Carlyle Group Inc. - Quarter Report: 2014 March (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 001-35538
The Carlyle Group L.P.
(Exact name of registrant as specified in its charter)
Delaware | 45-2832612 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1001 Pennsylvania Avenue, NW
Washington, D.C., 20004-2505
(Address of principal executive offices) (Zip Code)
(202) 729-5626
(Registrants telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of the Registrants common units representing limited partner interests outstanding as of April 30, 2014 was 64,092,165.
Table of Contents
Page | ||||||
Item 1. |
Financial Statements | 5 | ||||
Unaudited Condensed Consolidated Financial Statements March 31, 2014 and 2013: | ||||||
Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013 |
5 | |||||
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 |
6 | |||||
7 | ||||||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 |
8 | |||||
10 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 74 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 142 | ||||
Item 4. |
Controls and Procedures | 142 | ||||
Item 1. |
Legal Proceedings | 143 | ||||
Item 1A. |
Risk Factors | 143 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 143 | ||||
Item 3. |
Defaults Upon Senior Securities | 143 | ||||
Item 4. |
Mine Safety Disclosures | 143 | ||||
Item 5. |
Other Information | 143 | ||||
Item 6. |
Exhibits | 143 | ||||
144 | ||||||
145 |
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Forward-Looking Statements
This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as outlook, believe, expect, potential, continue, may, will, should, seek, approximately, predict, intend, plan, estimate, anticipate or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013, as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (the SEC), which are accessible on the SECs website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. 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.
Website and Social Media Disclosure
We use our website (www.carlyle.com), our corporate Facebook page (http://www.facebook.com/pages/The-Carlyle-Group/103519702981?rf=110614118958798) and our corporate Twitter account (@OneCarlyle) as channels of distribution of material company information. For example, financial and other material information regarding our company is routinely posted on and accessible at www.carlyle.com. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about Carlyle when you enroll your email address by visiting the Email Alert Subscription section at http://ir.carlyle.com/alerts.cfm?. The contents of our website and social media channels are not, however, a part of this Quarterly Report on Form 10-Q and are not incorporated by reference herein.
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.
When we refer to the partners of The Carlyle Group L.P., we are referring specifically to the common unitholders and our general partner and any others who may from time to time be partners of that specific Delaware limited partnership. When we refer to our senior Carlyle professionals, we are referring to the partner-level personnel of our firm. Senior Carlyle professionals, together with CalPERS and Mubadala, were 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 refer to those investment funds that we advise, including the buyout funds, growth capital funds, real estate funds, infrastructure funds, certain energy funds and distressed debt and mezzanine funds (but excluding our structured credit funds, hedge funds, fund of funds vehicles and the NGP funds), 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. The NGP management fee funds refer to those funds advised by NGP Energy Capital Management (together with its affiliates and subsidiaries, NGP) from which we only receive management fees. The NGP carry fund refers to the fund advised by NGP from which we are entitled to receive a carried interest. Our fund of funds vehicles refers to those funds, accounts and vehicles advised by AlpInvest Partners B.V. (AlpInvest), Metropolitan Real Estate Equity Management, LLC (Metropolitan), and Diversified Global Asset Management (DGAM).
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Fee-earning assets under management or Fee-earning AUM refer to the assets we manage or advise 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 and for Metropolitan fund of funds vehicles during the weighted-average investment period of the underlying funds, the amount of limited partner capital commitments, for AlpInvest fund of funds vehicles, the amount of external investor capital commitments during the commitment fee period, and for the NGP management fee funds and NGP carry fund, the amount of investor capital commitments before the first investment realization;
(b) for substantially all carry funds and certain co-investment vehicles where the investment period has expired and for Metropolitan fund of funds vehicles after the expiration of the weighted-average investment period of the underlying funds, the remaining amount of limited partner invested capital, and for the NGP management fee funds and NGP carry fund where the first investment has been realized, the amount of partner commitments less realized and written-off investments;
(c) the amount of aggregate Fee-earning collateral balance at par of our CLOs, as defined in the fund indentures (typically exclusive of equities and defaulted positions) as of the quarterly cut-off date for each CLO, and the reference portfolio notional amount of our synthetic CLOs;
(d) the external investor portion of the net asset value (pre-redemptions and subscriptions) of our long/short credit funds, emerging markets, multi-product macroeconomic, fund of hedge funds vehicles and other hedge funds;
(e) the gross assets (including assets acquired with leverage), excluding cash and cash equivalents of our business development companies and certain carry funds; and
(f) for AlpInvest fund of funds vehicles where the commitment fee period has expired, 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 or advise. Our AUM equals the sum of the following:
(a) the fair value of the capital invested in our carry funds, co-investment vehicles, fund of funds vehicles and the NGP management fee funds and NGP carry fund 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 and principal cash at par of our CLOs (inclusive of all positions) 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, fund of hedge funds vehicles and other hedge funds; and
(d) the gross assets (including assets acquired with leverage) of our business development companies.
We include in our calculation of AUM and Fee-earning AUM certain energy and renewable resources funds that we jointly advise with Riverstone Holdings L.L.C. (Riverstone) and certain NGP management fee funds and the NGP carry fund. In addition, our Solutions segment includes certain assets under consulting relationships. Fee-earning AUM and AUM only include those assets which earn a material fee.
For our carry funds, co-investment vehicles, fund of funds vehicles, NGP management fee funds and the NGP carry fund, total AUM includes the fair value of the capital invested, whereas Fee-earning AUM includes the amount of capital commitments or the remaining amount of invested capital, depending on whether the investment period for the fund has expired. As such, Fee-earning AUM may be greater than total AUM when the aggregate fair value of the remaining investments is less than the cost of those investments.
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Our calculations of AUM and Fee-earning AUM may differ from the calculations of other alternative asset managers. As a result, these measures may not be comparable to similar measures presented by other alternative asset managers. In addition, our calculation of AUM (but not Fee-earning AUM) includes uncalled commitments to, and the fair value of invested capital in, our investment funds from Carlyle and our personnel, regardless of whether such commitments or invested capital are subject to management or performance fees. Our calculations of AUM or Fee-earning AUM are not based on any definition of AUM or Fee-earning AUM that is set forth in the agreements governing the investment funds that we manage or advise.
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PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
The Carlyle Group L.P.
