millions)

 

Balance as of December 31, 2011

   $ 28.0       $ 8.8       $ 36.8   

Foreign currency translation

     —           0.3         0.3   
  

 

 

    

 

 

    

 

 

 

Balance as of March 31, 2012

   $ 28.0       $ 9.1       $ 37.1   
  

 

 

    

 

 

    

 

 

 

Intangible asset amortization expense was $18.7 million and $12.3 million for the three months ended March 31, 2012 and 2011, respectively, and is included in general, administrative, and other expenses in the condensed combined and consolidated statements of operations.

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

 

2012

   $ 77.9   

2013

     79.0   

2014

     78.6   

2015

     76.2   

2016

     69.9   

Thereafter

     216.9   
  

 

 

 
   $ 598.5   
  

 

 

 

4. Fair Value Measurement

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

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

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

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

 

19


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

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

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. The Company’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.

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of March 31, 2012:

 

(Dollars in millions)

   Level I      Level II      Level III      Total  

Assets

           

Investments of Consolidated Funds:

           

Equity securities

   $ 363.5       $ 689.2       $ 1,861.6       $ 2,914.3   

Bonds

     —           —           876.7         876.7   

Loans

     —           —           12,750.3         12,750.3   

Partnership and LLC interests(1)

     —           —           4,149.1         4,149.1   

Hedge funds

     —           2,227.9         —           2,227.9   

Other

     —           —           11.6         11.6   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 363.5       $ 2,917.1       $ 19,649.3       $ 22,929.9   

Trading securities and other

     —           —           32.4         32.4   

Restricted securities of Consolidated Funds

     55.1         —           —           55.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 418.6       $ 2,917.1       $ 19,681.7       $ 23,017.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Loans payable of Consolidated Funds

   $ —         $ —         $ 12,454.6       $ 12,454.6   

Interest rate swaps

     —           7.0         —           7.0   

Derivative instruments of the CLOs

     —           —           4.8         4.8   

Contingent consideration(2)

     —           —           170.5         170.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 7.0       $ 12,629.9       $ 12,636.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

20


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

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

 

(Dollars in millions)

   Level I      Level II      Level III      Total  

Assets

           

Investments of Consolidated Funds:

           

Equity securities

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

Bonds

     —           —           557.0         557.0   

Loans

     —           —           10,152.6         10,152.6   

Partnership and LLC interests (1)

     —           —           4,198.6         4,198.6   

Hedge funds

     —           1,929.1         —           1,929.1   

Other

     —           —           20.8         20.8   
  

 

 

    

 

 

    

 

 

    

 

 

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

Trading securities and other

     —           —           30.6         30.6   

Restricted securities of Consolidated Funds

     57.5         —           —           57.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Loans payable of Consolidated Funds

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

Interest rate swaps

     —           7.3         —           7.3   

Subordinated loan payable to affiliate

     —           —           262.5         262.5   

Contingent consideration(2)

     —           —           169.2         169.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

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

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

 

21


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

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

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

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

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

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

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

 

22


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

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

 

     Financial Assets  
     Three Months Ended March 31, 2012  
     Investments of Consolidated Funds               
                       Partnership           Trading         
     Equity                 and LLC           securities and         
     securities     Bonds     Loans     interests     Other     other      Total  

Balance, beginning of period

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

Initial consolidation of the CLOs

     25.2        274.7        2,641.5        —          —          —           2,941.4   

Transfers out (1)

     (125.4     —          —          —          —          —           (125.4

Purchases

     21.9        60.4        964.0        161.0        —          —           1,207.3   

Sales

     (94.3     (60.4     (595.3     (89.6     (1.7     —           (841.3

Settlements

     —          —          (711.0     —          —          —           (711.0

Realized and unrealized gains (losses), net

     165.3        45.0        298.5        (120.9     (7.5     1.8         382.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 381.1      $ 32.9      $ 198.3      $ 174.6      $ (4.1   $ 1.8       $ 784.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Financial Assets  
     Three Months Ended March 31, 2011  
     Investments of Consolidated Funds              
                       Partnership           Trading        
     Equity                 and LLC           securities and        
     securities     Bonds     Loans     interests     Other     other     Total  

Balance, beginning of period

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

Transfers out (1)

     (4.4     —          —          —          —          —          (4.4

Purchases

     4.8        84.6        1,416.8        —          —          2.5        1,508.7   

Sales

     (10.3     (122.2     (550.7     (0.2     (3.0     (0.2     (686.6

Settlements

     —          —          (1,256.3     —          —          —          (1,256.3

Realized and unrealized gains (losses), net

     19.6        44.2        474.4        (1.4     1.8        3.0        541.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 15.8      $ 25.4      $ 218.4      $ (1.4   $ (0.3   $ 3.0      $ 260.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

    

Financial Liabilities

 
     Three Months Ended March 31, 2012  
           Derivative                     
     Loans Payable     Instruments of      Subordinated              
     of Consolidated     Consolidated      Loan Payable     Contingent        
     Funds     Funds      to Affiliate     Consideration     Total  

Balance, beginning of period

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

Initial consolidation of the CLOs

     2,705.9        4.6         —          —          2,710.5   

Paydowns

     (182.9     —           (260.0     (0.7     (443.6

Realized and unrealized (gains) losses, net

     241.7        0.2         (2.5     2.0        241.4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, end of period

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

   $ 153.2      $ 3.9       $ —        $ (0.8   $ 156.3   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

    

Financial Liabilities

 
     Three Months Ended March 31, 2011  
           Derivative                      
     Loans Payable     Instruments of     Subordinated                
     of Consolidated     Consolidated     Loan Payable      Contingent         
     Funds     Funds     to Affiliate      Consideration      Total  

Balance, beginning of period

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

Borrowings

     0.7        —          —           —           0.7   

Paydowns

     (417.4     (0.1     —           —           (417.5

Realized and unrealized losses, net

     732.8        1.1        14.7         1.7         750.3   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance, end of period

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

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

   $ 521.5      $ 0.9      $ 14.7       $ 0.7       $ 537.8   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

 

24


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

The following table summarizes quantitative information about the Company’s Level III inputs as of March 31, 2012:

 

     Fair Value               
     at               
     March 31,              Range

(Dollars in millions)

   2012      Valuation Technique(s)   Unobservable Input(s)   (Weighted Average)

Assets

         

Investments of Consolidated Funds:

         

Equity securities

   $ 1,757.8       Comparable Multiple   LTM EBITDA Multiple   4.8x -13.2x (8.8x)
     29.5       Comparable Multiple   Price Earnings Multiple   (10.1x)
     14.7       Comparable Multiple   Book Value Multiple   (1.0x)
     59.6       Consensus Pricing   Indicative Quotes ($ per Share)   ($15)

Bonds

     876.7       Consensus Pricing   Indicative Quotes (% of Par)   (88)

Loans

     12,386.9       Consensus Pricing   Indicative Quotes (% of Par)   (92)
     363.4       Discounted Cash Flow   Discount Rate   9% - 25%
(13%)

Partnership and LLC interests

     4,149.1       NAV of Underlying
Fund
(1)
  N/A   N/A

Other

     11.6       Counterparty Pricing   Indicative Quotes (% of
Notional Amount)
  (3)
  

 

 

        
   $ 19,649.3          

Trading securities and other

     32.4       Dealer Pricing   Indicative Quotes (% of Par)   75 - 86 (81)
  

 

 

        

Total

   $ 19,681.7          
  

 

 

        

Liabilities

         

Loans payable of Consolidated Funds

         

Senior secured notes

     11,605.7       Discounted Cash Flow
with Consensus
Pricing
  Discount Rates   (6%)
        Default Rates   (3%)
        Recovery Rates   (67%)
        Indicative Quotes (% of Par)   (86)

Subordinated notes and preferred shares

     843.6       Discounted Cash Flow
with Consensus
Pricing
  Discount Rates   (27%)
        Default Rates   (2%)
        Recovery Rates   (67%)
        Indicative Quotes (% of Par)   (48)

