Carlyle Group Inc. - Quarter Report: 2012 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 001-35538

The Carlyle Group L.P.

(Exact name of registrant as specified in its charter)

Delaware

45-2832612

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1001 Pennsylvania Avenue, NW

Washington, D.C., 20004-2505

(Address of principal executive offices)(Zip Code)

(202) 729-5626

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

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

TABLE OF CONTENTS


		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Unaudited Condensed Consolidated Financial Statements – June 30, 2012 and 2011:
	Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011		3
	Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2012 and 2011		4
	Condensed Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 2012 and 2011		5
	Condensed Consolidated Statements of Changes in Partners’ Capital and Redeemable Non-controlling Interests in Consolidated Entities for the Six Months Ended June 30, 2012		6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011		7
	Notes to the Condensed Consolidated Financial Statements		9
Item 1A.	Unaudited Pro Forma Financial Information		76
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		92
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		166
Item 4.	Controls and Procedures		166
PART II – OTHER INFORMATION			167
Item 1.	Legal Proceedings		167
Item 1A.	Risk Factors		167
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		167
Item 3.	Defaults Upon Senior Securities		168
Item 4.	Mine Safety Disclosures		168
Item 5.	Other Information		168
Item 6.	Exhibits		168
SIGNATURE			169
INDEX TO EXHIBITS			170

Forward-Looking Statements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The Carlyle Group L.P.

Condensed Consolidated Balance Sheets

(Dollars in millions)


	June 30,			December 31,
	2012			2011
	(Unaudited)
Assets
Cash and cash equivalents	$	449.5		$	509.6
Cash and cash equivalents held at Consolidated Funds		1,553.7			566.6
Restricted cash		29.8			24.6
Restricted cash and securities of Consolidated Funds		80.7			89.2
Accrued performance fees		2,119.8			2,189.1
Investments		406.6			454.9
Investments of Consolidated Funds		23,585.3			19,507.3
Due from affiliates and other receivables, net		251.3			287.0
Due from affiliates and other receivables of Consolidated Funds, net		335.9			287.6
Fixed assets, net		61.1			52.7
Deposits and other		60.3			70.2
Intangible assets, net		594.9			594.9
Deferred tax assets		51.6			18.0

Total assets	$	29,580.5		$	24,651.7

Liabilities and partners’ capital
Loans payable	$	500.0		$	860.9
Subordinated loan payable to affiliate		—			262.5
Loans payable of Consolidated Funds		12,565.0			9,689.9
Accounts payable, accrued expenses and other liabilities		197.2			203.4
Accrued compensation and benefits		1,204.7			577.9
Due to Carlyle partners		—			1,015.9
Due to affiliates		265.9			108.5
Deferred revenue		59.3			89.2
Deferred tax liabilities		69.0			48.3
Other liabilities of Consolidated Funds		1,316.7			568.1
Accrued giveback obligations		133.4			136.5

Total liabilities		16,311.2			13,561.1

Commitments and contingencies
Redeemable non-controlling interests in consolidated entities		2,534.2			1,923.4

Partners’ capital (common units, 43,221,452 issued and outstanding as of June 30, 2012)		197.6			—
Members’ equity		—			873.1
Accumulated other comprehensive loss		(4.2	)		(55.8	)
Partners’ capital appropriated for Consolidated Funds		1,122.2			853.7
Non-controlling interests in consolidated entities		8,225.8			7,496.2
Non-controlling interests in Carlyle Holdings		1,193.7			—

Total partners’ capital		10,735.1			9,167.2

Total liabilities and partners’ capital	$	29,580.5		$	24,651.7

See accompanying notes.

The Carlyle Group L.P.

Condensed Consolidated Statements of Operations

(Unaudited)

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Revenues
Fund management fees	$	239.9		$	219.2		$	474.3		$	447.2
Performance fees
Realized		116.7			92.5			397.3			494.9
Unrealized		(337.1	)		253.2			23.1			725.5

Total performance fees		(220.4	)		345.7			420.4			1,220.4
Investment income (loss)
Realized		2.4			9.7			1.6			42.8
Unrealized		4.6			10.9			26.9			19.2

Total investment income (loss)		7.0			20.6			28.5			62.0
Interest and other income		2.7			7.2			5.4			13.1
Interest and other income of Consolidated Funds		219.2			163.1			430.7			330.4

Total revenues		248.4			755.8			1,359.3			2,073.1

Expenses
Compensation and benefits
Base compensation		149.9			88.6			256.0			175.3
Equity-based compensation		94.2			—			94.2			—
Performance fee related
Realized		32.1			31.8			66.4			84.8
Unrealized		(97.7	)		22.3			(42.9	)		57.8

Total compensation and benefits		178.5			142.7			373.7			317.9
General, administrative and other expenses		84.0			77.8			175.2			144.3
Interest		6.2			15.8			16.6			32.8
Interest and other expenses of Consolidated Funds		179.5			104.3			364.0			190.9
Other non-operating (income) expenses		0.7			5.2			(3.4	)		20.6

Total expenses		448.9			345.8			926.1			706.5

Other income (loss)
Net investment gains (losses) of Consolidated Funds		386.6			(92.7	)		1,258.7			(277.0	)


Income before provision for income taxes		186.1			317.3			1,691.9			1,089.6
Provision for income taxes		10.6			6.7			22.3			12.8

Net income		175.5			310.6			1,669.6			1,076.8

Net income (loss) attributable to non-controlling interests in consolidated entities		357.9			(61.1	)		1,222.8			(191.1	)

Net income (loss) attributable to Carlyle Holdings		(182.4	)	$	371.7			446.8		$	1,267.9

Net income (loss) attributable to non-controlling interests in Carlyle Holdings		(172.1	)					457.1

Net loss attributable to The Carlyle Group L.P.	$	(10.3	)				$	(10.3	)

Net loss attributable to The Carlyle Group L.P. per common unit
Basic	$	(0.26	)				$	(0.26	)

Diluted	$	(0.26	)				$	(0.26	)

Weighted-average common units
Basic		40,160,245						40,160,245

Diluted		40,160,245						40,160,245

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

The Carlyle Group L.P.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in millions)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net income	$	175.5		$	310.6		$	1,669.6		$	1,076.8
Other comprehensive income (loss)
Foreign currency translation adjustments		70.2			(4.4	)		(188.4	)		27.1
Cash flow hedges
Unrealized losses for the period		(5.3	)		(1.1	)		(6.9	)		(1.1	)
Less: reclassification adjustment for losses included in net income		1.8			1.4			3.7			2.9

Total cash flow hedges		(3.5	)		0.3			(3.2	)		1.8

Other comprehensive income (loss)		66.7			(4.1	)		(191.6	)		28.9

Comprehensive income		242.2			306.5			1,478.0			1,105.7
Less: Comprehensive (income) loss attributable to partners’ capital appropriated for Consolidated Funds		216.8			130.7			101.2			293.1
Less: Comprehensive (income) loss attributable to non-controlling interests in consolidated entities		(629.3	)		(53.8	)		(1,154.4	)		(71.7	)
Less: Comprehensive (income) loss attributable to redeemable non-controlling interests in consolidated entities		(11.6	)		(29.9	)		9.2			(65.6	)

Comprehensive income (loss) attributable to Carlyle Holdings		(181.9	)	$	353.5			434.0		$	1,261.5

Less: Comprehensive (income) loss attributable to non-controlling interests in Carlyle Holdings		169.7						(446.2	)

Comprehensive income attributable to The Carlyle Group L.P.	$	(12.2	)				$	(12.2	)

See accompanying notes.