Condensed Consolidated Balance Sheets
(Dollars in millions)
March 31, 2014 |
December 31, 2013 |
|||||||
(Unaudited) | ||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 1,034.3 | $ | 966.6 | ||||
Cash and cash equivalents held at Consolidated Funds |
2,149.8 | 1,402.7 | ||||||
Restricted cash |
45.4 | 129.9 | ||||||
Restricted cash and securities of Consolidated Funds |
25.2 | 25.7 | ||||||
Accrued performance fees |
3,776.6 | 3,653.6 | ||||||
Investments |
748.0 | 765.3 | ||||||
Investments of Consolidated Funds |
27,080.1 | 26,886.4 | ||||||
Due from affiliates and other receivables, net |
165.3 | 175.9 | ||||||
Due from affiliates and other receivables of Consolidated Funds, net |
282.9 | 626.2 | ||||||
Receivables and inventory of a consolidated real estate VIE |
170.9 | 180.4 | ||||||
Fixed assets, net |
67.4 | 68.8 | ||||||
Deposits and other |
50.2 | 38.5 | ||||||
Other assets of a consolidated real estate VIE |
46.7 | 60.1 | ||||||
Intangible assets, net |
568.6 | 582.8 | ||||||
Deferred tax assets |
137.1 | 59.4 | ||||||
|
|
|
|
|||||
Total assets |
$ | 36,348.5 | $ | 35,622.3 | ||||
|
|
|
|
|||||
Liabilities and partners capital |
||||||||
Loans payable |
$ | 42.4 | $ | 42.4 | ||||
3.875% senior notes due 2023 |
499.8 | 499.8 | ||||||
5.625% senior notes due 2043 |
607.0 | 398.4 | ||||||
Loans payable of Consolidated Funds |
15,678.7 | 15,220.7 | ||||||
Loans payable of a consolidated real estate VIE at fair value (principal amount of $278.3 and $305.3 as of March 31, 2014 and December 31, 2013, respectively) |
125.3 | 122.1 | ||||||
Accounts payable, accrued expenses and other liabilities |
240.2 | 265.1 | ||||||
Accrued compensation and benefits |
2,193.3 | 2,253.0 | ||||||
Due to affiliates |
274.3 | 403.7 | ||||||
Deferred revenue |
198.0 | 64.1 | ||||||
Deferred tax liabilities |
120.4 | 103.6 | ||||||
Other liabilities of Consolidated Funds |
1,647.7 | 1,382.7 | ||||||
Other liabilities of a consolidated real estate VIE |
98.0 | 97.7 | ||||||
Accrued giveback obligations |
35.7 | 39.6 | ||||||
|
|
|
|
|||||
Total liabilities |
21,760.8 | 20,892.9 | ||||||
Commitments and contingencies |
||||||||
Redeemable non-controlling interests in consolidated entities |
4,671.4 | 4,352.0 | ||||||
Partners capital (common units, 64,092,165 and 49,353,406 issued and outstanding as of March 31, 2014 and December 31, 2013, respectively) |
471.1 | 357.1 | ||||||
Accumulated other comprehensive loss |
(14.6 | ) | (11.2 | ) | ||||
Partners capital appropriated for Consolidated Funds |
381.1 | 463.6 | ||||||
Non-controlling interests in consolidated entities |
7,371.9 | 7,696.6 | ||||||
Non-controlling interests in Carlyle Holdings |
1,706.8 | 1,871.3 | ||||||
|
|
|
|
|||||
Total partners capital |
9,916.3 | 10,377.4 | ||||||
|
|
|
|
|||||
Total liabilities and partners capital |
$ | 36,348.5 | $ | 35,622.3 | ||||
|
|
|
|
See accompanying notes.
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The Carlyle Group L.P.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in millions, except unit and per unit data)
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
Revenues |
||||||||
Fund management fees |
$ | 260.3 | $ | 231.4 | ||||
Performance fees |
||||||||
Realized |
251.4 | 252.8 | ||||||
Unrealized |
369.1 | 389.6 | ||||||
|
|
|
|
|||||
Total performance fees |
620.5 | 642.4 | ||||||
Investment income (loss) |
||||||||
Realized |
| (4.2 | ) | |||||
Unrealized |
6.1 | 4.6 | ||||||
|
|
|
|
|||||
Total investment income (loss) |
6.1 | 0.4 | ||||||
Interest and other income |
3.8 | 2.4 | ||||||
Interest and other income of Consolidated Funds |
250.7 | 268.4 | ||||||
Revenue of a consolidated real estate VIE |
6.0 | | ||||||
|
|
|
|
|||||
Total revenues |
1,147.4 | 1,145.0 | ||||||
Expenses |
||||||||
Compensation and benefits |
||||||||
Base compensation |
204.6 | 178.5 | ||||||
Equity-based compensation |
74.2 | 52.3 | ||||||
Performance fee related |
||||||||
Realized |
108.7 | 108.7 | ||||||
Unrealized |
221.6 | 195.0 | ||||||
|
|
|
|
|||||
Total compensation and benefits |
609.1 | 534.5 | ||||||
General, administrative and other expenses |
134.3 | 111.4 | ||||||
Interest |
12.2 | 10.5 | ||||||
Interest and other expenses of Consolidated Funds |
264.0 | 250.1 | ||||||
Interest and other expenses of a consolidated real estate VIE |
49.2 | | ||||||
Other non-operating (income) expenses |
30.2 | (2.4 | ) | |||||
|
|
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|
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Total expenses |
1,099.0 | 904.1 | ||||||
Other income |
||||||||
Net investment gains of Consolidated Funds |
424.0 | 211.5 | ||||||
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|
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Income before provision for income taxes |
472.4 | 452.4 | ||||||
Provision for income taxes |
16.0 | 24.9 | ||||||
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|
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Net income |
456.4 | 427.5 | ||||||
Net income attributable to non-controlling interests in consolidated entities |
324.5 | 168.0 | ||||||
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|
|
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Net income attributable to Carlyle Holdings |
131.9 | 259.5 | ||||||
Net income attributable to non-controlling interests in Carlyle Holdings |
107.3 | 225.7 | ||||||
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Net income attributable to The Carlyle Group L.P. |
$ | 24.6 | $ | 33.8 | ||||
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Net income attributable to The Carlyle Group L.P. per common unit (see Note 15) |
||||||||
Basic |
$ | 0.46 | $ | 0.78 | ||||
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Diluted |
$ | 0.41 | $ | 0.66 | ||||
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Weighted-average common units |
||||||||
Basic |
52,501,412 | 43,343,268 | ||||||
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Diluted |
59,453,670 | 51,109,008 | ||||||
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Distributions declared per common unit |
$ | 1.40 | $ | 0.85 | ||||
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Substantially all revenue is earned from affiliates of the Partnership. See accompanying notes.
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The Carlyle Group L.P.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in millions)
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
Net income |
$ | 456.4 | $ | 427.5 | ||||
Other comprehensive income |
||||||||
Foreign currency translation adjustments |
87.8 | 59.8 | ||||||
Cash flow hedges |
||||||||
Net gains for the period |
| 0.2 | ||||||
Less: reclassification adjustment for loss included in interest expense |
0.6 | 1.5 | ||||||
Defined benefit plans |
||||||||
Net gains for the period |
0.8 | 1.0 | ||||||
Less: reclassification adjustment for unrecognized loss during the period, net, included in base compensation expense |
0.1 | 0.2 | ||||||
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|
|
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Other comprehensive income |
89.3 | 62.7 | ||||||
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|
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Comprehensive income |
545.7 | 490.2 | ||||||
Less: Comprehensive loss attributable to partners capital appropriated for Consolidated Funds |
82.5 | 272.8 | ||||||
Less: Comprehensive income attributable to non-controlling interests in consolidated entities |
(431.3 | ) | (330.1 | ) | ||||
Less: Comprehensive income attributable to redeemable non-controlling interests in consolidated entities |
(67.0 | ) | (177.2 | ) | ||||
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|
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Comprehensive income attributable to Carlyle Holdings |
129.9 | 255.7 | ||||||
Less: Comprehensive income attributable to non-controlling interests in Carlyle Holdings |
(105.8 | ) | (222.4 | ) | ||||
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Comprehensive income attributable to The Carlyle Group L.P. |
$ | 24.1 | $ | 33.3 | ||||
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|
See accompanying notes.