Combination notes

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

Derivative instruments of Consolidated Funds

     4.8       Counterparty Pricing   Indicative Quotes (% of
Notional Amount)
  (3)

Contingent consideration(2)

     170.5       Discounted Cash Flow   Assumed % of Total Potential
Contingent Payments
  37% -100% (84%)
        Discount Rate   6% -25% (21%)
  

 

 

        

Total

   $ 12,629.9          
  

 

 

        

 

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

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

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

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

 

25


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

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

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

5. Investments and Accrued Performance Fees

Investments

Investments consist of the following:

 

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

Equity method investments, excluding accrued performance fees

   $ 374.4       $ 419.9   

Trading securities and other investments

     37.1         35.0   
  

 

 

    

 

 

 

Total

   $ 411.5       $ 454.9   
  

 

 

    

 

 

 

Accrued Performance Fees

The components of accrued performance fees are as follows:

 

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

Corporate Private Equity

   $ 1,881.9       $ 1,599.2   

Global Market Strategies

     63.0         170.0   

Real Assets

     368.2         270.9   

Fund of Funds Solutions

     176.5         149.0   
  

 

 

    

 

 

 

Total

   $ 2,489.6       $ 2,189.1   
  

 

 

    

 

 

 

 

26


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

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

 

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

Corporate Private Equity

   $ (23.9   $ (77.8

Global Market Strategies

     (1.2     (1.2

Real Assets

     (64.1     (57.5
  

 

 

   

 

 

 

Total

   $ (89.2   $ (136.5
  

 

 

   

 

 

 

Performance Fees

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

 

$XXX,X $XXX,X
     Three Months Ended  
     March 31,  
     2012      2011  
     (Dollars in millions)  

Corporate Private Equity

   $ 464.5       $ 693.7   

Global Market Strategies

     45.5         80.0   

Real Assets

     105.5         101.0   

Fund of Funds Solutions

     25.3         —     
  

 

 

    

 

 

 

Total

   $ 640.8       $ 874.7   
  

 

 

    

 

 

 

Approximately 56% and 55% of accrued performance fees at March 31, 2012 and December 31, 2011, respectively, are related to Carlyle Asia Partners II, L.P., Carlyle Partners IV, L.P. and Carlyle Partners V, L.P., three of the Company’s corporate private equity funds. Performance fees from these funds were $397.5 million and $572.6 million, respectively, of total performance fees for the three months ended March 31, 2012 and 2011. Total revenues recognized from Carlyle Asia Partners II, L.P., Carlyle Partners IV, L.P. and Carlyle Partners V, L.P. were $81.5 million, $287.1 million and $93.2 million, respectively, for the three months ended March 31, 2012.

 

27


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Equity-Method Investments

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

 

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

Corporate Private Equity

   $ 183.6       $ 238.5   

Global Market Strategies

     11.6         11.9   

Real Assets

     179.2         169.5   
  

 

 

    

 

 

 

Total

   $ 374.4       $ 419.9   
  

 

 

    

 

 

 

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

 

     Corporate     Global                             
     Private Equity     Market Strategies      Real Assets      Aggregate Totals  
     For the Three Months Ended     For the Three Months      For the Three Months      For the Three Months Ended  
     March 31,     Ended March 31,      Ended March 31,      March 31,  
     2012     2011     2012      2011      2012      2011      2012     2011  

Statement of income information

                    

Investment income

   $ 60.5      $ 50.0      $ 35.0       $ 30.7       $ 116.2       $ 108.1       $ 211.7      $ 188.8   

Expenses

     130.5        126.5        10.2         10.7         101.4         93.3         242.1        230.5   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net investment income (loss)

     (70.0     (76.5     24.8         20.0         14.8         14.8         (30.4     (41.7

Net realized and unrealized gain

     2,932.7        3,186.0        201.2         253.9         2,125.4         1,383.8         5,259.3        4,823.7   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 2,862.7      $ 3,109.5      $ 226.0       $ 273.9       $ 2,140.2       $ 1,398.6       $ 5,228.9      $ 4,782.0   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

Balance sheet information

                       

Investments

   $ 38,201.9       $ 36,517.6       $ 1,800.6       $ 1,936.2       $ 24,524.7       $ 20,952.4       $ 64,527.2       $ 59,406.2   

Total assets

   $ 40,066.9       $ 37,729.7       $ 1,994.1       $ 2,224.3       $ 25,909.3       $ 21,860.3       $ 67,970.3       $ 61,814.3   

Debt

   $ 239.4       $ 79.9       $ —         $ 64.0       $ 1,747.3       $ 1,978.1       $ 1,986.7       $ 2,122.0   

Other liabilities

   $ 270.0       $ 278.7       $ 18.8       $ 116.0       $ 390.8       $ 260.9       $ 679.6       $ 655.6   

Total liabilities

   $ 509.4       $ 358.6       $ 18.8       $ 180.0       $ 2,138.1       $ 2,239.0       $ 2,666.3       $ 2,777.6   

Partners’ capital

   $ 39,557.5       $ 37,371.1       $ 1,975.3       $ 2,044.3       $ 23,771.2       $ 19,621.3       $ 65,304.0       $ 59,036.7   

 

28


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Investment Income

The components of investment income are as follows:

 

      Three Months Ended
March  31,
 
      2012     2011  
     (Dollars in millions)  

Income from equity investments

   $ 21.5      $ 39.6   

Income from trading securities

     2.1        1.3   

Other investment income (loss)

     (2.1     0.5   
  

 

 

   

 

 

 

Total

   $ 21.5      $ 41.4   
  

 

 

   

 

 

 

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

 

      Three Months Ended
March  31,
 
      2012      2011  
     (Dollars in millions)  

Corporate Private Equity

   $ 19.9       $ 32.8   

Global Market Strategies

     0.8         0.6   

Real Assets

     0.8         6.2   
  

 

 

    

 

 

 

Total

   $ 21.5       $ 39.6   
  

 

 

    

 

 

 

Trading Securities and Other Investments

Trading securities as of March 31, 2012 and December 31, 2011 primarily consisted of $37.1 million and $35.0 million, respectively, of investments in corporate mezzanine securities, bonds and warrants.

Investments of Consolidated Funds

On March 30, 2012, the Company formed a new CLO. The Company has concluded that the CLO is a VIE and the Company is the primary beneficiary. As a result, the Company consolidates the financial position and results of operations of the CLO into its condensed combined and consolidated financial statements beginning on March 30, 2012. As of March 31, 2012, the total assets of this CLO were $892.4 million.

 

29


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

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

 

     Fair Value      Percentage of Investments of
Consolidated Funds
 
Geographic Region/Instrument Type/ Industry    March 31,      December 31,      March 31,     December 31,  

Description or Investment Strategy

   2012      2011      2012     2011  
     (Dollars in millions)               

United States

          

Equity securities:

          

Accommodation and Food Services

   $ 84.8       $ 106.1         0.37     0.54

Administrative Support, Waste Management, Remediation Services

     157.6         —           0.69     —     

Aerospace and defense

     57.0         53.2         0.25     0.27

Education Services

     52.5         —           0.23     —     

Finance and Insurance

     83.0         —           0.36     —     

Manufacturing

     338.0         412.7         1.47     2.12

Professional, Scientific, Technical Services

     584.8         500.0         2.55     2.56

Retail trade

     132.2         147.1         0.58     0.75

Wholesale Trade

     74.3         —           0.32     —     

Other

     145.3         263.2         0.63     1.35
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities (cost of $2,024.4 and $2,160.6 at March 31, 2012 and December 31, 2011, respectively)

     1,709.5         1,482.3         7.45     7.59

Partnership and LLC interests:

          

Fund investments

     2,671.5         2,701.0         11.65     13.85
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Partnership and LLC interests (cost of $2,513.8 and $2,593.5 at March 31, 2012 and December 31, 2011, respectively)

     2,671.5         2,701.0         11.65     13.85

Loans:

          

Administrative Support, Waste Management, Remediation Services

     —           60.6         —          0.31

Manufacturing

     86.2         65.0         0.38     0.33

Professional, Scientific, Technical Services

     99.3         81.1         0.43     0.42

Wholesale Trade

     67.1         —           0.29     —     

Other

     100.0         129.9         0.44     0.67
  

 

 

    

 

 

    

 

 

   

 

 

 

Total loans (cost of $422.6 and $361.4 at March 31, 2012 and December 31, 2011, respectively)

     352.6         336.6         1.54     1.73

Total investment in hedge funds

     2,227.9         1,929.1         9.72     9.89

Assets of the CLOs

          

Bonds

     265.5         247.7         1.16     1.27

Equity

     51.7         25.3         0.23     0.13

Loans

     7,605.0         6,911.6         33.16     35.43

Other

     —           0.1         —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets of the CLOs (cost of $8,036.8 and $7,446.8 at March 31, 2012 and December 31, 2011, respectively)

     7,922.2         7,184.7         34.55 %      36.83
  

 

 

    

 

 

    

 

 

   

 

 

 

Total United States

   $ 14,883.7       $ 13,633.7         64.91 %      69.89
  

 

 

    

 

 

    

 

 

   

 

 

 

 

30


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

     Fair Value      Percentage of Investments  of
Consolidated Funds
 

Geographic Region/Instrument Type/ Industry

Description or Investment Strategy

   March 31,
2012
     December 31,
2011
     March 31,
2012
    December 31,
2011
 
     (Dollars in millions)               

Canada

          

Equity securities:

          

Other

   $ 2.0       $ 5.8         0.01     0.03
  

 

 

    

 

 

    

 

 

   

 

 

 

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

     2.0         5.8         0.01     0.03

Partnership and LLC interests:

          

Fund investments

     44.0         45.0         0.19 %      0.23
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Partnership and LLC interests (cost of $106.6 and $112.0 at March 31, 2012 and December 31, 2011, respectively)

     44.0         45.0         0.19     0.23

Loans:

          

Transportation and Warehousing

     9.0         8.0         0.04 %      0.04
  

 

 

    

 

 

    

 

 

   

 

 

 

Total loans (cost of $15.3 and $9.5 at March 31, 2012 and December 31, 2011, respectively)

     9.0         8.0         0.04 %      0.04

Assets of the CLOs

          

Bonds

     10.0         15.8         0.04     0.08

Loans

     261.7         228.5         1.14     1.17
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets of the CLOs (cost of $269.6 and $247.2 at March 31, 2012 and December 31, 2011, respectively)

     271.7         244.3         1.18 %      1.25
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Canada

   $ 326.7       $ 303.1         1.42 %      1.55
  

 

 

    

 

 

    

 

 

   

 

 

 

Europe

          

Equity securities:

          

Administrative Support, Waste Management, Remediation Services

   $ 105.9       $ 104.4         0.46     0.54

Health Care and Social Assistance

     51.8         —           0.23     —     

Information

     88.4         88.1         0.39     0.45

Manufacturing

     425.6         389.2         1.86     1.99

Mining

     84.5         —           0.37     —     

Retail Trade

     122.8         95.4         0.54     0.49

Wholesale Trade

     76.3         62.8         0.33     0.32

Other

     75.6         106.9         0.33     0.55
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities (cost of $1,556.5 and $1,249.3 at March 31, 2012 and December 31, 2011,respectively)

     1,030.9         846.8         4.51 %      4.34

Partnership and LLC interests:

          

Fund investments

     967.9         976.9         4.22     5.01
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Partnership and LLC interests (cost of $1,025.0 and $1,052.6 at March 31, 2012 and December 31, 2011, respectively)

   $ 967.9       $ 976.9         4.22     5.01

 

31


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

     Fair Value      Percentage of Investments  of
Consolidated Funds
 

Geographic Region/Instrument Type/ Industry

Description or Investment Strategy

   March 31,
2012
     December 31,
2011
     March 31,
2012
    December 31,
2011
 
     (Dollars in millions)               

Europe

          

Loans:

          

Manufacturing

   $ 1.8       $ 158.2         0.01     0.81

Other

     —           135.1         —          0.69
  

 

 

    

 

 

    

 

 

   

 

 

 

Total loans (cost of $0 and $413.3 at March 31, 2012 and December 31, 2011, respectively)

     1.8         293.3         0.01     1.50

Assets of the CLOs

          

Bonds

     594.2         288.6         2.59     1.48

Equity

     11.4         12.5         0.05     0.06

Loans

     4,520.2         2,577.2         19.71     13.21

Other

     11.6         20.7         0.05     0.11
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets of the CLOs (cost of $5,747.9 and $3,345.2 at March 31, 2012 and December 31, 2011, respectively)

     5,137.4         2,899.0         22.40     14.86
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Europe

   $ 7,138.0       $ 5,016.0         31.14     25.71
  

 

 

    

 

 

    

 

 

   

 

 

 

Australia

          

Assets of the CLOs

          

Bonds

   $ 7.0       $ 4.9         0.03     0.03
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets of the CLOs (cost of $6.5 and $5.0 at March 31, 2012 and December 31, 2011,respectively)

     7.0         4.9         0.03     0.03
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Australia

   $ 7.0       $ 4.9         0.03     0.03
  

 

 

    

 

 

    

 

 

   

 

 

 

Global

          

Equity securities:

          

Manufacturing

   $ 108.8       $ 73.9         0.47     0.38
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities (cost of $89.8 and $85.3 at March 31, 2012 and December 31, 2011, respectively)

     108.8         73.9         0.47     0.38

Partnership and LLC interests:

          

Fund investments

     465.7         475.7         2.03     2.44
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Partnership and LLC interests (cost of $408.5 and $427.2 at March 31, 2012 and December 31, 2011, respectively)

     465.7         475.7         2.03     2.44
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Global

   $ 574.5       $ 549.6         2.50     2.82
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments of Consolidated Funds (cost of $22,223.3 and $19,514.9 at March 31, 2012 and December 31, 2011, respectively)

   $ 22,929.9       $ 19,507.3         100.00     100.00
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no individual investments with a fair value greater than five percent of total assets for any period presented.

 

32


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Interest and Other Income of Consolidated Funds

The components of interest and other income of Consolidated Funds are as follows:

 

      Three Months Ended
March  31,
 
      2012      2011  
     (Dollars in millions)  

Interest income from investments

   $ 184.0       $ 137.8   

Other income

     27.5         29.5   
  

 

 

    

 

 

 

Total

   $ 211.5       $ 167.3   
  

 

 

    

 

 

 

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
March 31,
 
      2012     2011  
     (Dollars in millions)  

Gains from investments of Consolidated Funds

   $ 1,031.1      $ 343.1   

Losses from liabilities of CLOs

     (159.2     (527.0

Gains (losses) on other assets of CLOs

     0.2        (0.4
  

 

 

   

 

 

 

Total

   $ 872.1      $ (184.3
  

 

 

   

 

 

 

The following table presents realized and unrealized gains earned from investments of the Consolidated Funds:

 

      Three Months Ended
March 31,
 
      2012      2011  
     (Dollars in millions)  

Realized gains

   $ 215.1       $ 46.1   

Net change in unrealized gains

     816.0         297.0   
  

 

 

    

 

 

 

Total

   $ 1,031.1       $ 343.1   
  

 

 

    

 

 

 

 

33


Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

6. Non-controlling Interests in Consolidated Entities

The components of the Company’s non-controlling interests in consolidated entities are as follows:

 

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

Non-Carlyle interests in Consolidated Funds

   $ 7,351.3       $ 7,290.6   

Non-Carlyle interests in majority-owned subsidiaries

     166.2         159.4   

Non-controlling interest in AlpInvest

     46.3         40.2   

Non-controlling interest in carried interest and cash held for carried interest distributions

     6.9         6.0   
  

 

 

    

 

 

 

Non-controlling interests in consolidated entities

   $ 7,570.7       $ 7,496.2   
  

 

 

    

 

 

 

The components of the Company’s non-controlling interests in income (loss) of consolidated entities are as follows:

 

      Three Months Ended
March 31,
 
      2012     2011  
     (Dollars in millions)  

Non-Carlyle interests in Consolidated Funds

   $ 772.2      $ 9.6   

Non-Carlyle interests in majority-owned subsidiaries

     7.4        7.3   

Non-controlling interest in carried interest and cash held for carried interest distributions

     1.0        0.1   
  

 

 

   

 

 

 

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

     780.6        17.0   

Net income (loss) attributable to equity appropriated for CLOs

     105.1        (182.7

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

     (20.8     35.7   
  

 

 

   

 

 

 

Non-controlling interests in income (loss) of consolidated entities

   $ 864.9      $ (130.0
  

 

 

   

 

 

 

There have been no significant changes in the Company’s ownership interests in its consolidated entities for the periods presented.