The Carlyle Group L.P.

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

(Unaudited)

(Dollars and units in millions)


	Common Units		Members’ Equity			Partners’ Capital			Accumulated Other Comprehensive Income (Loss)			Partners’ Capital Appropriated for Consolidated Funds			Non-controlling Interests in Consolidated Entities			Non-controlling Interests in Carlyle Holdings			Total Partners’ Capital			Redeemable Non-controlling Interests in Consolidated Entities
Balance at December 31, 2011		—	$	873.1		$	—		$	(55.8	)	$	853.7		$	7,496.2		$	—		$	9,167.2		$	1,923.4
Acquisition of CLOs		—		—			—			—			357.3			—			—			357.3			—
Contributions		—		9.3			—			—			12.4			340.7			—			362.4			719.1
Distributions		—		(658.5	)		—			—			—			(813.9	)		—			(1,472.4	)		(114.8	)
Net income (loss)		—		532.7			—			—			47.5			955.5			—			1,535.7			(20.8	)
Currency translation adjustments		—		—			—			2.3			(4.1	)		(168.0	)		—			(169.8	)		—
Change in fair value of cash flow hedge instruments		—		—			—			(2.2	)		—			—			—			(2.2	)		—
Contribution of equity interests in general partners of carry funds (see Note 1)		—		261.1			—			—			—			—			—			261.1			—
Reorganization of beneficial interests in investments (see Note 1)		—		(64.1	)		—			—			—			64.1			—			—			—
Reorganization of carried interest rights of retired senior Carlyle professionals (see Note 1)		—		(56.2	)		—			—			—			56.2			—			—			—
Exchange of interests for Carlyle Holdings units (see Note 1)		—		(897.4	)		—			55.7			—			—			841.7			—			—

Balance post-reorganization		—		—			—			—			1,266.8			7,930.8			841.7			10,039.3			2,506.9

Issuance of common units in initial public offering, net of issuance costs (see Note 1)		30.5		—			615.8			—			—			—			—			615.8			—
Deferred tax effects resulting from acquisition and exchange of interests in Carlyle Holdings (see Note 1)		—		—			(9.4	)		—			—			—			—			(9.4	)		—
Dilution assumed with IPO		—		—			(469.8	)		—			—			—			469.8			—			—
CalPERS equity exchange		12.7		—			66.4			(2.3	)		—			—			(60.9	)		3.2
Contributions		—		—			—			—			—			120.5			—			120.5			105.0
Distributions		—		—			—			—			—			(192.4	)		—			(192.4	)		(89.3	)
Net income (loss)		—		—			(10.3	)		—			(115.3	)		344.3			(75.6	)		143.1			11.6
Equity-based compensation		—		—			4.9			—			—			—			29.7			34.6			—
Currency translation adjustments		—		—			—			(1.7	)		(29.3	)		22.6			(10.2	)		(18.6	)		—
Change in fair value of cash flow hedge instruments		—					—			(0.2	)		—			—			(0.8	)		(1.0	)		—

Balance at June 30, 2012		43.2	$	—		$	197.6		$	(4.2	)	$	1,122.2		$	8,225.8		$	1,193.7		$	10,735.1		$	2,534.2

See accompanying notes.

The Carlyle Group L.P.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in millions)


	Six Months Ended June 30,
	2012			2011
Cash flows from operating activities
Net income	$	1,669.6		$	1,076.8
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		48.2			37.2
Amortization of deferred financing fees		0.8			0.5
Equity-based compensation		94.2			—
Non-cash performance fees		(55.9	)		(737.7	)
Other non-cash amounts		(3.4	)		(4.2	)
Consolidated Funds related:
Realized/unrealized gain on investments of Consolidated Funds		(1,553.5	)		(417.5	)
Realized/unrealized loss from loans payable of Consolidated Funds		351.9			696.1
Purchases of investments by Consolidated Funds		(3,821.1	)		(3,761.6	)
Proceeds from sale and settlements of investments by Consolidated Funds		4,309.5			4,246.5
Non-cash interest income, net		(31.3	)		(54.0	)
Change in cash and cash equivalents held at Consolidated Funds		153.6			64.6
Change in other receivables held at Consolidated Funds		28.7			12.5
Change in other liabilities held at Consolidated Funds		(211.2	)		182.0
Investment income		(25.7	)		(54.0	)
Purchases of investments		(20.3	)		(84.5	)
Proceeds from the sale of investments		149.8			263.6
Purchases of trading securities		(10.1	)		—
Change in deferred taxes		0.1			2.1
Change in due from affiliates and other receivables		(1.8	)		(11.9	)
Change in deposits and other		2.3			(3.3	)
Change in accounts payable, accrued expenses and other liabilities		(7.2	)		(45.7	)
Change in accrued compensation and benefits		(127.0	)		(41.2	)
Change in due to affiliates		(3.8	)		1.1
Change in deferred revenue		(28.4	)		(56.9	)

Net cash provided by operating activities		908.0			1,310.5

Cash flows from investing activities
Change in restricted cash		(5.1	)		(15.4	)
Purchases of fixed assets, net		(18.3	)		(17.8	)
Purchases of intangible assets		(41.0	)		—

Net cash used in investing activities		(64.4	)		(33.2	)

The Carlyle Group L.P.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in millions)


	Six Months Ended June 30,
	2012			2011
Cash flows from financing activities
Borrowings under credit facility		433.7			—
Repayments under credit facility		(744.6	)		—
Payments on loans payable		(310.0	)		(17.0	)
Net payments on loans payable of Consolidated Funds		(507.0	)		(983.4	)
Net proceeds from issuance of Units in Initial Public Offering		615.8			—
Contributions from predecessor owners		9.3			6.0
Distributions to predecessor owners		(452.3	)		(657.0	)
Contributions from non-controlling interest holders		1,227.8			354.5
Distributions to non-controlling interest holders		(1,198.2	)		(189.8	)
Change in due to/from affiliates financing activities		14.6			48.7
Change in due to/from affiliates and other receivables of Consolidated Funds		18.9			—

Net cash used in financing activities		(892.0	)		(1,438.0	)

Effect of foreign exchange rate changes		(11.7	)		29.1
Decrease in cash and cash equivalents		(60.1	)		(131.6	)
Cash and cash equivalents, beginning of period		509.6			616.9

Cash and cash equivalents, end of period	$	449.5		$	485.3


Supplemental non-cash disclosures
Net assets related to consolidation of the CLOs	$	357.3		$	—

Non-cash distributions to predecessor owners	$	402.5		$	304.7

Non-cash contributions from non-controlling interest holders	$	69.9		$	87.6

Non-cash distributions to non-controlling interest holders	$	12.2		$	73.3

Reorganization:
Transfer of Partners Capital to non-controlling interests in consolidated entities	$	120.3		$	—

Deferred taxes from transfer of ownership interests	$	9.4		$	—

Exchange of CalPERS equity interests:
Deferred tax asset	$	21.5		$	—

Tax receivable agreement liability	$	18.3		$	—

Partners’ capital	$	3.2		$	—

See accompanying notes.