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The Carlyle Group L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 456.4 | $ | 427.5 | ||||
Adjustments to reconcile net income to net cash flows from operating activities: |
||||||||
Depreciation and amortization |
57.7 | 43.5 | ||||||
Equity-based compensation |
74.2 | 52.3 | ||||||
Non-cash performance fees |
(446.3 | ) | (475.0 | ) | ||||
Other non-cash amounts |
42.6 | 3.0 | ||||||
Consolidated Funds related: |
||||||||
Realized/unrealized (gain) loss on investments of Consolidated Funds |
(474.1 | ) | (586.5 | ) | ||||
Realized/unrealized loss from loans payable of Consolidated Funds |
66.5 | 387.0 | ||||||
Purchases of investments by Consolidated Funds |
(2,418.6 | ) | (2,934.1 | ) | ||||
Proceeds from sale and settlements of investments by Consolidated Funds |
2,801.2 | 3,181.4 | ||||||
Non-cash interest income, net |
(8.9 | ) | (21.4 | ) | ||||
Change in cash and cash equivalents held at Consolidated Funds |
(31.7 | ) | 679.5 | |||||
Change in other receivables held at Consolidated Funds |
310.4 | 26.9 | ||||||
Change in other liabilities held at Consolidated Funds |
265.0 | 321.6 | ||||||
Investment income |
(6.9 | ) | 16.2 | |||||
Purchases of investments and trading securities |
(12.0 | ) | (60.6 | ) | ||||
Proceeds from the sale of investments and trading securities |
390.8 | 108.8 | ||||||
Payments of contingent consideration |
(43.5 | ) | | |||||
Changes in deferred taxes, net |
1.4 | 11.2 | ||||||
Change in due from affiliates and other receivables |
(5.3 | ) | (3.6 | ) | ||||
Change in receivables and inventory of a consolidated real estate VIE |
(0.8 | ) | | |||||
Change in deposits and other |
(7.1 | ) | 2.1 | |||||
Change in other assets of a consolidated real estate VIE |
11.5 | | ||||||
Change in accounts payable, accrued expenses and other liabilities |
(32.3 | ) | (3.8 | ) | ||||
Change in accrued compensation and benefits |
(57.3 | ) | 152.0 | |||||
Change in due to affiliates |
(83.9 | ) | (2.1 | ) | ||||
Change in other liabilities of a consolidated real estate VIE |
7.3 | | ||||||
Change in deferred revenue |
133.5 | 128.9 | ||||||
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Net cash provided by operating activities |
989.8 | 1,454.8 | ||||||
Cash flows from investing activities |
||||||||
Change in restricted cash |
84.5 | (9.3 | ) | |||||
Purchases of fixed assets, net |
(3.7 | ) | (5.4 | ) | ||||
Acquisitions, net of cash acquired |
(3.1 | ) | | |||||
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Net cash provided by (used in) investing activities |
77.7 | (14.7 | ) |
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The Carlyle Group L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Cash flows from financing activities |
||||||||
Repayments under credit facility |
| (386.3 | ) | |||||
Issuance of 3.875% senior notes due 2023, net of financing costs |
| 495.3 | ||||||
Issuance of 5.625% senior notes due 2043, net of financing costs |
210.8 | 394.1 | ||||||
Payments on loans payable |
| (475.0 | ) | |||||
Net payments on loans payable of a consolidated real estate VIE |
(9.5 | ) | | |||||
Net payment on loans payable of Consolidated Funds |
(323.2 | ) | (769.3 | ) | ||||
Payments of contingent consideration |
(29.2 | ) | (10.0 | ) | ||||
Distributions to common unitholders |
(70.4 | ) | (36.8 | ) | ||||
Distributions to non-controlling interest holders in Carlyle Holdings |
(366.5 | ) | (223.5 | ) | ||||
Net proceeds from issuance of common units, net of offering costs |
449.5 | | ||||||
Acquisition of non-controlling interests in Carlyle Holdings |
(303.4 | ) | | |||||
Contributions from non-controlling interest holders |
753.3 | 477.2 | ||||||
Distributions to non-controlling interest holders |
(1,256.9 | ) | (981.5 | ) | ||||
Change in due to/from affiliates financing activities |
1.6 | 38.5 | ||||||
Change in due to/from affiliates and other receivables of Consolidated Funds |
(53.9 | ) | 52.7 | |||||
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Net cash used in financing activities |
(997.8 | ) | (1,424.6 | ) | ||||
Effect of foreign exchange rate changes |
(2.0 | ) | (12.2 | ) | ||||
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Increase in cash and cash equivalents |
67.7 | 3.3 | ||||||
Cash and cash equivalents, beginning of period |
966.6 | 567.1 | ||||||
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Cash and cash equivalents, end of period |
$ | 1,034.3 | $ | 570.4 | ||||
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Supplemental non-cash disclosures |
||||||||
Increase in partners capital related to reallocation of ownership interest in Carlyle Holdings |
$ | 32.9 | $ | | ||||
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Tax effect from acquisition of Carlyle Holdings partnership units: |
||||||||
Deferred tax asset |
$ | 70.0 | $ | | ||||
|
|
|
|
|||||
Tax receivable agreement liability |
$ | 60.1 | $ | | ||||
|
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Total partners capital |
$ | 9.9 | $ | | ||||
|
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|
|
See accompanying notes.
9
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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 worlds largest global alternative asset management firms that originates, structures and acts as lead equity investor in management-led buyouts, strategic minority equity investments, equity private placements, consolidations and buildups, growth capital financings, real estate opportunities, bank loans, high-yield debt, distressed assets, mezzanine debt and other investment opportunities. The 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 Carlyles founders and other senior Carlyle professionals.
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 typically serves as the general partner, investment manager or collateral manager, making day-to-day investment decisions concerning the assets of these products. Carlyle operates its business through four reportable segments: Corporate Private Equity, Global Market Strategies, Real Assets and Solutions (see Note 18).
Basis of Presentation
The accompanying financial statements include the accounts of the Partnership and its consolidated subsidiaries. In addition, certain Carlyle-affiliated funds, related co-investment entities, certain CLOs managed by the Partnership (collectively the Consolidated Funds) and a real estate development company (see Note 17) 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. The consolidation of the Consolidated Funds 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.
The accompanying condensed consolidated financial statements 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 consolidated financial statements included in the Partnerships Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission. 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.
March 2014 Public Offering of Partnership Common Units
On March 10, 2014, the Partnership completed a public offering of 13,800,000 common units priced at $33.50 per common unit. The Partnership received net proceeds of approximately $449.5 million, after deduction of the underwriting discount and offering expenses. The Partnerships wholly-owned subsidiaries used $146.1 million of the net proceeds to acquire 4,500,000 newly issued Carlyle Holdings partnership units from Carlyle Holdings. These proceeds will be used by Carlyle Holdings for general corporate purposes, investments in Carlyles funds as well as investment capital for acquisitions of new fund platforms and strategies or other growth initiatives, to drive innovation across the broader Carlyle platform. The Partnerships wholly-owned subsidiaries used the remaining net proceeds of $303.4 million to acquire 9,300,000 Carlyle Holding partnership units from the other limited partners of Carlyle Holdings, including certain of the Partnerships directors and executive officers.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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 Partnerships consolidated financial statements. As it relates to the 4,500,000 newly issued Carlyle Holdings partnership units that the Partnership acquired, because the Partnership acquired these partnership units at a valuation in excess of the proportion of the book value of the net assets acquired, the Partnership incurred an immediate dilution of approximately $116.8 million. This dilution was reflected within partners capital as a reallocation from partners capital to non-controlling interests in Carlyle Holdings.