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

7. Fixed Assets, Net

The components of the Company’s fixed assets are as follows:

 

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

Furniture, fixtures and equipment

   $ 37.7      $ 37.4   

Computer hardware and software

     95.0        94.8   

Leasehold improvements

     48.7        49.1   
  

 

 

   

 

 

 

Total fixed assets

     181.4        181.3   

Less: accumulated depreciation

     (129.0     (128.6
  

 

 

   

 

 

 

Net fixed assets

   $ 52.4      $ 52.7   
  

 

 

   

 

 

 

Depreciation and amortization expense of $5.5 million and $5.9 million for the three months ended March 31, 2012 and 2011, respectively, is included in general, administrative and other expenses in the condensed combined and consolidated statements of operations.

8. Loans Payable

Senior Secured Credit Facility

At March 31, 2012, the Company had in place a senior secured credit facility with certain financial institutions under which it may borrow up to $500.0 million in a term loan and $750.0 million in a revolving credit facility. The term loan and revolving credit facility mature on September 30, 2016. Principal amounts outstanding under the amended term loan and revolving credit facility will 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% (2.00% at March 31, 2012). As of March 31, 2012 and December 31, 2011, $500.0 million was outstanding under the term loan. Outstanding principal amounts under the term loan are payable quarterly beginning in September 2014 as follows (Dollars in millions):

 

$000,000

2014

   $ 75.0   

2015

     175.0   

2016

     250.0   
  

 

 

 
   $ 500.0   
  

 

 

 

The senior secured credit facility is secured by management fees and carried interest allocable to the partners of the Company from certain funds and requires the Company to comply with certain financial and other covenants, which include maintaining management fee earning assets of at least $53.0 billion, a senior debt leverage ratio of less than or equal to 2.5 to 1.0, a total debt leverage ratio of less than 5.5 to 1.0, and a minimum interest coverage ratio of not less than 4.0 to 1.0, in each case, tested on a quarterly basis. The senior secured credit facility also contains non-financial covenants that restrict some of the Company’s corporate activities, including its ability to incur additional debt, pay certain dividends, create liens, make certain acquisitions or investments and engage in specified transactions with affiliates. Non-compliance with any of the financial or nonfinancial covenants without cure or waiver would constitute an event of default under the senior secured credit facility. An event of default resulting from a breach of a financial or non-financial covenant 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 secured 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.

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

As of March 31, 2012 and December 31, 2011, $568.1 million and $310.9 million, respectively, was outstanding under the revolving credit facility.

Total interest expense under the senior secured credit facility was $6.7 million and $5.4 million for the three months ended March 31, 2012 and 2011, respectively. The fair value of the outstanding term loan and revolving credit facility in the senior secured credit facility approximates par value at March 31, 2012 and December 31, 2011, respectively.

The Company is subject to interest rate risk associated with its variable rate debt financing. To manage this risk, the Company entered into an interest rate swap in March 2008 to fix the base LIBOR interest rate on approximately 33% of the $725.0 million in term loan borrowings at 3.319%. The interest rate swap had an initial notional balance of $239.2 million and amortizes through August 20, 2013 (the swap’s maturity date) as the related term loan borrowings are repaid. This instrument was designated as a cash flow hedge and remains in place after the amendment of the senior secured credit facility.

In December 2011, the Company entered into a second interest rate swap to fix the base LIBOR interest rate at 1.082% on the remaining term loan borrowings not hedged by the March 2008 interest rate swap. This interest rate swap matures on September 30, 2016, which coincides with the maturity of the term loan. This instrument has been designated as a cash flow hedge.

The effective portion of losses related to change in the fair value of the swaps were not significant for the three months ended March 31, 2012 and 2011. The ineffective portion of losses recognized in earnings were not significant for any period presented. The balance in accumulated other comprehensive loss related to these cash flow hedges will be reclassified into earnings as interest expense is recognized. As of March 31, 2012, approximately $5.9 million of the accumulated other comprehensive loss related to these cash flow hedges is expected to be recognized as a decrease to income from continuing operations over the next twelve months.

On December 13, 2011, the Company entered into a new senior credit facility. The new senior credit facility, while currently effective, became operative on May 9, 2012. The new senior credit facility replaces the existing senior secured credit facility, amounts borrowed under the existing senior secured credit facility were deemed to have been repaid by borrowings in like amount under the new senior credit facility, and the Company is no longer subject to the financial and other covenants of the existing senior secured credit facility.

The new senior credit facility includes $500.0 million in a term loan and $750.0 million in a revolving credit facility. As of May 21, 2012, no borrowings are outstanding on the new revolving credit facility. The new term loan and revolving credit facility mature on September 30, 2016. Principal amounts outstanding under the new 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%. Outstanding principal amounts due under the term loan are payable quarterly beginning in September 2014 as follows: $75.0 million in 2014, $175.0 million in 2015 and $250.0 million in 2016. The new senior credit facility is unsecured and is not guaranteed by any subsidiaries of the Company. The Company is required to maintain management fee earning assets (as defined in the new senior credit facility) of at least $53.0 billion and a total debt leverage ratio of less than 3.0 to 1.0. The Company is not subject to a senior debt leverage ratio or a minimum interest coverage ratio.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Other Loans

At March 31, 2012, the Company had an outstanding loan of $40.0 million related to the Claren Road acquisition. The loan was scheduled to mature on December 31, 2015 and interest is payable semi-annually at an adjustable annual rate, currently 6.0%. Total interest expense was $0.6 million and $0.7 million for the three months ended March 31, 2012 and 2011. On May 9, 2012, the outstanding balance of $40.0 million was repaid (see Note 1).

As part of the Claren Road acquisition, Claren Road entered into a loan agreement with a financial institution for $50.0 million. The loan was scheduled to mature on January 3, 2017 and interest is payable quarterly, commencing March 31, 2011 at an annual rate of 8.0%. Total interest expense was $0.1 million and $1.0 million for the three months ended March 31, 2012 and 2011, respectively. The remaining principal balance outstanding was repaid in 2012 and no principal amounts remain outstanding at March 31, 2012.

Debt Covenants

The Company 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 Company is also subject to various non-financial covenants under its loan agreements. The Company was in compliance with all financial and non-financial covenants under its various loan agreements as of March 31, 2012.

Subordinated Loan Payable to Affiliate

In December 2010, the Company received net cash proceeds of $494.0 million from Mubadala in exchange for $500.0 million in subordinated notes and a 2% equity interest in the Company. Interest on the notes is payable semi-annually, commencing June 30, 2011 at a rate of 7.25% per annum to the extent paid in cash or 7.5% per annum to the extent paid by issuing payment-in-kind notes (“PIK Notes”). Total interest expense was $3.1 million and $10.0 million for the three months ended March 31, 2012 and 2011, respectively.

On October 20, 2011, the Company borrowed $265.5 million under its revolving credit facility to redeem $250.0 million aggregate principal amount of the subordinated notes for a redemption price of $260.0 million, representing a 4% premium, plus accrued interest of approximately $5.5 million.