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

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

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

Basis of Presentation

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

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Reorganization

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

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

•

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

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

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

•

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

•

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

Initial Public Offering

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

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

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

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

CalPERS Exchange

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

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

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

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

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

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

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

Investments in Unconsolidated Variable Interest Entities

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


	As of
	June 30,		December 31,
	2012		2011
	(Dollars in millions)
Investments	$	2.8	$	2.3
Receivables		14.1		100.0

Maximum Exposure to Loss	$	16.9	$	102.3

Basis of Accounting

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Use of Estimates

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

Business Combinations

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

Revenue Recognition

Fund Management Fees

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

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

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

Performance Fees

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

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

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

Investment Income (Loss)

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Interest Income

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

Compensation and Benefits

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

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

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

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

Income Taxes

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

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

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

Tax Receivable Agreement

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

Non-controlling Interests in Consolidated Entities

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

Earnings Per Common Unit

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

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

Investments

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

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Equity-Method Investments

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

Cash and Cash Equivalents

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

Cash and Cash Equivalents Held at Consolidated Funds

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

Restricted Cash

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

Restricted Cash and Securities of Consolidated Funds

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

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

Derivative Instruments

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

Fixed Assets

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

Intangible Assets and Goodwill

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

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

Due to Carlyle Partners

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

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

Deferred Revenue

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

Comprehensive Income

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Foreign Currency Translation

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

Recent Accounting Pronouncements

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

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

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

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

3. Acquisitions and Acquired Intangible Assets

Acquisition of CLO Management Contracts

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Acquisition of AlpInvest

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

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

Acquisition of ESG

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

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

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

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

Acquisition of Claren Road

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

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

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

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Intangible Assets

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


	June 30,			December 31,
	2012			2011
	(Dollars in millions)
Acquired contractual rights	$	654.2		$	615.8
Acquired trademarks		6.8			6.8
Accumulated amortization		(102.7	)		(64.5	)

Finite-lived intangible assets, net		558.3			558.1
Goodwill		36.6			36.8

Intangible assets, net	$	594.9		$	594.9

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


	Global Market Strategies		Fund of Funds Solutions			Total
	(Dollars in millions)
Balance as of December 31, 2011	$	28.0	$	8.8		$	36.8
Foreign currency translation		—		(0.2	)		(0.2	)

Balance as of June 30, 2012	$	28.0	$	8.6		$	36.6

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

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


2012	$	77.9
2013		79.0
2014		78.6
2015		76.2
2016		69.9
Thereafter		216.9

	$	598.5

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

4. Fair Value Measurement

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

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

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

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

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

(Dollars in millions)

Level I

Level II

Level III

Total

Assets

Investments of Consolidated Funds:

Equity securities

344.4

556.6

2,140.0

3,041.0

Bonds

—

891.0

Loans

—

12,643.1

Partnership and LLC interests⁽¹⁾

—

4,467.1

Hedge funds

—

2,531.7

—

2,531.7

Other

—

11.4

344.4

3,088.3

20,152.6

23,585.3

Trading securities and other

—

35.5

Restricted securities of Consolidated Funds

43.5

—

43.5

Total

387.9

3,088.3

20,188.1

23,664.3

Liabilities

Loans payable of Consolidated Funds

—

12,565.0

Interest rate swaps

—

10.5

—

10.5

Derivative instruments of the CLOs

—

16.7

Contingent consideration⁽²⁾

—

170.6

Total

—

10.5

12,752.3

12,762.8

(1)

Balance represents Fund Investments that the Partnership consolidates one fiscal quarter in arrears.

(2)

Related to contingent cash and equity consideration associated with the acquisitions of Claren Road, AlpInvest and ESG (see Note 3).

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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


(Dollars in millions)	Level I		Level II		Level III		Total
Assets
Investments of Consolidated Funds:
Equity securities	$	61.9	$	718.4	$	1,868.9	$	2,649.2
Bonds		—		—		557.0		557.0
Loans		—		—		10,152.6		10,152.6
Partnership and LLC interests⁽¹⁾		—		—		4,198.6		4,198.6
Hedge funds		—		1,929.1		—		1,929.1
Other		—		—		20.8		20.8

	$	61.9	$	2,647.5	$	16,797.9	$	19,507.3
Trading securities and other		—		—		30.6		30.6
Restricted securities of Consolidated Funds		57.5		—		—		57.5

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

Liabilities
Loans payable of Consolidated Funds	$	—	$	—	$	9,689.9	$	9,689.9
Interest rate swaps		—		7.3		—		7.3
Subordinated loan payable to affiliate		—		—		262.5		262.5
Contingent consideration⁽²⁾		—		—		169.2		169.2

Total	$	—	$	7.3	$	10,121.6	$	10,128.9

(1)

Balance represents Fund Investments that the Partnership consolidates one fiscal quarter in arrears.

(2)

Related to contingent cash and equity consideration associated with the acquisitions of Claren Road, AlpInvest and ESG (see Note 3).

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

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

Financial Assets
Three Months Ended June 30, 2012

Investments of Consolidated Funds

Equity
securities

Bonds

Loans

Partnership
and LLC
interests

Other

Trading
securities and
other

Total

Balance, beginning of period

1,861.6

876.7

12,750.3

4,149.1

11.6

32.4

19,681.7

Initial consolidation of the CLOs

—

13.0

382.7

—

395.7

Transfers out ⁽¹⁾

(20.2

)

—

(20.2

)

Purchases

19.1

114.0

1,579.0

148.8

—

1,860.9

Sales

(16.2

)

(80.3

)

(655.8

)

(77.8

)

(0.3

)

—

(830.4

)

Settlements

—

(1,151.8

)

—

(1,151.8

)

Realized and unrealized gains (losses), net

295.7

(32.4

)

(261.3

)

247.0

0.1

3.1

252.2

Balance, end of period

2,140.0

891.0

12,643.1

4,467.1

11.4

35.5

20,188.1

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

306.8

(1.8

)

(9.6

)

283.4

2.8

3.1

584.7

Financial Assets

Six Months Ended June 30, 2012

Investments of Consolidated Funds

Equity
securities

Bonds

Loans

Partnership
and LLC
interests

Other

Trading
securities and
other

Total

Balance, beginning of period

1,868.9

557.0

10,152.6

4,198.6

20.8

30.6

16,828.5

Initial consolidation of the CLOs

25.2

287.7

3,024.2

—

3,337.1

Transfers out ⁽¹⁾

(145.6

)

—

(145.6

)

Purchases

41.0

174.4

2,543.0

309.8

—

3,068.2

Sales

(110.5

)

(140.7

)

(1,251.1

)

(167.4

)

(2.0

)

—

(1,671.7

)

Settlements

—

(1,862.8

)

—

(1,862.8

)

Realized and unrealized gains (losses), net

461.0

12.6

37.2

126.1

(7.4

)

4.9

634.4

Balance, end of period

2,140.0

891.0

12,643.1

4,467.1

11.4

35.5

20,188.1

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

687.9

25.2

150.6

458.0

1.5

4.9

1,328.1


	Financial Assets
	Three Months Ended June 30, 2011
	Investments of Consolidated Funds
	Equity securities			Bonds			Loans			Partnership and LLC interests			Other			Trading securities and other			Total
Balance, beginning of period	$	46.5		$	466.9		$	10,517.7		$	13.2		$	32.7		$	27.1		$	11,104.1
Purchases		—			193.5			1,732.2			—			—			—			1,925.7
Sales		(10.9	)		(99.5	)		(466.0	)		—			(9.9	)		—			(586.3	)
Settlements		—			(2.8	)		(1,505.3	)		—			—			—			(1,508.1	)