As it relates to the 9,300,000 Carlyle Holdings partnership units that the Partnership acquired from the other limited partners of Carlyle Holdings, the Partnership accounted for this transaction as an acquisition of ownership interests in a subsidiary while retaining a controlling interest in the subsidiary. Accordingly, the carrying value of the non-controlling interest was adjusted to reflect the change in the ownership interests in Carlyle Holdings. The excess of the fair value of the consideration issued by the Partnership over the carrying amount of the non-controlling interest acquired was recognized directly as a reduction to partners capital. The adjustment to partners capital was derived as follows (Dollars in millions):
Acquisition-date fair value of consideration transferred: |
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Cash |
$ | 303.4 | ||
Carrying value of non-controlling interest acquired |
(66.4 | ) | ||
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Excess of fair value of consideration transferred over carrying value of non-controlling interest acquired |
$ | 237.0 | ||
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The following summarizes the adjustments within partners capital related to the March 2014 public offering (Dollars in millions):
Partners Capital |
Non-controlling interests in Carlyle Holdings |
Total Partners Capital |
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Proceeds from The Carlyle Group L.P. common units issued |
$ | 449.5 | $ | | $ | 449.5 | ||||||
Dilution associated with the acquisition of 4,500,000 Carlyle Holdings partnership units |
(116.8 | ) | 116.8 | | ||||||||
Acquisition of non-controlling interest in Carlyle Holdings |
(237.0 | ) | (66.4 | ) | (303.4 | ) | ||||||
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Total increase |
$ | 95.7 | $ | 50.4 | $ | 146.1 | ||||||
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Additionally, the acquisition by the Partnership of the 9,300,000 Carlyle Holdings partnership units from the other limited partners of Carlyle Holdings is subject to the terms of the tax receivable agreement. Accordingly, the Partnership recorded a deferred tax asset of $70.0 million, an increase to the liability owed under the tax receivable agreement of $60.1 million, and an increase in partners capital of $9.9 million based on estimated tax information available at the time. The liability is expected to be paid as the deferred tax asset is realized as a reduction in taxes payable.
Following the issuance of common units from the March 2014 public offering, the issuance of common units for the acquisition of Diversified Global Asset Management Corporation (see Note 3) and the vesting of deferred restricted common units, the total number of Partnership common units outstanding as of March 31, 2014 was 64,092,165 common units.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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 and a real estate development company, 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 entitys 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 Partnerships 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 enterprises 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 March 31, 2014, assets and liabilities of consolidated VIEs reflected in the condensed consolidated balance sheets were $25.1 billion and $17.5 billion, respectively. Except to the extent of the assets of the VIEs which are consolidated, the holders of the consolidated VIEs liabilities generally do not have recourse to the Partnership. The assets and liabilities of the consolidated VIEs that are Consolidated Funds 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. In cases where the Partnership consolidates the CLOs, those management fees have been eliminated as intercompany transactions. As of March 31, 2014, the Partnership held $86.6 million of investments in these CLOs which represents its maximum risk of loss. The Partnerships 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 Partnerships condensed consolidated financial statements.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Investments in Unconsolidated Variable Interest Entities
The Partnership holds variable interests in certain VIEs that are not consolidated because the Partnership is not the primary beneficiary. The Partnerships 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 Partnerships condensed consolidated balance sheets related to the Partnerships interests in these non-consolidated VIEs and the Partnerships maximum exposure to loss relating to non-consolidated VIEs were as follows:
As of | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Investments |
$ | 356.2 | $ | 364.8 | ||||
Receivables |
57.4 | 132.4 | ||||||
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Maximum Exposure to Loss |
$ | 413.6 | $ | 497.2 | ||||
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Basis of Accounting
The accompanying financial statements are prepared in accordance with U.S. GAAP. Management has determined that the Partnerships 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 investments 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 Partnerships 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 Partnerships condensed consolidated statements of operations. The excess of the CLO assets over the CLO liabilities upon consolidation is reflected in the Partnerships 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.
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. Managements 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 Partnerships 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 consolidated financial statements and the resulting impact on performance fees. Actual results could differ from these estimates and such differences could be material.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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 at the lower of cost or aggregate remaining fair value, (c) gross assets, excluding cash and cash equivalents or (d) 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 generally 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 typically pay management fees quarterly that generally range from 1.5% to 2.0% of NAV per year. Management fees for the Partnerships business development companies are due quarterly in arrears at annual rates that range from 0.25% to 1.0% of gross assets, excluding cash and cash equivalents. Management fees for the CLOs typically range from 0.15% to 0.65% 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.
Management fees for our private equity and real estate fund of funds vehicles generally range from 0.3% to 1.0% on the vehicles capital commitments during the commitment fee period of the relevant fund or the weighted-average investment period of the underlying funds. Following the expiration of the commitment fee period or weighted-average investment period of such funds, the management fees generally range from 0.3% to 1.0% on the lower of cost or fair value of the capital invested, the net asset value for unrealized investments, or the contributions for unrealized investments. The management fees for our fund of hedge fund vehicles generally range from 0.2% to 1.5% of net asset value. Management fees for our Solutions segment are generally due quarterly and recognized over the related quarter.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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 $7.0 million and $15.0 million for the three months ended March 31, 2014 and 2013, 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 10% to 20% on external coinvestment vehicles, with some earning no carried interest, or approximately 2% to 10% in the case of most of the Partnerships 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 (generally subject to catch-up provisions) from its corporate private equity and real assets funds and closed-end carry funds in the global market strategies segment. 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 total performance fees reflects the Partnerships 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) certain costs borne by the limited partner investors have been reimbursed, (iii) the funds cumulative returns are in excess of the preferred return and (iv) the Partnership has decided to collect carry rather than return additional capital to limited partner investors. Realized carried interest may be required to be returned by the Partnership in future periods if the funds investment values decline below certain levels. When the fair value of a funds 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 funds investments at their then current fair values, previously recognized and distributed carried interest would be required to be returned, a liability is established for the potential giveback obligation. As of March 31, 2014 and December 31, 2013, the Partnership has recognized $35.7 million and $39.6 million, respectively, for giveback obligations.
In addition to its performance fees from its corporate private equity and real assets funds and closed-end carry funds in the global market strategies segment, 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 Partnerships equity method investments and other principal investments. Equity method investment income (loss) includes the related amortization of the basis difference between the Partnerships carrying value of its investment and the Partnerships share of underlying net assets of the investee, as well as the compensation expense associated with compensatory arrangements provided by the Partnership to employees of its equity method investee. Investment income (loss) is realized when the Partnership redeems all or a portion of its investment or when the Partnership receives or is due cash income, such as dividends or distributions. Unrealized investment income (loss) results from changes in the fair value of the underlying investment as well as the reversal of unrealized gain (loss) at the time an investment is realized.
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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 $0.3 million and $0.5 million for the three months ended March 31, 2014 and 2013, respectively, and is included in interest and other income in the accompanying condensed consolidated statements of operations. Interest income of the Consolidated Funds was $221.2 million and $230.6 million for the three months ended March 31, 2014 and 2013, 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. Upon the end of the service period, compensation expense is adjusted to account for the actual forfeiture rate. Cash settled equity-based awards are classified as liabilities and are re-measured at the end of each reporting period. The compensation expense for awards that contain performance conditions is recognized when it is probable that the performance conditions will be achieved; in certain instances, such compensation expense may be recognized prior to the grant date of the award.
Equity-based awards issued to non-employees are recognized as general, administrative and other expenses. The grant-date fair value of equity-based awards granted to Carlyles non-employee directors is expensed 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 March 31, 2014 and December 31, 2013, the Partnership had recorded a liability of $1.8 billion and $1.7 billion, respectively, 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.