On March 1, 2012, the Company borrowed $263.1 million under its revolving credit facility to redeem all of the remaining $250.0 million aggregate principal amount of the subordinated notes held by Mubadala for a redemption price of $260.0 million, representing a 4% premium, plus accrued interest of approximately $3.1 million.

Loans Payable of Consolidated Funds

Loans payable of Consolidated Funds 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 combined and consolidated balance sheets.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

As of March 31, 2012 and December 31, 2011, the following borrowings were outstanding, which includes preferred shares classified as liabilities (Dollars in millions):

 

     As of March 31, 2012  
     Borrowing
Outstanding
     Fair Value      Weighted
Average Interest
Rate
          Weighted Average
Remaining
Maturity in Years
 

Senior secured notes

   $ 13,302.8       $ 11,605.7         1.67       8.98   

Subordinated notes, Income notes and Preferred shares

     674.7         843.6         N/A        (a     8.49   

Combination notes

     6.0         5.3         N/A        (b     9.68   
  

 

 

    

 

 

        

Total

   $ 13,983.5       $ 12,454.6          
  

 

 

    

 

 

        

 

     As of December 31, 2011  
     Borrowing
Outstanding
     Fair Value      Weighted
Average Interest
Rate
          Weighted Average
Remaining
Maturity in Years
 

Senior secured notes

   $ 10,291.2       $ 9,010.7         1.44       8.85   

Subordinated notes, Income notes and Preferred shares

     417.3         670.7         N/A        (a     8.54   

Combination notes

     9.9         8.5         N/A        (b     9.92   
  

 

 

    

 

 

        

Total

   $ 10,718.4       $ 9,689.9          
  

 

 

    

 

 

        

 

(a) The subordinated notes, income notes and preferred shares do not have contractual interest rates, but instead receive distributions from the excess cash flows of the CLOs.
(b) The combination notes do not have contractual interest rates and have recourse only to U.S. Treasury securities and OATS specifically held to collateralize such combination notes.

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 March 31, 2012 and December 31, 2011, the fair value of the CLO assets was $14.9 billion and $11.0 billion, respectively. Included in loans payable of the CLOs are loan revolvers (the APEX Revolvers), which the CLOs entered into with financial institutions on their respective closing dates. The APEX Revolvers provide credit enhancement to the securities issued by the CLOs by allowing the CLOs to draw down on the revolvers in order to offset a certain level of principal losses upon any default of the investment assets held by that CLO. The APEX Revolvers allow for a maximum borrowing of $38.3 million as of March 31, 2012 and December 31, 2011, and bear weighted average interest at LIBOR plus 0.37% per annum. Amounts borrowed under the APEX Revolvers are repaid based on cash flows available subject to priority of payments under each CLO’s governing documents. Due to their short-term nature, the Company has elected not to apply the fair value option to the APEX revolvers; rather, they are carried at amortized cost at each reporting date which the Company believes approximates fair value. There were no outstanding principal amounts borrowed under the APEX Revolvers as of March 31, 2012 and December 31, 2011.

Certain CLOs entered into liquidity facility agreements with various liquidity facility providers on or about the various closing dates in order to fund payments of interest where there are insufficient funds available. The proceeds from such draw-downs are used for payments of interest at each interest payment date and the acquisition or exercise of an option or warrant as part of any collateral enhancement obligation. The liquidity facilities in aggregate allow for a maximum borrowing of $40.0 million and bear weighted average interest at EURIBOR plus 0.39% per annum. Amounts borrowed under the liquidity facilities are repaid based on cash flows available subject to priority of payments under each CLO’s governing documents. There was $22.0 million outstanding under the liquidity facility as of March 31, 2012. There were no borrowings outstanding under the liquidity facility as of December 31, 2011.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

9. Commitments and Contingencies

Capital Commitments

The Company and its unconsolidated affiliates have unfunded commitments to entities within the following segments as of March 31, 2012 (Dollars in millions):

 

     Unfunded
Commitments
 

Corporate Private Equity

   $ 961.3   

Global Market Strategies

     129.2   

Real Assets

     238.5   
  

 

 

 
   $ 1,329.0   
  

 

 

 

In addition to these unfunded commitments, the Company 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 Company entered into an agreement with a financial institution pursuant to which the Company 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 $16.3 million, and accrues interest at the lower of the prime rate, as defined, or three-month LIBOR plus 2% (3.45% at March 31, 2012), reset quarterly. As of March 31, 2012 and December 31, 2011, approximately $14.0 million and $14.3 million, respectively, was outstanding under the credit facility and payable by the employees. The amount funded by the Company under this guarantee as of March 31, 2012 was not material. The Company believes the likelihood of any material funding under this guarantee to be remote. The fair value of this guarantee is not significant to the condensed combined and consolidated financial statements.

Other Guarantees

The Company has guaranteed payment of giveback obligations, if any, related to one of its corporate private equity funds to the extent the amount of funds reserved for potential giveback obligations is not sufficient to fulfill such obligations. At March 31, 2012 and December 31, 2011, $13.6 million was held in an escrow account and the Company believes the likelihood of any material fundings under this guarantee to be remote.

Contingent Obligations (Giveback)

A liability for potential repayment of previously received performance fees of $89.2 million at March 31, 2012, is shown as accrued giveback obligations in the condensed combined and consolidated balance sheets, representing the giveback obligation that would need to be paid if the funds were liquidated at their current fair values at March 31, 2012. However, the ultimate giveback obligation, if any, does not become realized until the end of a fund’s life (see Note 2). The Company has recorded $29.5 million and $56.5 million, of unbilled receivables from former and current employees and Carlyle’s individual partners as of March 31, 2012 and December 31, 2011, respectively, related to giveback obligations, which are included in due from affiliates and other receivables, net in the accompanying condensed combined and consolidated balance sheets. Current and former partners and employees are personally responsible for their giveback obligations. The receivables are collateralized by investments made by individual partners and employees in Carlyle-sponsored funds. In addition, $275.4 million and $250.8 million has been withheld from distributions of carried interest to partners and employees for potential giveback obligations as of March 31, 2012 and December 31, 2011, respectively. Such amounts are held by an entity not included in the accompanying condensed combined and consolidated balance sheets.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

If, at March 31, 2012, all of the investments held by the Company’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 $961.4 million, on an after-tax basis where applicable.

Leases

The Company leases office space in various countries around the world and maintains its headquarters in Washington, D.C., where it leases its primary office space under a non-cancelable lease agreement expiring on July 31, 2026. Office leases in other locations expire in various years from 2012 through 2020. These leases are accounted for as operating leases. Rent expense was approximately $12.2 million and $10.2 million for the three months ended March 31, 2012 and 2011, respectively, and is included in general, administrative and other expenses in the condensed combined and consolidated statements of operations. Included in rent expense are lease termination costs of $0.2 million and $1.8 million for the three months ended March 31, 2012 and 2011, respectively.

The future minimum commitments for the leases are as follows (Dollars in millions):

 

$xxxxxx

2012

   $ 35.2   

2013

     43.1   

2014

     40.1   

2015

     36.1   

2016

     23.5   

Thereafter

     133.9   
  

 

 

 
   $ 311.9   
  

 

 

 

Total minimum rentals to be received in the future under non-cancelable subleases as of March 31, 2012 were $7.0 million.

The Company records contractual escalating minimum lease payments on a straight-line basis over the term of the lease. Deferred rent payable under the leases was $14.2 million and $12.9 million as of March 31, 2012 and December 31, 2011, respectively, and is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed combined and consolidated balance sheets.

Legal Matters

In the ordinary course of business, the Company is a party to litigation, investigations, disputes and other potential claims. Certain of these matters are described below. The Company is not currently able to estimate for any such matters the reasonably possible amount of loss or range of loss. The Company does not believe it is probable that the outcome of any existing litigation, investigations, disputes or other potential claims will materially affect the Company or these financial statements.