Realized and unrealized gains (losses), net		(0.9	)		10.0			79.2			(0.1	)		12.3			(2.2	)		98.3

Balance, end of period	$	34.7		$	568.1		$	10,357.8		$	13.1		$	35.1		$	24.9		$	11,033.7

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date	$	(0.4	)	$	4.1		$	(14.9	)	$	—		$	11.6		$	(2.2	)	$	(1.8	)

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)


	Financial Assets
	Six Months Ended June 30, 2011
	Investments of Consolidated Funds
	Equity securities			Bonds			Loans			Partnership and LLC interests			Other			Trading securities and other			Total
Balance, beginning of period	$	36.8		$	460.3		$	10,433.5		$	14.8		$	33.9		$	21.8		$	11,001.1
Transfers out ⁽¹⁾		(4.4	)		—			—			—			—			—			(4.4	)
Purchases		4.8			278.1			3,149.0			—			—			2.5			3,434.4
Sales		(21.2	)		(221.7	)		(1,016.7	)		(0.2	)		(12.9	)		(0.2	)		(1,272.9	)
Settlements		—			(2.8	)		(2,761.6	)		—			—			—			(2,764.4	)
Realized and unrealized gains (losses), net		18.7			54.2			553.6			(1.5	)		14.1			0.8			639.9

Balance, end of period	$	34.7		$	568.1		$	10,357.8		$	13.1		$	35.1		$	24.9		$	11,033.7

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date	$	15.4		$	29.5		$	203.5		$	(1.4	)	$	11.3		$	0.8		$	259.1

(1)

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

Financial Liabilities

Three Months Ended June 30, 2012

Loans Payable
of Consolidated
Funds

Derivative
Instruments of
Consolidated
Funds

Subordinated
Loan
Payable to
Affiliate

Contingent
Consideration

Total

Balance, beginning of period

12,454.6

4.8

—

170.5

12,629.9

Initial consolidation of the CLOs

497.4

—

497.4

Borrowings

1.5

—

1.5

Paydowns

(324.4

)

—

(0.5

)

(324.9

)

Sales

—

(0.3

)

—

(0.3

)

Realized and unrealized (gains) losses, net

(64.1

)

12.2

—

0.6

(51.3

)

Balance, end of period

12,565.0

16.7

—

170.6

12,752.3

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

179.4

(8.5

)

—

0.6

171.5

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Financial Liabilities

Six Months Ended June 30, 2012

Loans Payable
of Consolidated
Funds

Derivative
Instruments of
Consolidated
Funds

Subordinated
Loan Payable
to Affiliate

Contingent
Consideration

Total

Balance, beginning of period

9,689.9

—

262.5

169.2

10,121.6

Initial consolidation of the CLOs

3,203.3

4.6

—

3,207.9

Borrowings

1.5

—

1.5

Paydowns

(507.3

)

—

(260.0

)

(1.2

)

(768.5

)

Sales

—

(0.3

)

—

(0.3

)

Realized and unrealized (gains) losses, net

177.6

12.4

(2.5

)

2.6

190.1

Balance, end of period

12,565.0

16.7

—

170.6

12,752.3

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

329.2

(19.2

)

—

(0.2

)

309.8


	Financial Liabilities
	Three Months Ended June 30, 2011
	Loans Payable of Consolidated Funds			Derivative Instruments of Consolidated Funds		Subordinated Loan Payable to Affiliate		Contingent Consideration		Total
Balance, beginning of period	$	10,734.6		$	2.9	$	508.7	$	96.7		11,342.9
Borrowings		8.5			—		—		—		8.5
Paydowns		(561.0	)		—		—		—		(561.0	)
Realized and unrealized losses, net		243.2			0.3		3.0		6.6		253.1

Balance, end of period	$	10,425.3		$	3.2	$	511.7	$	103.3	$	11,043.5

Changes in unrealized losses included in earnings related to financial liabilities still held at the reporting date	$	100.0		$	0.3	$	3.0	$	2.2	$	105.5


	Financial Liabilities
	Six Months Ended June 30, 2011
	Loans Payable of Consolidated Funds			Derivative Instruments of Consolidated Funds			Subordinated Loan Payable to Affiliate		Contingent Consideration		Total
Balance, beginning of period	$	10,418.5		$	1.9		$	494.0	$	95.0	$	11,009.4
Borrowings		9.2			—			—		—		9.2
Paydowns		(978.4	)		(0.1	)		—		—		(978.5	)
Realized and unrealized losses, net		976.0			1.4			17.7		8.3		1,003.4

Balance, end of period	$	10,425.3		$	3.2		$	511.7	$	103.3	$	11,043.5

Changes in unrealized losses included in earnings related to financial liabilities still held at the reporting date	$	621.5		$	1.2		$	17.7	$	2.9	$	643.3

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

(Dollars in millions)

Fair Value
at
June 30,
2012

Valuation Technique(s)

Unobservable Input(s)

Range
(Weighted Average)

Assets

Investments of Consolidated Funds:

Equity securities

2,018.0

Comparable Multiple

LTM EBITDA Multiple

5.3x - 13.8x (9.0x)

46.2

Comparable Multiple

Price Earnings Multiple

(10.6x)

16.0

Comparable Multiple

Book Value Multiple

(1.0x)

59.8

Consensus Pricing

Indicative Quotes ($ per Share)

($15)

Bonds

891.0

Consensus Pricing

Indicative Quotes (% of Par)

(89)

Loans

12,286.4

Consensus Pricing

Indicative Quotes (% of Par)

(93)

356.7

Discounted Cash Flow

Discount Rate

8% - 24% (11%)

Partnership and LLC interests

4,467.1

NAV of Underlying Fund⁽¹⁾

N/A

Other

11.4

Counterparty Pricing

Indicative Quotes (% of Notional Amount)

(5)

20,152.6

Trading securities and other

35.5

Dealer Pricing

Indicative Quotes (% of Par)

80 - 98 (90)

Total

20,188.1

Liabilities

Loans payable of Consolidated Funds

Senior secured notes

11,746.7

Discounted Cash Flow with Consensus Pricing

Discount Rates

(5%)

Default Rates

(3%)

Recovery Rates

(66%)

Indicative Quotes (% of Par)

(88)

Subordinated notes and preferred shares

812.8

Discounted Cash Flow with Consensus Pricing

Discount Rates

(27%)

Default Rates

(3%)

Recovery Rates

(67%)

Indicative Quotes (% of Par)

(42)

Combination notes

5.5

Consensus Pricing

Indicative Quotes (% of Par)

(92)

Derivative instruments of Consolidated Funds

16.7

Counterparty Pricing

Indicative Quotes (% of Notional Amount)

(6)

Contingent consideration⁽²⁾

170.6

Discounted Cash Flow

Assumed % of Total Potential Contingent Payments

37% - 100% (84%)

Discount Rate

5% - 25% (21%)

Total

12,752.3

(1)	Represents the Partnership’s investments in funds that are valued using the NAV of the underlying fund.

(2)	Related to contingent cash and equity consideration associated with the acquisitions of Claren Road, AlpInvest and ESG (see Note 3).