Income Taxes
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 Partnerships 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. AlpInvest Partners B.V. (AlpInvest), a subsidiary of the Partnership, 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.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The Partnership accounts for income taxes under the provisions of Accounting Standards Codification (ASC) 740, Income Taxes (ASC 740), using the liability method. ASC 740 requires the recognition of deferred tax liabilities and assets for the expected future consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement reporting and the tax basis of assets and liabilities using enacted tax rates in effect for the period in which the difference is expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change in the provision for income taxes. Further, deferred tax assets are recognized for the expected realization of available net operating loss and tax credit carry forwards. A valuation allowance is recorded on the Partnerships gross deferred tax assets when it is more likely than not that such asset will not be realized. When evaluating the realizability of the Partnerships 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 Partnerships 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 Partnerships 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 and will assess the probability that the related liability owed under the tax receivable agreement will be paid. The Partnership records 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the tax receivable agreement, which is included in due to affiliates in the accompanying condensed consolidated financial statements. The remaining 15% of the estimated realizable tax benefit is initially recorded as an increase to the Partnerships partners capital.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
All of the effects to the deferred tax asset of changes in any of the Partnerships estimates after the tax year of the exchange will be reflected in the provision for income taxes. Similarly, the effect of subsequent changes in the enacted tax rates will be reflected in the provision for income taxes.
Non-controlling Interests
Non-controlling interests in consolidated entities represent the component of equity in consolidated entities held by third party investors. These interests are adjusted for general partner allocations and by subscriptions and redemptions in hedge funds which occur during the reporting period. Any change in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between the controlling and non-controlling interests. Transaction costs incurred in connection with such changes in ownership of a subsidiary are recorded as a direct charge to partners capital.
Non-controlling interests 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, 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.
Non-controlling interests in Carlyle Holdings relate to the ownership interests of the other limited partners of the Carlyle Holdings partnerships. The Partnership, through wholly-owned subsidiaries, is the sole general partner of Carlyle Holdings. Accordingly, the Partnership consolidates Carlyle Holdings into its consolidated financial statements, and the other ownership interests in Carlyle Holdings are reflected as non-controlling interests in the Partnerships condensed consolidated financial statements. Any change to the Partnerships ownership interest in Carlyle Holdings while it retains the controlling financial interest in Carlyle Holdings is accounted for as a transaction within partners capital as a reallocation of ownership interests in Carlyle Holdings.
Earnings Per Common Unit
The Partnership computes earnings per common unit in accordance with ASC 260, Earnings Per Share (ASC 260). Basic earnings per common unit is calculated by dividing net income (loss) attributable to the common units of the Partnership by the weighted-average number of common units outstanding for the period. Diluted earnings per common unit reflects the assumed conversion of all dilutive securities. Net income (loss) attributable to the common units excludes net income (loss) and dividends attributable to any participating securities under the two-class method of ASC 260.
Investments
Investments include (i) the Partnerships 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 Partnerships condensed consolidated financial statements), (iii) strategic investments made by the Partnership and (iv) 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.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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.
Equity-Method Investments
The Partnership accounts for all investments in which it has significant influence, including investments in the unconsolidated Funds and strategic investments, using the equity method of accounting. The carrying value of equity-method investments is determined based on amounts invested by the Partnership, adjusted for the equity in earnings or losses of the investee allocated based on the respective partnership agreement, less distributions received. The Partnership evaluates its equity-method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
Cash and Cash Equivalents
Cash and cash equivalents include cash held at banks and cash held for distributions, including 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 $72.2 million and $55.2 million at March 31, 2014 and December 31, 2013, 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 $13.2 million is included in restricted cash at March 31, 2014 and December 31, 2013. Restricted cash at March 31, 2014 also includes $6.2 million of cash received on behalf of certain non-consolidated Carlyle funds that was paid out in April 2014. Also included in restricted cash at March 31, 2014 and December 31, 2013 is 4.4 million ($6.1 million as of March 31, 2014 and December 31, 2013) in escrow related to a tax contingency at one of the Partnerships real estate funds (see Note 11). The remaining balance in restricted cash at March 31, 2014 and December 31, 2013 primarily represents cash held by the Partnerships 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 $13.3 million and $13.4 million is included in restricted cash and securities of Consolidated Funds at March 31, 2014 and December 31, 2013, respectively.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Certain CLOs hold U.S. Treasury notes, Obligation Assimilable du Tresor Securities (OATS) Strips and corporate bonds as collateral for specific classes of loans payable in the CLOs. As of March 31, 2014 and December 31, 2013, securities of $11.9 million and $12.3 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 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 Partnerships 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.
Deferred Revenue
Deferred revenue represents management fees and other revenue received prior to the balance sheet date, which has not yet been earned.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). The Partnerships other comprehensive income is comprised of unrealized gains and losses on cash flow hedges, foreign currency translation adjustments and gains / losses on defined benefit plans sponsored by AlpInvest. The components of accumulated other comprehensive income (loss) as of March 31, 2014 and December 31, 2013 were as follows:
As of | ||||||||
March 31, 2014 |
December 31, 2013 |
|||||||
(Dollars in millions) | ||||||||
Unrealized losses on cash flow hedge instruments |
$ | (1.2 | ) | $ | (1.0 | ) | ||
Currency translation adjustments |
(11.4 | ) | (8.5 | ) | ||||
Unrealized losses on defined benefit plans |
(2.0 | ) | (1.7 | ) | ||||
|
|
|
|
|||||
Total |
$ | (14.6 | ) | $ | (11.2 | ) | ||
|
|
|
|
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 losses resulting from transactions outside of the functional currency of an entity of $0.6 million and $0.9 million for the three months ended March 31, 2014 and 2013, respectively, are included in general, administrative and other expenses in the condensed consolidated statements of operations.
Recent Accounting Pronouncements
In June 2013, the FASB issued ASU 2013-08, Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. ASU 2013-08 provides additional guidance on the characteristics necessary to qualify as an investment company. The Partnership currently consolidates entities that are investment companies and the Partnership retains the specialized accounting for those investment companies in its consolidated financial statements. The Partnership adopted this guidance as of January 1, 2014 and the adoption did not have a material impact on the Partnerships condensed consolidated financial statements.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
3. Acquisitions
Acquisition of Diversified Global Asset Management Corporation
On February 3, 2014, the Partnership acquired 100% of the equity interests in Diversified Global Asset Management Corporation (DGAM), a Toronto, Canada-based alternative investment manager with $2.9 billion in fee-earning assets under management. DGAM also advises on $3.6 billion in assets, for which it earns a nominal advisory fee. The purchase price consisted of approximately $8.0 million in cash and 662,134 newly issued common units (approximately $23.1 million). The transaction also included contingent compensation of up to $23.7 million in cash and $47.3 million in common units, which are issuable through 2021 upon the achievement of certain performance and service-based requirements. The Partnership consolidated the financial position and results of operations of DGAM effective February 3, 2014 and accounted for this transaction as a business combination. DGAM is the Partnerships fund of hedge funds platform and is included in the Partnerships Solutions business segment. In connection with this transaction, the Partnership incurred approximately $1.3 million of acquisition costs that were recorded as expenses.
The acquisition-date fair value of the consideration transferred for the DGAM acquisition, and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (Dollars in millions):
Acquisition-date fair value of consideration transferred |
||||
Cash |
$ | 8.0 | ||
The Carlyle Group L.P. common units |
23.1 | |||
|
|
|||
Total |
$ | 31.1 | ||
|
|
|||
Estimated fair value of assets acquired and liabilties assumed |
||||
Cash |
$ | 4.9 | ||
Other assets |
3.9 | |||
Finite-lived intangible assets - contractual rights |
29.0 | |||
Goodwill |
8.6 | |||
Deferred tax liabilities |
(7.7 | ) | ||
Other liabilities |
(7.6 | ) | ||
|
|
|||
Total |
$ | 31.1 | ||
|
|
The finite-lived intangible assets are amortized over a seven-year period.
The Partnership recognized a dilution in partners capital associated with the issuance of Carlyle common units and the portion of this transaction allocable to the non-controlling interests in Carlyle Holdings. The effect of the dilution was an increase to non-controlling interests in Carlyle Holdings of approximately $19.4 million and a corresponding decrease to partners capital.