Along with many other companies and individuals in the financial sector, the Company and Carlyle Mezzanine Partners are named as defendants in Foy v. Austin Capital, a case filed in June 2009, pending in the State of New Mexico’s First Judicial District Court, County of Santa Fe, which purports to be a qui tam suit on behalf of the State of New Mexico. 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, actual damages for lost income, rescission of the investment transactions described in the complaint and disgorgement of all fees received. In May 2011, the Attorney General of New Mexico moved to dismiss certain defendants including the Company and Carlyle Mezzanine Partners on the ground that separate civil litigation by the Attorney General is a more effective means to seek recovery for the State from these defendants. The Attorney General has brought two civil actions against certain of those defendants, not including the Carlyle defendants. The Attorney General has stated that its investigation is continuing and it may bring additional civil actions. The Company is currently unable to anticipate when the litigation will conclude or what impact the litigation may have on the Company and its interest holders.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

In July 2009, a former shareholder of Carlyle Capital Corporation Limited (CCC), claiming to have lost $20.0 million, filed a claim against CCC, the Company and certain affiliates and one officer of the Company (Huffington v. TC Group L.L.C., et al.) alleging violations of Massachusetts “blue sky” law provisions relating to material misrepresentations and omissions allegedly made during and after the marketing of CCC. The plaintiff seeks treble damages, interest, expenses and attorney’s fees and to have the subscription agreement deemed null and void and a full refund of the investment. In March 2010, the United States District Court for the District of Massachusetts dismissed the plaintiff’s complaint on the grounds that it should have been filed in Delaware instead of Massachusetts, and the plaintiff subsequently filed a notice of appeal to the United States Court of Appeals for the First Circuit. The plaintiff lost his appeal to the First Circuit and has filed a new claim in Delaware State Court. The Delaware State Court granted in part and denied in part defendants’ motion for summary judgment. The defendants are vigorously contesting all claims asserted by the plaintiff.

In November 2009, another CCC investor instituted legal proceedings on similar grounds in Kuwait’s Court of First Instance (National Industries Group v. Carlyle Group) seeking to recover losses incurred in connection with an investment in CCC. In July 2011, the Delaware Court of Chancery issued a decision restraining the plaintiff from proceeding in Kuwait against either Carlyle Investment Management L.L.C. or TC Group, L.L.C., based on the forum selection clause in the plaintiff’s subscription agreement, which provided for exclusive jurisdiction in Delaware courts. In September 2011, the plaintiff reissued its complaint in Kuwait naming CCC only, and reissued its complaint in January 2012 joining Carlyle Investment Management, L.L.C. as a defendant. The Company believes these claims are without merit and intends to vigorously contest all such allegations and is currently unable to anticipate what impact they may have on the Company.

The Guernsey liquidators who took control of CCC in March 2008 filed four suits in July 2010 against the Company, certain of its affiliates and the former directors of CCC in the Delaware Chancery Court, the Royal Court of Guernsey, the Superior Court of the District of Columbia and the Supreme Court of New York, New York County, (Carlyle Capital Corporation Limited v. Conway et al.) seeking $1.0 billion in damages. They allege that the Company and the CCC board of directors were negligent, grossly negligent or willfully mismanaged the CCC investment program and breached certain fiduciary duties allegedly owed to CCC and its shareholders. The Liquidators further allege (among other things) that the directors and the Company put the interests of the Company ahead of the interests of CCC and its shareholders and gave priority to preserving and enhancing the Company’s reputation and its “brand” over the best interests of CCC. The defendants filed a comprehensive motion to dismiss in Delaware in October 2010. In December 2010, the Liquidators dismissed the complaint in Delaware voluntarily and without prejudice and expressed an intent to proceed against the defendants in Guernsey. The Company filed an action in Delaware seeking an injunction against the Liquidators to preclude them from proceeding in Guernsey in violation of a Delaware exclusive jurisdiction clause contained in the investment management agreement. In July 2011, the Royal Court of Guernsey held that the case should be litigated in Delaware pursuant to the exclusive jurisdiction clause. That ruling was appealed by the Liquidators, and in February 2012 was reversed by the Guernsey Court of Appeal, which held that the case should proceed in Guernsey. The Company has sought a review of that ruling pursuant to an application for special leave to the Privy Council. The Company has also requested a stay of further proceedings from the Privy Council. Also, in October 2011, the plaintiffs obtained an ex parte anti-anti-suit injunction in Guernsey against the Company’s anti-suit claim in Delaware. That ruling has been affirmed by the Guernsey Court of Appeal. The Company has sought an appeal before the Privy Council on the anti-anti-suit injunction order. The Liquidators’ lawsuits in New York and the District of Columbia were dismissed in December 2011 without prejudice. The Company believes that regardless of where the claims are litigated, they are without merit and it will vigorously contest all allegations. The Company recognized a loss of $152.3 million in 2008 in connection with the winding up of CCC.

In June 2011, August 2011, and September 2011, three putative shareholder class actions were filed against the Company, certain of its affiliates and former directors of CCC alleging that the fund offering materials and

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

various public disclosures were materially misleading or omitted material information. Two of the shareholder class actions, (Phelps v. Stomber, et al.) and (Glaubach v. Carlyle Capital Corporation Limited, et al.), were filed in the United States District Court for the District of Columbia. The most recent shareholder class action (Phelps v. Stomber, et al.) was filed in the Supreme Court of New York, New York County was subsequently removed to the United States District Court for the Southern District of New York. The two original D.C. cases were consolidated into one case, under the caption of Phelps v. Stomber, and the Phelps named plaintiffs have been designated “lead plaintiffs” by the court. The New York case has been transferred to the D.C. federal court and the plaintiffs have requested that it be consolidated with the other two D.C. actions. The defendants have opposed and have moved to dismiss the case as duplicative. The plaintiffs seek all compensatory damages sustained as a result of the alleged misrepresentations, costs and expenses, as well as reasonable attorney fees. The defendants have filed a comprehensive motion to dismiss. We believe the claims are without merit and will vigorously contest all claims.

In September 2006 and March 2009, the Company received requests for certain documents and other information from the Antitrust Division of the U.S. Department of Justice (“DOJ”) in connection with the DOJ’s investigation of global alternative asset firms to determine whether they have engaged in conduct prohibited by U.S. antitrust laws. The Company is fully cooperating with the DOJ’s investigation and is currently unable to anticipate what impact it may have on the Company.

On February 14, 2008, a private class-action lawsuit challenging “club” bids and other alleged anti-competitive business practices was filed in the U.S. District Court for the District of Massachusetts (Police and Fire Retirement System of the City of Detroit v. Apollo Global Management, LLC). The complaint alleges, among other things, that certain global alternative asset firms, including the Company, violated Section 1 of the Sherman Act by forming multi-sponsor consortiums for the purpose of bidding collectively in company buyout actions in certain going private transactions, which the plaintiffs allege constitutes a “conspiracy in restraint of trade.” The plaintiffs seek damages as provided for in Section 4 of the Clayton Act and injunction against such conduct in restraint of trade in the future. The Company believes the claims are without merit and will vigorously contest all claims and is currently unable to anticipate what impact it may have on the Company.

Other Contingencies

From 2007 to 2009, a Luxembourg portfolio company owned by Carlyle Europe Real Estate Partners, L.P. (CEREP I) received proceeds from the sale of real estate located in Paris, France. CEREP I is a real estate fund not consolidated by the Company. The relevant French tax authorities have asserted that such portfolio company had a permanent establishment in France, and have issued a tax assessment seeking to collect €97.0 million, consisting of taxes, interest and penalties.

During 2006, CEREP I completed a reorganization of several Italian portfolio companies. Such Italian portfolio companies subsequently completed the sale of various properties located in Italy. The Italian tax authorities have issued revised income tax audit reports to various subsidiaries of CEREP I. The tax audit reports proposed to disallow deductions of certain capital losses claimed with respect to the reorganization of the Italian portfolio companies. As a result of the disallowance of such deductions, the audit reports proposed to increase the aggregate amount of Italian income tax and penalties owed by subsidiaries of CEREP I by approximately €50.0 million. It is possible that the Italian Ministry of Justice could appoint a prosecutor to conduct an investigation.