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

5. Accrued Performance Fees

The components of accrued performance fees are as follows:


	As of
	June 30,		December 31,
	2012		2011
	(Dollars in millions)
Corporate Private Equity	$	1,574.5	$	1,599.2
Global Market Strategies		65.3		170.0
Real Assets		294.1		270.9
Fund of Funds Solutions		185.9		149.0

Total	$	2,119.8	$	2,189.1

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


	As of
	June 30,			December 31,
	2012			2011
	(Dollars in millions)
Corporate Private Equity	$	(74.9	)	$	(77.8	)
Global Market Strategies		(1.2	)		(1.2	)
Real Assets		(57.3	)		(57.5	)

Total	$	(133.4	)	$	(136.5	)

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Performance Fees

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


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2011		2012		2011
	(Dollars in millions)
Corporate Private Equity	$	(217.6	)	$	270.1	$	246.9	$	963.8
Global Market Strategies		6.9			44.5		52.4		124.5
Real Assets		(30.4	)		31.1		75.1		132.1
Fund of Funds Solutions		20.7			—		46.0		—

Total	$	(220.4	)	$	345.7	$	420.4	$	1,220.4

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

6. Investments

Investments consist of the following:


	As of
	June 30,		December 31,
	2012		2011
	(Dollars in millions)
Equity method investments, excluding accrued performance fees	$	366.3	$	419.9
Trading securities and other investments		40.3		35.0

Total investments	$	406.6	$	454.9

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Equity-Method Investments

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


	As of
	June 30,		December 31,
	2012		2011
	(Dollars in millions)
Corporate Private Equity	$	175.5	$	238.5
Global Market Strategies		14.6		11.9
Real Assets		176.2		169.5

Total	$	366.3	$	419.9

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


	Corporate Private Equity					Global Market Strategies				Real Assets					Aggregate Totals
	For the Three Months Ended June 30,					For the Three Months Ended June 30,				For the Three Months Ended June 30,					For the Three Months Ended June 30,
	2012			2011		2012		2011		2012			2011		2012			2011
Statement of income information
Investment income	$	255.4		$	148.1	$	38.1	$	33.7	$	126.9		$	203.3	$	420.4		$	385.1
Expenses		119.9			140.7		17.1		10.7		110.2			99.3		247.2			250.7

Net investment income		135.5			7.4		21.0		23.0		16.7			104.0		173.2			134.4
Net realized and unrealized gain (loss)		(738.2	)		1,909.5		23.7		58.7		(984.2	)		155.0		(1,698.7	)		2,123.2

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


	Corporate Private Equity					Global Market Strategies				Real Assets				Aggregate Totals
	For the Six Months Ended June 30,					For the Six Months Ended June 30,				For the Six Months Ended June 30,				For the Six Months Ended June 30,
	2012		2011			2012		2011		2012		2011		2012		2011
Statement of income information
Investment income	$	315.9	$	198.1		$	73.1	$	64.4	$	243.1	$	311.4	$	632.1	$	573.9
Expenses		250.4		267.2			27.3		21.4		211.6		192.6		489.3		481.2

Net investment income (loss)		65.5		(69.1	)		45.8		43.0		31.5		118.8		142.8		92.7
Net realized and unrealized gain		2,194.5		5,095.5			224.9		312.6		1,141.2		1,538.8		3,560.6		6,946.9

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


	Corporate				Global
	Private Equity				Market Strategies				Real Assets				Aggregate Totals
	As of				As of				As of				As of
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2012		2011		2012		2011		2012		2011		2012		2011
Balance sheet information
Investments	$	36,349.9	$	36,517.6	$	1,932.9	$	1,936.2	$	22,796.6	$	20,952.4	$	61,079.4	$	59,406.2
Total assets	$	37,511.5	$	37,729.7	$	2,088.0	$	2,224.3	$	23,557.1	$	21,860.3	$	63,156.6	$	61,814.3
Debt	$	149.8	$	79.9	$	32.0	$	64.0	$	1,394.2	$	1,978.1	$	1,576.0	$	2,122.0
Other liabilities	$	352.2	$	278.7	$	13.7	$	116.0	$	301.5	$	260.9	$	667.4	$	655.6
Total liabilities	$	502.0	$	358.6	$	45.7	$	180.0	$	1,695.7	$	2,239.0	$	2,243.4	$	2,777.6
Partners' capital	$	37,009.5	$	37,371.1	$	2,042.3	$	2,044.3	$	21,861.4	$	19,621.3	$	60,913.2	$	59,036.7

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Investment Income

The components of investment income are as follows:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012		2011			2012			2011
	(Dollars in millions)					(Dollars in millions)
Income from equity investments	$	4.5	$	21.0		$	26.0		$	60.6
Income (loss) from trading securities		2.5		(0.4	)		4.6			0.9
Other investment income (loss)		—		—			(2.1	)		0.5

Total	$	7.0	$	20.6		$	28.5		$	62.0

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
	(Dollars in millions)
Corporate Private Equity	$	2.2	$	19.6	$	22.1	$	52.4
Global Market Strategies		0.2		0.3		1.0		0.9
Real Assets		2.1		1.1		2.9		7.3

Total	$	4.5	$	21.0	$	26.0	$	60.6

Trading Securities and Other Investments

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

Investments of Consolidated Funds

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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


	Fair Value				Consolidated Funds
Geographic Region/Instrument Type/ Industry Description or Investment Strategy	June 30, 2012		December 31, 2011		June 30, 2012			December 31, 2011
	(Dollars in millions)
United States
Equity securities:
Accommodation and Food Services	$	43.7	$	106.1		0.19	%		0.54	%
Administrative Support, Waste Management, Remediation Services		294.1		3.7		1.25	%		0.02	%
Aerospace and defense		—		53.2		—			0.27	%
Finance and Insurance		45.7		44.3		0.19	%		0.23	%
Health Care and Social Assistance		57.1		31.8		0.24	%		0.16	%
Information		91.3		48.0		0.39	%		0.25	%
Manufacturing		348.5		412.7		1.48	%		2.12	%
Professional, Scientific, Technical Services		547.9		500.0		2.32	%		2.56	%
Retail trade		145.8		147.1		0.62	%		0.75	%
Wholesale Trade		116.1		17.9		0.49	%		0.09	%
Other		80.4		117.5		0.34	%		0.60	%

Total equity securities (cost of $1,932.2 and $2,160.6 at June 30, 2012 and December 31, 2011, respectively)		1,770.6		1,482.3		7.51	%		7.59	%

Partnership and LLC interests:
Fund investments		2,933.5		2,701.0		12.44	%		13.85	%

Total Partnership and LLC interests (cost of $2,650.2 and $2,593.5 at June 30, 2012 and December 31, 2011, respectively)		2,933.5		2,701.0		12.44	%		13.85	%

Loans:
Administrative Support, Waste Management, Remediation Services		29.1		60.6		0.12	%		0.31	%
Finance and Insurance		43.3		—		0.18	%		—
Manufacturing		64.6		65.0		0.27	%		0.33	%
Professional, Scientific, Technical Services		107.2		81.1		0.45	%		0.42	%
Wholesale Trade		77.5		48.2		0.33	%		0.25	%
Other		26.3		81.7		0.11	%		0.42	%

Total loans (cost of $419.1 and $361.4 at June 30, 2012 and December 31, 2011, respectively)		348.0		336.6		1.46	%		1.73	%