The amount of revenue and earnings of DGAM since the acquisition date and the pro forma impact to the Partnerships condensed consolidated financial results for the three months ended March 31, 2014 and 2013 as if the acquisition had been consummated as of January 1, 2013, was not significant.
The fair value of The Carlyle Group L.P. common units was based on the quoted price of the Partnerships common units on the NASDAQ exchange. This fair value measurement was based on inputs that are directly observable and thus represented a Level I measurement as defined in the accounting guidance for fair value measurement.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Acquisition of Metropolitan Real Estate Equity Management
On November 1, 2013, the Partnership acquired 100% of the equity interests in Metropolitan Real Estate Equity Management, LLC (Metropolitan), a global manager of real estate fund of funds with more than $2.6 billion in capital commitments at the acquisition date. The purchase price consisted of approximately $12.8 million in cash and 67,338 newly issued common units (approximately $2.1 million). The transaction also included contingent consideration that is payable through 2018 upon the achievement of performance conditions of up to $5.0 million in cash and common units equivalent to $10.0 million at the time of vesting. Additionally, the transaction included compensation of 52,889 newly issued Carlyle Holdings partnership units (approximately $1.6 million) that vest ratably over a period of five years, up to $10.4 million of cash payable through 2018 based on the achievement of performance conditions, and $10.6 million and $10.0 million of Carlyle Holdings partnership units and common units, respectively, that are issuable through 2023 based on the achievement of performance conditions and time vesting. The Partnership consolidated the financial position and results of operations of Metropolitan effective November 1, 2013 and accounted for this transaction as a business combination. Metropolitan is included in the Partnerships Solutions business segment.
See Note 3 to the consolidated financial statements included in the Partnerships 2013 Annual Report on Form 10-K for additional information on the Metropolitan acquisition.
Acquisition of Remaining 40% Equity Interest in AlpInvest
On August 1, 2013, Carlyle Holdings, a controlled subsidiary of the Partnership, acquired the remaining 40% equity interest in AlpInvest for an aggregate of 2,887,970 newly issued common units of the Partnership (approximately $80.8 million) and approximately 4.5 million in cash (approximately $6.0 million). Of the 2,887,970 common units issued in this transaction, 914,087 common units (approximately $25.5 million) were issued to AlpInvest sellers who are employees of the Partnership and are subject to vesting over a period up to five years (see Note 16). The remaining 1,973,883 common units issued in the transaction (approximately $55.3 million) were not subject to any vesting conditions. The Partnership accounted for this transaction as an acquisition of ownership interests in a subsidiary while retaining a controlling interest in the subsidiary. Accordingly, the carrying value of the non-controlling interest was adjusted to reflect the change in the ownership interests in AlpInvest. The excess of the fair value of the consideration paid by the Partnership (excluding any elements of the transaction deemed to be compensatory) over the carrying amount of the non-controlling interest acquired was recognized directly as a reduction to partners capital.
See Note 3 to the consolidated financial statements included in the Partnerships 2013 Annual Report on Form 10-K for additional information on the acquisition of remaining 40% equity interest in AlpInvest.
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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 Partnerships 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.
24
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the Partnerships assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of March 31, 2014:
(Dollars in millions) |
Level I | Level II | Level III | Total | ||||||||||||
Assets |
||||||||||||||||
Investments of Consolidated Funds: |
||||||||||||||||
Equity securities |
$ | 546.7 | $ | 95.0 | $ | 2,485.0 | $ | 3,126.7 | ||||||||
Bonds |
| | 1,223.9 | 1,223.9 | ||||||||||||
Loans |
| | 14,324.6 | 14,324.6 | ||||||||||||
Partnership and LLC interests(1) |
| | 3,723.6 | 3,723.6 | ||||||||||||
Hedge funds |
| 4,679.9 | | 4,679.9 | ||||||||||||
Other |
| | 1.4 | 1.4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
546.7 | 4,774.9 | 21,758.5 | 27,080.1 | |||||||||||||
Trading securities |
| | 5.2 | 5.2 | ||||||||||||
Restricted securities of Consolidated Funds |
3.6 | | 8.3 | 11.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 550.3 | $ | 4,774.9 | $ | 21,772.0 | $ | 27,097.2 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Loans payable of Consolidated Funds |
$ | | $ | | $ | 15,678.7 | $ | 15,678.7 | ||||||||
Loans payable of a consolidated real estate VIE |
| | 125.3 | 125.3 | ||||||||||||
Interest rate swaps |
| 5.5 | | 5.5 | ||||||||||||
Derivative instruments of the CLOs |
| | 14.7 | 14.7 | ||||||||||||
Contingent consideration(2) |
| 26.3 | 135.4 | 161.7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 31.8 | $ | 15,954.1 | $ | 15,985.9 | ||||||||
|
|
|
|
|
|
|
|
(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, ESG, Vermillion, and Metropolitan, excluding employment-based contingent consideration (see Note 9). |
The following table summarizes the Partnerships assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of December 31, 2013:
(Dollars in millions) |
Level I | Level II | Level III | Total | ||||||||||||
Assets |
||||||||||||||||
Investments of Consolidated Funds: |
||||||||||||||||
Equity securities |
$ | 610.5 | $ | 24.0 | $ | 2,714.1 | $ | 3,348.6 | ||||||||
Bonds |
| | 1,249.5 | 1,249.5 | ||||||||||||
Loans |
| | 14,067.8 | 14,067.8 | ||||||||||||
Partnership and LLC interests(1) |
| | 3,815.2 | 3,815.2 | ||||||||||||
Hedge funds |
| 4,403.3 | | 4,403.3 | ||||||||||||
Other |
| | 2.0 | 2.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
610.5 | 4,427.3 | 21,848.6 | 26,886.4 | |||||||||||||
Trading securities |
| | 6.9 | 6.9 | ||||||||||||
Restricted securities of Consolidated Funds |
3.7 | | 8.6 | 12.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 614.2 | $ | 4,427.3 | $ | 21,864.1 | $ | 26,905.6 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Loans payable of Consolidated Funds |
$ | | $ | | $ | 15,220.7 | $ | 15,220.7 | ||||||||
Loans payable of a consolidated real estate VIE |
| | 122.1 | 122.1 | ||||||||||||
Interest rate swaps |
| 6.3 | | 6.3 | ||||||||||||
Derivative instruments of the CLOs |
| | 13.1 | 13.1 | ||||||||||||
Contingent consideration(2) |
| 15.7 | 185.9 | 201.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 22.0 | $ | 15,541.8 | $ | 15,563.8 | ||||||||
|
|
|
|
|
|
|
|
(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, ESG, Vermillion, and Metropolitan, excluding employment-based contingent consideration (see Note 9). |
25
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Investment professionals with responsibility for the underlying investments are responsible for preparing the investment valuations pursuant to the policies, methodologies and templates prepared by the Partnerships valuation group, which is a team made up of individuals with previous valuation experience reporting to the Partnerships chief accounting officer. The valuation group is responsible for maintaining the Partnerships valuation policy and related guidance, templates and systems that are designed to be consistent with the guidance found in ASC 820, Fair Value Measurement. These valuations, inputs and preliminary conclusions are reviewed by the fund accounting teams. The valuations are then reviewed and approved by the respective fund valuation sub-committees, which are comprised of the respective fund head, segment head, chief financial and chief accounting officers, as well as members from the valuation group. The valuation group compiles the aggregate results and significant matters and presents them for review and approval by the global valuation committee, which is comprised of the Partnerships co-chief executive officers, chief operating officer, chief risk officer, chief financial officer, chief accounting officer, deputy chief investment officer, the business segment heads, and observed by the chief compliance officer and director of internal audit. Additionally, each quarter a sample of valuations are reviewed by external valuation firms.