CEREP I and its subsidiaries and portfolio companies are contesting the French tax assessment and also intend to contest the proposed Italian income tax adjustments. Settlement opportunities are also being explored. Although neither CEREP I nor the relevant portfolio companies are consolidated by the Company, the Company expects to advance amounts to such nonconsolidated entities, provide credit support or payment guarantees on their behalf, or otherwise incur costs to resolve such matters, in which case the Company would seek to recover such advance from proceeds of subsequent portfolio dispositions by CEREP I. The amount of any unrecoverable costs that may be incurred by the Company is not estimable at this time.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Indemnifications

In the normal course of business, the Company and its subsidiaries enter into contracts that contain a variety of representations and warranties and provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company believes the risk of material loss to be remote.

Risks and Uncertainties

The 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 Company’s investments and profitability. Such events are beyond the Company’s control, and the likelihood that they may occur and the effect on the Company cannot be predicted.

Furthermore, most 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 are subject to significant limitations and uncertainties, including among others currency fluctuations and natural disasters.

The funds make investments outside of the United States. Non-U.S. investments are subject to the same risks associated with the Company’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 Company encounters credit risk. Credit risk is the risk of default by a counterparty in the Company’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 Company considers cash, cash equivalents, securities, receivables, equity-method investments, accounts payable, accrued expenses, other liabilities, loans payable, assets and liabilities of Consolidated Funds and contingent and other consideration for acquisitions to be its financial instruments. The carrying amounts reported in the condensed combined and consolidated balance sheets for these financial instruments, equal or closely approximate their fair values.

 

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Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Termination Costs

Employee and office lease termination costs are included in accrued compensation and benefits and accrued expenses in the condensed combined and consolidated balance sheets as well as general, administrative and other expenses in the condensed combined and consolidated statements of operations. As of March 31, 2012 and December 31, 2011, the accrual for termination costs primarily represents lease obligations associated with closed offices, which represents management’s estimate of the total amount expected to be incurred. The changes in the accrual for termination costs for the three months ended March 31, 2012 and 2011 are as follows:

 

     Three Months Ended
March 31,
 
     2012     2011  
     (Dollars in millions)  

Balance, beginning of period

   $ 15.2      $ 23.1   

Compensation expense

     2.2        0.2   

Contract termination costs

     0.2        1.8   

Costs paid or settled

     (1.3     (1.7
  

 

 

   

 

 

 

Balance, end of period

   $ 16.3      $ 23.4   
  

 

 

   

 

 

 

10. Related Party Transactions

Due from Affiliates and Other Receivables, Net

The Company had the following due from affiliates and other receivables at March 31, 2012 and December 31, 2011:

 

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

Unbilled receivable for giveback obligations from current and former employees

   $ 9.1       $ 14.9   

Unbilled receivable for giveback obligations from Carlyle’s individual partners

     20.4         41.6   

Notes receivable and accrued interest from affiliates

     36.8         56.8   

Other receivables from unconsolidated funds and affiliates, net

     154.2         173.7   
  

 

 

    

 

 

 

Total

   $ 220.5       $ 287.0   
  

 

 

    

 

 

 

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 Company to reimburse the expenses. Based on management’s determination, the Company accrues and charges interest on amounts due from affiliate accounts at interest rates ranging from 0% to 8%. The accrued and charged interest to the affiliates was not significant during the three months ended March 31, 2012 and 2011.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

The Company has provided loans to certain unconsolidated funds to meet short-term obligations to purchase investments. These notes accrue interest at rates specified in each agreement, ranging from one-month LIBOR plus 2.15% (2.39% at March 31, 2012) to 18%.

These receivables are assessed regularly for collectibility and amounts determined to be uncollectible are charged directly to general, administrative and other expenses in the condensed combined and 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 Company had the following due to affiliates balances at March 31, 2012 and December 31, 2011:

 

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

Due to affiliates of Consolidated Funds

   $ 37.0       $ 37.3   

Due to non-consolidated affiliates

     16.9         44.4   

Other

     30.7         26.8   
  

 

 

    

 

 

 

Total

   $ 84.6       $ 108.5   
  

 

 

    

 

 

 

The Company has recorded obligations for amounts due to certain of its affiliates. These outstanding obligations are payable on demand. The Company periodically offsets expenses it has paid on behalf of its affiliates against these obligations. Based on management’s determination, the Company accrues and pays interest on the amounts due to affiliates at interest rates ranging from 0% to the prime rate, as defined, plus 2% (5.25% at March 31, 2012). The interest incurred to the affiliates was not significant during the three months ended March 31, 2012 and 2011.

Distribution of Investments

In conjunction with the reorganization that occurred on May 2, 2012 (see Note 1), on March 31, 2012, the Company distributed certain investments in or alongside Carlyle funds that were funded by certain existing and former owners of the Company indirectly through the Company. These investments, totaling $127.7 million, were distributed by the Company so that they are now held directly by such persons and are no longer consolidated in the accompanying condensed combined and consolidated financial statements.

Other Related Party Transactions

In May 2011, the Company and its affiliates invested €41.0 million ($54.7 million as of March 31, 2012) and €52.2 million ($69.6 million as of March 31, 2012), respectively, into one of its European real estate funds. The proceeds were used to refinance the fund’s existing loans. The Company’s investment is recorded as an equity-method investment.

In the normal course of business, the Company has made use of aircraft owned by entities controlled by senior managing directors. The senior managing directors paid for their purchases of the aircraft and bear all operating, personnel and maintenance costs associated with their operation for personal use. Payment by the Company for the business use of these aircraft by senior managing directors and other employees is made at market rates, which totaled $1.8 million and $2.2 million for the three months ended March 31, 2012 and 2011, respectively. These fees are included in general, administrative, and other expenses in the condensed combined and consolidated statements of operations.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

Carlyle partners 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 Carlyle partners and employees to pay management or performance fees.

Carried interest income from the funds can be distributed to Carlyle partners and employees on a current basis, but is subject to repayment by the subsidiary of Carlyle Group that acts as general partner of the fund in the event that certain specified return thresholds are not ultimately achieved. The Carlyle partners 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.

Substantially all revenue is earned from affiliates of Carlyle.

11. Derivative Instruments in the CLOs

In the ordinary course of business, the CLOs enter into various types of derivative instruments. Derivative instruments serve as components of the CLOs’ investment strategies and are utilized primarily to structure and manage the risks related to currency, credit and interest exposure. The derivative instruments that the CLOs hold or issue do not qualify for hedge accounting under the accounting standards for derivatives and hedging. The CLOs’ derivative instruments include currency swap contracts, currency options, credit risk swap contracts, and interest rate cap contracts, and are carried at fair value in the Company’s condensed combined and consolidated balance sheets.

Certain CLOs purchase put and call options to manage risk from changes in the value of foreign currencies. Certain CLOs entered into currency swap transactions, which represent agreements that obligate two parties to exchange a series of cash flows in different currencies at specified intervals based upon or calculated by reference to changes in specified prices or rates for a specified amount of an underlying asset or otherwise determined notional amount. The currency swap transactions are stated at fair value and the difference between cash to be paid and received on swaps is recognized as net investment gains (losses) of Consolidated Funds in the condensed combined and consolidated statements of operations. The fair value of derivative instruments held by the CLOs are recorded in investments of Consolidated Funds in the condensed combined and consolidated balance sheets.