Total investment in hedge funds		2,531.7		1,929.1		10.73	%		9.89	%

Assets of the CLOs
Bonds		289.0		247.7		1.23	%		1.27	%
Equity		56.6		25.3		0.24	%		0.13	%
Loans		7,763.5		6,911.6		32.93	%		35.43	%
Other		—		0.1		—			0.00	%

Total assets of the CLOs (cost of $8,235.1 and $7,446.8 at June 30, 2012 and December 31, 2011, respectively)		8,109.1		7,184.7		34.40	%		36.83	%

Total United States	$	15,692.9	$	13,633.7		66.54	%		69.89	%

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)


	Fair Value				Percentage of Investments of Consolidated Funds
Geographic Region/Instrument Type/ Industry Description or Investment Strategy	June 30, 2012		December 31, 2011		June 30, 2012			December 31, 2011
	(Dollars in millions)
Canada
Equity securities:
Manufacturing	$	2.1	$	2.9		0.01	%		0.01	%
Other		—		2.9		—			0.02	%

Total equity securities (cost of $0 and $6.1 at June 30, 2012 and December 31, 2011, respectively)		2.1		5.8		0.01	%		0.03	%

Partnership and LLC interests:
Fund investments		42.4		45.0		0.18	%		0.23	%

Total Partnership and LLC interests (cost of $109.8 and $112.0 at June 30, 2012 and December 31, 2011, respectively)		42.4		45.0		0.18	%		0.23	%

Loans:
Transportation and Warehousing		6.9		8.0		0.03	%		0.04	%

Total loans (cost of $15.2 and $9.5 at June 30, 2012 and December 31, 2011, respectively)		6.9		8.0		0.03	%		0.04	%

Assets of the CLOs
Bonds		8.5		15.8		0.04	%		0.08	%
Loans		180.7		228.5		0.77	%		1.17	%

Total assets of the CLOs (cost of $190.3 and $247.1 at June 30, 2012 and December 31, 2011, respectively)		189.2		244.3		0.81	%		1.25	%

Total Canada	$	240.6	$	303.1		1.03	%		1.55	%

Europe
Equity securities:
Administrative Support, Waste Management, Remediation Services	$	130.1	$	104.4		0.55	%		0.53	%
Health Care and Social Assistance		77.7		13.2		0.33	%		0.07	%
Information		94.3		88.1		0.40	%		0.45	%
Manufacturing		382.2		389.2		1.62	%		2.00	%
Retail Trade		216.2		95.4		0.92	%		0.49	%
Wholesale Trade		97.5		62.8		0.41	%		0.32	%
Other		73.6		93.7		0.31	%		0.48	%

Total equity securities (cost of $1,512.3 and $1,249.3 at June 30, 2012 and December 31, 2011, respectively)		1,071.6		846.8		4.54	%		4.34	%

Partnership and LLC interests:
Fund investments		983.1		976.9		4.17	%		5.01	%

Total Partnership and LLC interests (cost of $1,054.6 and $1,052.6 at June 30, 2012 and December 31, 2011, respectively)	$	983.1	$	976.9		4.17	%		5.01	%

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)


	Fair Value				Percentage of Investments of Consolidated Funds
Geographic Region/Instrument Type/ Industry Description or Investment Strategy	June 30, 2012		December 31, 2011		June 30, 2012			December 31, 2011
	(Dollars in millions)
Europe
Loans:
Manufacturing	$	1.9	$	158.2		0.01	%		0.81	%
Other		—		135.1		—			0.69	%

Total loans (cost of $0 and $413.3 at June 30, 2012 and December 31, 2011, respectively)		1.9		293.3		0.01	%		1.50	%

Assets of the CLOs
Bonds		583.0		288.6		2.47	%		1.48	%
Equity		5.4		12.5		0.02	%		0.06	%
Loans		4,342.2		2,577.2		18.41	%		13.21	%
Other		11.4		20.7		0.05	%		0.11	%

Total assets of the CLOs (cost of $5,482.7 and $3,345.2 at June 30, 2012 and December 31, 2011, respectively)		4,942.0		2,899.0		20.95	%		14.86	%

Total Europe	$	6,998.6	$	5,016.0		29.67	%		25.71	%

Australia
Assets of the CLOs
Bonds	$	10.5	$	4.9		0.04	%		0.03	%

Total assets of the CLOs (cost of $10.5 and $5.0 at June 30, 2012 and December 31, 2011, respectively)		10.5		4.9		0.04	%		0.03	%

Total Australia	$	10.5	$	4.9		0.04	%		0.03	%

Global
Equity securities:
Manufacturing	$	134.6	$	73.9		0.57	%		0.38	%

Total equity securities (cost of $86.6 and $85.3 at June 30, 2012 and December 31, 2011, respectively)		134.6		73.9		0.57	%		0.38	%

Partnership and LLC interests:
Fund investments		508.1		475.7		2.15	%		2.44	%

Total Partnership and LLC interests (cost of $429.0 and $427.2 at June 30, 2012 and December 31, 2011, respectively)		508.1		475.7		2.15	%		2.44	%

Total Global	$	642.7	$	549.6		2.72	%		2.82	%

Total investments of Consolidated Funds (cost of $22,127.6 and $19,514.9 at June 30, 2012 and December 31, 2011, respectively)	$	23,585.3	$	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.

The Carlyle Group L.P.

Notes to the Condensed 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				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
	(Dollars in millions)
Interest income from investments	$	185.9	$	134.9	$	369.9	$	272.7
Other income		33.3		28.2		60.8		57.7

Total	$	219.2	$	163.1	$	430.7	$	330.4

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						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(Dollars in millions)
Gains from investments of Consolidated Funds	$	577.6		$	74.4		$	1,608.7		$	417.5
Losses from liabilities of CLOs		(193.3	)		(169.1	)		(352.5	)		(696.1	)
Gains on other assets of CLOs		2.3			2.0			2.5			1.6

Total	$	386.6		$	(92.7	)	$	1,258.7		$	(277.0	)

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


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012		2011			2012		2011
	(Dollars in millions)					(Dollars in millions)
Realized gains	$	246.2	$	97.0		$	461.3	$	143.1
Net change in unrealized gains (losses)		331.4		(22.6	)		1,147.4		274.4

Total	$	577.6	$	74.4		$	1,608.7	$	417.5

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

7. Non-controlling Interests in Consolidated Entities

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


	As of
	June 30,		December 31,
	2012		2011
	(Dollars in millions)
Non-Carlyle interests in Consolidated Funds	$	7,920.2	$	7,290.6
Non-Carlyle interests in majority-owned subsidiaries		232.5		159.4
Non-controlling interest in AlpInvest		33.7		40.2
Non-controlling interest in carried interest and cash held for carried interest distributions		39.4		6.0

Non-controlling interests in consolidated entities	$	8,225.8	$	7,496.2

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(Dollars in millions)
Non-Carlyle interests in Consolidated Funds	$	551.8		$	38.0		$	1,324.0		$	47.6
Non-Carlyle interests in majority-owned subsidiaries		3.0			12.6			10.4			19.9
Non-controlling interest in carried interest and cash held for carried interest distributions		(35.6	)		2.2			(34.6	)		2.3

Net income (loss) attributable to other non-controlling interests in consolidated entities		519.2			52.8			1,299.8			69.8
Net income (loss) attributable to equity appropriated for CLOs		(172.9	)		(143.8	)		(67.8	)		(326.5	)
Net (loss) income attributable to redeemable non-controlling interests in consolidated entities		11.6			29.9			(9.2	)		65.6

Non-controlling interests in income (loss) of consolidated entities	$	357.9		$	(61.1	)	$	1,222.8		$	(191.1	)

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

8. Fixed Assets, Net

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


	As of
	June 30,			December 31,
	2012			2011
	(Dollars in millions)
Furniture, fixtures and equipment	$	38.0		$	37.4
Computer hardware and software		100.1			94.8
Leasehold improvements		56.1			49.1

Total fixed assets		194.2			181.3
Less: accumulated depreciation		(133.1	)		(128.6	)

Net fixed assets	$	61.1		$	52.7

Depreciation and amortization expense of $4.3 million and $6.1 million for the three months ended June 30, 2012 and 2011, respectively, and $9.8 million and $12.0 million for the six months ended June 30, 2012 and 2011, respectively, is included in general, administrative and other expenses in the condensed consolidated statements of operations.