In the absence of observable market prices, the Partnership values its investments using valuation methodologies applied on a consistent basis. For some investments little market activity may exist. Managements determination of fair value is then based on the best information available in the circumstances and may incorporate managements 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 and real estate properties, and certain debt positions. The valuation technique for each of these investments is described below:
Private Equity and Real Estate Investments The fair values of private equity investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (EBITDA), the discounted cash flow method, public market or private transactions, valuations for comparable companies or sales of comparable assets, and other measures which, in many cases, are unaudited at the time received. The methods used to estimate the fair value of real estate investments include the discounted cash flow method and/or capitalization rate (cap rate) analysis. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (e.g., applying a key performance metric of the investment such as EBITDA or net operating income to a relevant valuation multiple or cap rate observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar models. Adjustments to observable valuation measures are frequently made upon the initial investment to calibrate the initial investment valuation to industry observable inputs. Such adjustments are made to align the investment to observable industry changes for differences in size, profitability, projected growth rates, geography and capital structure if applicable. The adjustments are reviewed with each subsequent valuation to assess how the investment has evolved relative to the observable inputs. Additionally, the investment may be subject to certain specific risks and/or development milestones which are also taken into account in the valuation assessment. Option pricing models and similar tools do not currently drive a significant portion of private equity or real estate valuations and are used primarily to value warrants, derivatives, certain restrictions and other atypical investment instruments.
Credit-Oriented Investments The fair values of credit-oriented investments are generally determined on the basis of prices between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments and various relationships between investments. Specifically, for investments in distressed debt and corporate loans and bonds, the fair values are generally determined by valuations of comparable investments. In some instances, the Partnership may utilize other valuation techniques, including the discounted cash flow method.
26
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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 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 loan and bond assets of 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.
Loans Payable of a Consolidated Real Estate VIE The Partnership has elected the fair value option to measure the loans payable of a consolidated real estate VIE at fair value. The fair values of the loans are primarily based on discounted cash flows analyses, which consider the liquidity and current financial condition of the consolidated real estate VIE. These loans are classified as Level III.
Fund Investments The Partnerships 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 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 March 31, 2014 | ||||||||||||||||||||||||||||||||
Investments of Consolidated Funds | Restricted securities of Consolidated Funds |
|||||||||||||||||||||||||||||||
Equity securities |
Bonds | Loans | Partnership and LLC interests |
Other | Trading securities and other |
Total | ||||||||||||||||||||||||||
Balance, beginning of period |
$ | 2,714.1 | $ | 1,249.5 | $ | 14,067.8 | $ | 3,815.2 | $ | 2.0 | $ | 6.9 | $ | 8.6 | $ | 21,864.1 | ||||||||||||||||
Transfers in (1) |
4.5 | | | | | | | 4.5 | ||||||||||||||||||||||||
Transfers out (1) |
(87.5 | ) | | | | | | | (87.5 | ) | ||||||||||||||||||||||
Purchases |
14.4 | 99.0 | 1,787.0 | 133.8 | | | | 2,034.2 | ||||||||||||||||||||||||
Sales |
(240.3 | ) | (138.8 | ) | (372.5 | ) | (450.9 | ) | | (3.6 | ) | | (1,206.1 | ) | ||||||||||||||||||
Settlements |
| | (1,177.8 | ) | | | | | (1,177.8 | ) | ||||||||||||||||||||||
Realized and unrealized gains (losses), net |
79.8 | 14.2 | 20.1 | 225.5 | (0.6 | ) | 1.9 | (0.3 | ) | 340.6 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, end of period |
$ | 2,485.0 | $ | 1,223.9 | $ | 14,324.6 | $ | 3,723.6 | $ | 1.4 | $ | 5.2 | $ | 8.3 | $ | 21,772.0 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date |
$ | (88.7 | ) | $ | 13.7 | $ | 60.2 | $ | (105.0 | ) | $ | (0.6 | ) | $ | 1.9 | $ | (0.3 | ) | $ | (118.8 | ) | |||||||||||
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|
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|
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|
|
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|
27
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Financial Assets | ||||||||||||||||||||||||||||
Three Months Ended March 31, 2013 | ||||||||||||||||||||||||||||
Investments of Consolidated Funds | ||||||||||||||||||||||||||||
Equity securities |
Bonds | Loans | Partnership and LLC interests |
Other | Trading securities and other |
Total | ||||||||||||||||||||||
Balance, beginning of period |
$ | 2,475.1 | $ | 934.2 | $ | 13,290.1 | $ | 4,315.5 | $ | 7.3 | $ | 20.0 | $ | 21,042.2 | ||||||||||||||
Transfers out (1) |
(4.3 | ) | | | | | | (4.3 | ) | |||||||||||||||||||
Purchases |
68.1 | 175.2 | 2,255.5 | 88.4 | | | 2,587.2 | |||||||||||||||||||||
Sales |
(44.5 | ) | (209.4 | ) | (593.5 | ) | (240.0 | ) | | | (1,087.4 | ) | ||||||||||||||||
Settlements |
| | (1,418.4 | ) | | | | (1,418.4 | ) | |||||||||||||||||||
Realized and unrealized gains (losses), net |
78.7 | 9.2 | (26.3 | ) | (161.7 | ) | 1.5 | 2.0 | (96.6 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, end of period |
$ | 2,573.1 | $ | 909.2 | $ | 13,507.4 | $ | 4,002.2 | $ | 8.8 | $ | 22.0 | $ | 21,022.7 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date |
$ | 124.5 | $ | 21.7 | $ | 121.8 | $ | 69.9 | $ | (8.1 | ) | $ | 2.0 | $ | 331.8 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Transfers into and 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 period in which the transfer occurs. |
Financial Liabilities | ||||||||||||||||||||
Three Months Ended March 31, 2014 | ||||||||||||||||||||
Loans Payable of Consolidated Funds |
Derivative Instruments of Consolidated Funds |
Contingent Consideration |
Loans Payable of a consolidated real estate VIE |
Total | ||||||||||||||||
Balance, beginning of period |
$ | 15,220.7 | $ | 13.1 | $ | 185.9 | $ | 122.1 | $ | 15,541.8 | ||||||||||
Borrowings |
1,345.0 | | | 9.6 | 1,354.6 | |||||||||||||||
Paydowns |
(949.2 | ) | | (72.7 | ) | (19.1 | ) | (1,041.0 | ) | |||||||||||
Sales |
| (0.9 | ) | | | (0.9 | ) | |||||||||||||
Realized and unrealized losses, net |
62.2 | 2.5 | 22.2 | 12.7 | 99.6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, end of period |
$ | 15,678.7 | $ | 14.7 | $ | 135.4 | $ | 125.3 | $ | 15,954.1 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date |
$ | (23.3 | ) | $ | (1.6 | ) | $ | 22.2 | $ | 12.7 | $ | 10.0 | ||||||||
|
|
|
|
|
|
|
|
|
|
28
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Financial Liabilities | ||||||||||||||||
Three Months Ended March 31, 2013 | ||||||||||||||||
Loans Payable of Consolidated Funds |
Derivative Instruments of Consolidated Funds |
Contingent Consideration |
Total | |||||||||||||
Balance, beginning of period |
$ | 13,656.7 | $ | 15.8 | $ | 186.7 | $ | 13,859.2 | ||||||||
Borrowings |
1,236.4 | | | 1,236.4 | ||||||||||||
Paydowns |
(820.7 | ) | | (10.0 | ) | (830.7 | ) | |||||||||
Sales |
| 0.1 | | 0.1 | ||||||||||||
Realized and unrealized (gains) losses, net |
240.3 | (5.6 | ) | (9.9 | ) | 224.8 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of period |
$ | 14,312.7 | $ | 10.3 | $ | 166.8 | $ | 14,489.8 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date |
$ | 354.2 | $ | (6.6 | ) | $ | (9.9 | ) | $ | 337.7 | ||||||
|
|
|
|
|
|
|
|
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.