The following table identifies the gross fair value amounts of derivative instruments, which may be offset and presented net in the condensed combined and consolidated balance sheets to the extent that there is a legal right of offset, categorized by the volume of the total notional amounts or number of contracts and by primary underlying risk as of March 31, 2012 and December 31, 2011 (Dollars in millions):

 

     March 31, 2012  
     Notional
Amount
     Fair Value -
Assets
     Fair Value -
Liabilities
 

Currency-related

        

Cross-currency swap contract(s)

   $ 322.7       $ 13.6       $ (15.9

Currency option(s)

     186.7         9.0         —     

Interest-related

        

Interest rate cap contract(s)

     32.0         —           —     
     

 

 

    

 

 

 
      $ 22.6       $ (15.9
     

 

 

    

 

 

 

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

     December 31, 2011  
     Notional
Amount
     Fair Value -
Assets
     Fair Value -
Liabilities
 

Currency-related

        

Cross-currency swap contract(s)

   $ 272.7       $ 16.6       $ (5.9

Currency option(s)

     181.3         10.0         —     

Interest-related

        

Interest rate cap contract(s)

     32.0         0.1         —     
     

 

 

    

 

 

 
      $ 26.7       $ (5.9
     

 

 

    

 

 

 

The following tables present a summary of net realized and unrealized appreciation (depreciation) on derivative instruments which is included in net investment gains (losses) of Consolidated Funds in the condensed combined and consolidated statements of operations (Dollars in millions):

 

     Three Months Ended March 31, 2012  
     Realized
Appreciation
     Change in
Unrealized
Depreciation
    Total  

Currency-related

       

Cross-currency swap contract(s)

   $ 1.7       $ (8.5 )    $ (6.8 ) 

Currency option(s)

     —           (1.4 )      (1.4 ) 
  

 

 

    

 

 

   

 

 

 
   $ 1.7       $ (9.9   $ (8.2
  

 

 

    

 

 

   

 

 

 

 

     Three Months Ended March 31, 2011  
     Realized
Appreciation
     Change in
Unrealized
Appreciation
(Depreciation)
    Total  

Currency-related

       

Cross-currency swap contract(s)

   $ 2.9       $ 0.6      $ 3.5   

Currency option(s)

     —           (4.7     (4.7

Credit-related

       

Credit risk swap contract(s)

     —           (0.1     (0.1
  

 

 

    

 

 

   

 

 

 
   $ 2.9       $ (4.2   $ (1.3
  

 

 

    

 

 

   

 

 

 

Certain derivative instruments contain provisions which require the CLOs or the counterparty to post collateral if certain conditions are met. Cash received to satisfy these collateral requirements is included in restricted cash and securities of Consolidated Funds (see Note 2) and in other liabilities of Consolidated Funds in the condensed combined and consolidated balance sheets. The Company has elected not to offset derivative positions against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements.

12. Income Taxes

The Company had $17.0 million and $18.0 million in deferred tax assets as of March 31, 2012 and December 31, 2011, respectively. These deferred tax assets resulted primarily from net operating losses in certain jurisdictions and the temporary differences between the financial statement and tax bases of depreciation on fixed assets and accrued bonuses. The Company had deferred tax liabilities of $54.9 million and $48.3 million at March 31, 2012 and December 31, 2011, respectively, which primarily related to the acquisitions of ESG and AlpInvest in 2011.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

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 Company has recorded a liability for uncertain tax positions of $16.4 million and $17.5 million as of March 31, 2012 and December 31, 2011, respectively, which is reflected in accounts payable, accrued expenses and other liabilities in the accompanying condensed combined and consolidated balance sheets. These balances include $3.9 million as of March 31, 2012 and December 31, 2011, related to interest and penalties associated with uncertain tax positions. If recognized, the entire amount of uncertain tax positions would be recorded as a reduction in the provision for income taxes. The total expense for interest and penalties related to unrecognized tax benefits for the three months ended March 31, 2012 and 2011 amounted to $0.3 million.

In the normal course of business, the Company is subject to examination by federal and certain state, local and foreign tax regulators. As of March 31, 2012, the Company’s U.S. federal income tax returns for the years 2008 through 2011 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 2007 to 2011. Foreign tax returns are generally subject to audit from 2005 to 2011. Certain of the Company’s foreign subsidiaries are currently under audit by foreign tax authorities.

The Company 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 condensed combined and consolidated financial statements. The Company 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.

13. Segment Reporting

Carlyle conducts its operations through four reportable segments:

Corporate Private Equity – The Corporate Private Equity segment is comprised of the Company’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.

Global Market Strategies – The Global Market Strategies 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, commodities, sovereign debt, and interest rate products and their derivatives.

Real Assets – The Real Assets segment is comprised of the Company’s operations that advises U.S. and international funds focused on real estate, infrastructure, energy and renewable energy transactions.

Fund of Funds Solutions – The Fund of Funds Solutions segment was launched upon the Company’s acquisition of a 60% equity interest in AlpInvest on July 1, 2011 and advises a global private equity fund of funds program and related co-investment and secondary activities.

The Company’s reportable business segments are differentiated by their various investment focuses and strategies. Overhead costs were allocated based on direct base compensation expense for the funds comprising each segment. With the acquisitions of Claren Road, AlpInvest and ESG, the Company revised how it evaluates certain financial information to include adjustments to reflect the Company’s economic interests in those entities. The Company’s segment presentation for the three months ended March 31, 2011 has been updated to reflect this change.

Economic Net Income (“ENI”) and its components are key performance measures used by management to make operating decisions and assess the performance of the Company’s reportable segments. ENI differs from income (loss) before provision for income taxes computed in accordance with U.S. GAAP in that it reflects a charge

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

for compensation, bonuses and performance fees attributable to Carlyle partners but does not include net income (loss) attributable to non-Carlyle interests in Consolidated Funds or charges (credits) related to Carlyle corporate actions and non-recurring items. Charges (credits) related to Carlyle corporate actions and non-recurring items include amortization associated with acquired intangible assets, transaction costs associated with acquisitions, gains and losses associated with the mark to market on contingent consideration issued in conjunction with acquisitions, gains and losses from the retirement of debt, charges associated with lease terminations and employee severance and settlements of legal claims.

Fee related earnings (“FRE”) is a component of ENI and is used to assess the ability of the business to cover direct base compensation 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 ENI and also adjusts ENI to exclude performance fees, investment income from investments in Carlyle funds, and performance fee related compensation.

Distributable earnings is a component of ENI and is used to assess performance and amounts potentially available for distribution. Distributable earnings 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 ENI and also adjusts ENI for unrealized performance fees, unrealized investment income and the corresponding unrealized performance fee compensation expense.

ENI and its components are used by management primarily in making resource deployment and compensation decisions across the Company’s four reportable segments. Management makes operating decisions and assesses the performance of each of the Company’s business segments based on financial and operating metrics and data that is presented without the consolidation of any of the Consolidated Funds. Consequently, ENI and all segment data exclude the assets, liabilities and operating results related to the Consolidated Funds.

 

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Table of Contents

Carlyle Group

(Predecessor of The Carlyle Group L.P.)

Notes to the Condensed Combined and Consolidated Financial Statements

(Unaudited)

 

The following table presents the financial data for the Company’s four reportable segments as of and for the three months ended March 31, 2012:

 

      March 31, 2012 and the Three Months Then Ended  
     Corporate
Private
Equity
     Global
Market
Strategies
     Real
Assets
    Fund of
Funds
Solutions
     Total  
     (Dollars in millions)  

Segment Revenues

             

Fund level fee revenues

             

Fund management fees

   $ 123.9       $ 48.6       $ 36.6      $ 16.3       $ 225.4   

Portfolio advisory fees, net

     7.0         0.7         0.3        —           8.0   

Transaction fees, net

     1.6         —           1.1        —           2.7   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fee revenues

     132.5         49.3         38.0        16.3         236.1   

Performance fees

             

Realized

     223.0         32.4         23.2        3.2         281.8   

Unrealized

     241.3         12.7         82.4        13.3         349.7   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total performance fees

     464.3         45.1         105.6        16.5         631.5   

Investment income

             

Realized

     0.8         1.3         —          —           2.1   

Unrealized

     14.5         3.7         3.0        —           21.2   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total investment income

     15.3         5.0         3.0        —           23.3   

Interest and other income

     1.4         0.6         0.4        0.2         2.6