9. Loans Payable

Senior Secured Credit Facility

At December 31, 2011, the Partnership had in place a senior secured credit facility with certain financial institutions under which it could 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 was scheduled to mature on September 30, 2016. As of December 31, 2011, $500.0 million was outstanding under the term loan and $310.9 million was outstanding under the revolving credit facility. On May 9, 2012, the senior secured credit facility was replaced by the new senior credit facility (discussed below).

Senior Credit Facility

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

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

The new senior credit facility includes $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% (1.25% at June 30, 2012). As of June 30, 2012, $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):


2014	$	75.0
2015		175.0
2016		250.0

	$	500.0

As of June 30, 2012, no amounts were outstanding under the revolving credit facility. The outstanding balance on the revolving credit facility of the pre-existing senior secured credit facility of $618.1 million as of May 8, 2012 was repaid with proceeds from the Partnership’s initial public offering.

The new senior credit facility is unsecured. The Partnership is required to maintain management fee earning assets (as defined in the new senior credit facility) of at least $53.0 billion plus 70% of any future acquired assets under management and a total debt leverage ratio of less than 3.0 to 1.0, in each case, tested on a quarterly basis. The Partnership is no longer subject to a senior debt leverage ratio or a minimum interest coverage ratio. Non-compliance with any of the financial or nonfinancial covenants without cure or waiver would constitute an event of default under the senior credit facility. An event of default resulting from a breach of certain financial or non-financial covenants may result, at the option of the lenders, in an acceleration of the principal and interest outstanding, and a termination of the revolving credit facility. The senior credit facility also contains other customary events of default, including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due, breach of specified covenants, change in control and material inaccuracy of representations and warranties.

Total interest expense under the new senior credit facility and the pre-existing senior secured credit facility was $5.7 million and $4.9 million for the three months ended June 30, 2012 and 2011, respectively, and $12.4 million and $10.3 million for the six months ended June 30, 2012 and 2011, respectively. The fair value of the outstanding balances of the term loan and revolving credit facility at June 30, 2012 and December 31, 2011 approximated par value.

The Partnership is subject to interest rate risk associated with its variable rate debt financing. To manage this risk, the Partnership 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 amount 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 new senior credit facility became operative on May 9, 2012.

In December 2011, the Partnership 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 and remains in place after the new senior credit facility became operative on May 9, 2012.

The effective portion of losses related to change in the fair value of the swaps were $5.3 million and $1.0 million for the three months ended June 30, 2012 and 2011, respectively, and $6.9 million and $1.1 million for the six months ended June 30, 2012 and 2011, respectively. 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 June 30, 2012, approximately $5.4 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.

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Other Loans

As part of the Claren Road acquisition, the Partnership entered into a loan agreement for $47.5 million. The loan was scheduled to mature on December 31, 2015 and interest was payable semi-annually at an adjustable annual rate, currently 6.0%. The outstanding balance on the Claren Road loan of $40.0 million was repaid with proceeds from the Partnership’s initial public offering on May 8, 2012. Total interest expense was not significant for the three months and six months ended June 30, 2012 and 2011.

Also in connection with 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 was payable quarterly, commencing March 31, 2011 at an annual rate of 8.0%. The remaining principal balance outstanding of $10.0 million was repaid in the first quarter of 2012. Total interest expense was not significant for the three months ended June 30, 2011 and the six months ended June 30, 2012 and 2011.

Debt Covenants

The Partnership is subject to various financial covenants under its loan agreements including among other items, maintenance of a minimum amount of management fee earning assets. The Partnership is also subject to various non-financial covenants under its loan agreements. The Partnership was in compliance with all financial and non-financial covenants under its various loan agreements as of June 30, 2012.

Subordinated Loan Payable to Affiliate

In December 2010, the Partnership 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 Former Parent Entities. Interest on the notes was 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”). In October 2011, the Partnership 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. In March 2012, the Partnership 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.

Total interest expense on the subordinated notes was $9.0 million and $19.0 million for the three months and six months ended June 30, 2011, respectively. Total interest expense was $3.1 million for the six months ended June 30, 2012.

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 consolidated balance sheets.

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

As of June 30, 2012 and December 31, 2011, the following borrowings were outstanding, which includes preferred shares classified as liabilities (Dollars in millions):

As of June 30, 2012

Borrowing
Outstanding

Fair Value

Weighted
Average
Interest
Rate

Weighted
Average
Remaining
Maturity
in Years

Senior secured notes

13,192.6

11,746.7

1.53

8.85

Subordinated notes, Income notes and Preferred shares

656.8

812.8

N/A

(a)

8.42

Combination notes

5.7

5.5

N/A

(b)

9.43

Total

13,855.1

12,565.0


	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 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 June 30, 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 June 30, 2012 and December 31, 2011, and bear weighted average interest at LIBOR plus 0.37% per annum (0.84% at June 30, 2012). 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 Partnership 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 Partnership believes approximates fair value. There were no outstanding principal amounts borrowed under the APEX Revolvers as of June 30, 2012 and December 31, 2011.

Certain CLOs entered into liquidity facility agreements with various liquidity facility providers on or about the various closing dates of the applicable CLO in order to fund payments of interest when 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 $27.8 million and bear weighted average interest at EURIBOR plus 0.39% per annum (1.34% at June 30, 2012). 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 $11.1 million outstanding under the liquidity facility as of June 30, 2012. There were no borrowings outstanding under the liquidity facility as of December 31, 2011.

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

10. Accrued Compensation and Benefits

Accrued compensation and benefits consist of the following:


	As of
	June 30,		December 31,
	2012		2011
	(Dollars in millions)
Accrued performance fee-related compensation	$	844.2	$	314.1
Accrued bonuses		193.7		222.4
Other		166.8		41.4

Total	$	1,204.7	$	577.9

11. Commitments and Contingencies

Capital Commitments

The Partnership and its unconsolidated affiliates have unfunded commitments to entities within the following segments as of June 30, 2012 (Dollars in millions):


	Unfunded
	Commitments
Corporate Private Equity	$	1,796.4
Global Market Strategies		132.5
Real Assets		220.4

	$	2,149.3

Of the $2.15 billion of unfunded commitments, approximately $2.05 billion is subscribed individually by senior Carlyle professionals, operating executives and other professionals, with the balance funded directly by the Partnership. In addition to these unfunded commitments, the Partnership may from time to time exercise its right to purchase additional interests in its investment funds that become available in the ordinary course of their operations.

Guaranteed Loans

On August 4, 2001, the Partnership entered into an agreement with a financial institution pursuant to which the Partnership is the guarantor on a credit facility for eligible employees investing in Carlyle sponsored funds. This credit facility renews on an annual basis, allowing for annual incremental borrowings up to an aggregate of $16.0 million, and accrues interest at the lower of the prime rate, as defined, or three-month LIBOR plus 2%, reset quarterly (3.34% weighted-average rate at June 30, 2012). As of June 30, 2012 and December 31, 2011, approximately $12.6 million and $14.3 million, respectively, was outstanding under the credit facility and payable by the employees. The amount funded by the Partnership under this guarantee as of June 30, 2012 was not material. The Partnership believes the likelihood of any material funding under this guarantee to be remote. The fair value of this guarantee is not significant to the condensed consolidated financial statements.

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Other Guarantees

The Partnership 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 June 30, 2012 and December 31, 2011, $14.2 million and $13.6 million, respectively, was held in an escrow account and the Partnership 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 $133.4 million at June 30, 2012, is shown as accrued giveback obligations in the condensed consolidated balance sheets, representing the giveback obligation that would need to be paid if the funds were liquidated at their current fair values at June 30, 2012. However, the ultimate giveback obligation, if any, does not become realized until the end of a fund’s life (see Note 2). The Partnership has recorded $62.1 million and $56.5 million, of unbilled receivables from former and current employees and senior Carlyle professionals as of June 30, 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 consolidated balance sheets. Current and former senior Carlyle professionals and employees are personally responsible for their giveback obligations. The receivables are collateralized by investments made by individual senior Carlyle professionals and employees in Carlyle-sponsored funds. In addition, $289.6 million and $250.8 million has been withheld from distributions of carried interest to senior Carlyle professionals and employees for potential giveback obligations as of June 30, 2012 and December 31, 2011, respectively. Such amounts are held by an entity not included in the accompanying condensed consolidated balance sheets.

If, at June 30, 2012, all of the investments held by the Partnership’s Funds were deemed worthless, a possibility that management views as remote, the amount of realized and distributed carried interest subject to potential giveback would be $1.0 billion, on an after-tax basis where applicable.

Leases

The Partnership leases office space in various countries around the world and maintains its headquarters in Washington, D.C., where 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 $11.8 million and $10.8 million for the three months ended June 30, 2012 and 2011, respectively, and $24.0 million and $21.0 million for the six months ended June 30, 2012 and 2011, respectively, and is included in general, administrative and other expenses in the condensed consolidated statements of operations. Included in rent expense are lease termination costs of $0.5 million and $0.6 million for the three months ended June 30, 2012 and 2011, respectively, and $0.7 million and $2.4 million for the six months ended June 30, 2012 and 2011.

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


2012	$	21.8
2013		42.2
2014		38.9
2015		34.5
2016		25.3
Thereafter		143.3

	$	306.0

Total minimum rentals to be received in the future under non-cancelable subleases as of June 30, 2012 were $6.2 million.

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

The Partnership records contractual escalating minimum lease payments on a straight-line basis over the term of the lease. Deferred rent payable under the leases was $22.4 million and $12.9 million as of June 30, 2012 and December 31, 2011, respectively, and is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.

Legal Matters

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

Along with many other companies and individuals in the financial sector, the Partnership 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 Partnership 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 Partnership is currently unable to anticipate when the litigation will conclude or what impact the litigation may have on the Partnership.

Carlyle Capital Corporation Limited (“CCC”) was a fund sponsored by Carlyle that invested in AAA-rated residential mortgage backed securities on a highly leveraged basis. In March of 2008, amidst turmoil throughout the mortgage markets and money markets, CCC filed for insolvency protection in Guernsey. Several different lawsuits, described below, developed from the CCC insolvency.

First, in July 2009, a former shareholder of CCC, claiming to have lost $20.0 million, filed a claim against CCC, the Partnership and certain affiliates and one officer of the Partnership (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 2011, 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 based on the forum selection provision in the plaintiff’s subscription agreement. 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 filed a new claim in Delaware State Court. The Delaware State Court granted in part and denied in part defendants’ motion to dismiss, which was converted to a motion for summary judgment. The defendants are vigorously contesting the one remaining claim asserted by the plaintiff. The Partnership is currently unable to anticipate what impact it may have on the Partnership.

Second, 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 the 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 Partnership 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 Partnership.

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Third, the Guernsey liquidators who took control of CCC in March 2008 filed four suits in July 2011 against the Partnership, 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 Partnership 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 Partnership put the interests of the Partnership ahead of the interests of CCC and its shareholders and gave priority to preserving and enhancing the Partnership’s reputation and its “brand” over the best interests of CCC.

In July 2011, the Royal Court of Guernsey held that the case should be litigated in Delaware pursuant to the exclusive jurisdiction clause in the investment management agreement. 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. Defendants’ attempts to appeal to the Privy Council were unsuccessful and the plaintiffs’ case is proceeding in Guernsey. In addition, the Liquidators’ lawsuits in New York and the District of Columbia were dismissed in December 2011 without prejudice. The Partnership believes that regardless of where the claims are litigated, they are without merit and it will vigorously contest all allegations. The Partnership recognized a loss of $152.3 million in 2008 in connection with the winding up of CCC. The Partnership is currently unable to anticipate what impact the claims may have on it.

Fourth, in June 2011, August 2011, and September 2011, three putative shareholder class actions were filed against the Partnership, certain of its affiliates and former directors of CCC alleging that the fund offering materials and 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. Phelps v. Stomber, et al. was also filed in the Supreme Court of New York, New York County and 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 were designated “lead plaintiffs” by the Court. The New York case was transferred to the D.C. federal court and the plaintiffs requested that it be consolidated with the other two D.C. actions. The plaintiffs were seeking all compensatory damages sustained as a result of the alleged misrepresentations, costs and expenses, as well as reasonable attorney’s fees. On August 13, 2012, the United States District Court for the District of Columbia granted defendants’ motion and dismissed both the D.C. and New York class actions. It is possible that the plaintiffs will appeal the Court’s decision, in which case the defendants will vigorously contest all claims. In addition, the Partnership also has received letters from a law firm in Holland, seeking to toll the statute of limitations with respect to potential actions on behalf of a CCC shareholder and a purported collective action vehicle that such law firm may initiate in The Netherlands. However, the Partnership is not aware that any such claims have actually been filed to date.

In September 2006 and March 2009, Carlyle 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 Partnership fully cooperated with the DOJ’s investigation and is currently unable to anticipate what impact it may have on the Partnership.

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 Partnership, violated Section 1 of the Sherman Act by forming multi-sponsor consortiums for the purpose of bidding collectively in company buyout transactions 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 Partnership believes the claims are without merit and will vigorously contest all claims. The Partnership is currently unable to anticipate what impact the claims may have on it.

The Carlyle Group L.P.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Other Contingencies

From 2007 to 2009, a Luxembourg subsidiary of Carlyle Europe Real Estate Partners, L.P. (CEREP I), a real estate fund, received proceeds from the sale of real estate located in Paris, France. The relevant French tax authorities have asserted that CEREP I was ineligible to claim certain exemptions from French tax under the Luxembourg-French tax treaty, and have