29
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes quantitative information about the Partnerships Level III inputs as of March 31, 2014:
(Dollars in millions) |
Fair Value at March 31, 2014 |
Valuation Technique(s) |
Unobservable Input(s) |
Range (Weighted Average) | ||||||
Assets |
||||||||||
Investments of Consolidated Funds: |
||||||||||
Equity securities |
$ | 2,256.8 | Comparable Multiple |
LTM EBITDA Multiple |
5.1x - 15.3x (11.1x) | |||||
169.7 | Comparable Multiple |
Price Earnings Multiple |
16.9x - 16.9x (16.9x) | |||||||
8.3 | Comparable Multiple |
Book Value Multiple |
1.0x - 1.0x (1.0x) | |||||||
23.9 | Consensus Pricing |
Indicative Quotes ($ per share) |
$0 - $280 ($0) | |||||||
26.3 | Discounted Cash Flow |
Discount Rate |
5% - 15% (14%) | |||||||
Exit Cap Rate |
12% - 12% (12%) | |||||||||
Bonds |
1,223.9 | Consensus Pricing |
Indicative Quotes (% of Par) |
0 - 132 (101) | ||||||
Loans |
14,154.8 | Consensus Pricing |
Indicative Quotes (% of Par) |
0 - 157 (98) | ||||||
169.8 | Market Yield Analysis |
Market Yield |
5% - 16% (12%) | |||||||
Partnership and LLC interests |
3,723.6 | NAV of Underlying Fund(1) |
N/A |
N/A | ||||||
Other |
1.4 | Various |
N/A |
N/A | ||||||
|
|
|||||||||
21,758.5 | ||||||||||
Trading securities and other |
4.7 | Comparable Multiple |
LTM EBITDA Multiple |
5.8x - 5.8x (5.8x) | ||||||
0.5 | Discounted Cash Flow |
Discount Rate |
7% - 7% (7%) | |||||||
Restricted securities of Consolidated Funds |
8.3 | Consensus Pricing |
Indicative Quotes (% of Par) |
83 - 83 (83) | ||||||
|
|
|||||||||
Total |
$ | 21,772.0 | ||||||||
|
|
|||||||||
Liabilities |
||||||||||
Loans payable of Consolidated Funds: |
||||||||||
Senior secured notes |
$ | 14,408.7 | Discounted Cash Flow with Consensus Pricing |
Discount Rates |
1% - 9% (2%) | |||||
Default Rates |
1% - 5% (3%) | |||||||||
Recovery Rates |
55% - 70% (62%) | |||||||||
Indicative Quotes (% of Par) |
69 - 101 (97) | |||||||||
Subordinated notes and preferred shares |
1,254.1 | Discounted Cash Flow with Consensus Pricing |
Discount Rates |
8% - 25% (16%) | ||||||
Default Rates |
1% - 5% (3%) | |||||||||
Recovery Rates |
55% - 70% (62%) | |||||||||
Indicative Quotes (% of Par) |
1 - 140 (61) | |||||||||
Combination notes |
15.9 | Consensus Pricing |
Indicative Quotes (% of Par) |
95 - 97 (96) | ||||||
Loans payable of a consolidated real estate VIE |
125.3 | Discounted Cash Flow |
Discount to Expected Payment |
0% - 100% (43%) | ||||||
Discount Rate |
20% - 30% (23%) | |||||||||
Derivative instruments of Consolidated Funds |
14.7 | Counterparty Pricing |
Indicative Quotes (% of Notional Amount) |
1 - 33 (7) | ||||||
Contingent cash consideration(2) |
135.4 | Discounted Cash Flow |
Assumed % of Total Potential Contingent Payments |
0% - 100% (69%) | ||||||
Discount Rate |
1% - 32% (10%) | |||||||||
|
|
|||||||||
Total |
$ | 15,954.1 | ||||||||
|
|
(1) | Represents the Partnerships investments in funds that are valued using the NAV of the underlying fund. |
(2) | Related to contingent cash consideration associated with the acquisitions of Claren Road, AlpInvest, ESG, Vermillion, and Metropolitan (see Note 9). |
30
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes quantitative information about the Partnerships Level III inputs as of December 31, 2013:
(Dollars in millions) |
Fair Value at December 31, 2013 |
Valuation Technique(s) |
Unobservable Input(s) |
Range (Weighted Average) | ||||||
Assets |
||||||||||
Investments of Consolidated Funds: |
||||||||||
Equity securities |
$ | 2,479.6 | Comparable Multiple |
LTM EBITDA Multiple |
5.6x - 15.5x (10.8x) | |||||
169.7 | Comparable Multiple |
Price Earnings Multiple |
17.0x - 17.0x (17.0x) | |||||||
10.2 | Comparable Multiple |
Book Value Multiple |
1.0x - 1.0x (1.0x) | |||||||
24.1 | Consensus Pricing |
Indicative Quotes ($ per share) |
$0 - $250 ($0) | |||||||
30.5 | Discounted Cash Flow |
Discount Rate |
5% - 12% (11%) | |||||||
Exit Cap Rate |
11% - 11% (11%) | |||||||||
Bonds |
1,249.5 | Consensus Pricing |
Indicative Quotes (% of Par) |
0 - 130 (100) | ||||||
Loans |
13,858.6 | Consensus Pricing |
Indicative Quotes (% of Par) |
0 - 158 (98) | ||||||
209.2 | Market Yield Analysis |
Market Yield |
5% - 17% (10%) | |||||||
Partnership and LLC interests |
3,815.2 | NAV of Underlying Fund(1) |
N/A |
N/A | ||||||
Other |
2.0 | Various |
N/A |
N/A | ||||||
|
|
|||||||||
21,848.6 | ||||||||||
Trading securities and other |
5.0 | Comparable Multiple |
LTM EBITDA Multiple |
5.9x - 5.9x (5.9x) | ||||||
1.9 | Discounted Cash Flow |
Discount Rate |
7% - 7% (7%) | |||||||
Restricted securities of Consolidated Funds |
8.6 | Consensus Pricing |
Indicative Quotes (% of Par) |
86 - 86 (86) | ||||||
|
|
|||||||||
Total |
$ | 21,864.1 | ||||||||
|
|
|||||||||
Liabilities |
||||||||||
Loans payable of Consolidated Funds: |
||||||||||
Senior secured notes |
$ | 13,910.4 | Discounted Cash Flow with Consensus Pricing |
Discount Rates |
2% - 10% (3%) | |||||
Default Rates |
1% - 6% (3%) | |||||||||
Recovery Rates |
50% - 75% (63%) | |||||||||
Indicative Quotes (% of Par) |
40 - 101 (98) | |||||||||
Subordinated notes and preferred shares |
1,294.0 | Discounted Cash Flow with Consensus Pricing |
Discount Rates |
9% - 25% (16%) | ||||||
Default Rates |
1% - 6% (2%) | |||||||||
Recovery Rates |
50% - 75% (62%) | |||||||||
Indicative Quotes (% of Par) |
0 - 102 (60) | |||||||||
Combination notes |
16.3 | Consensus Pricing |
Indicative Quotes (% of Par) |
93 - 100 (98) | ||||||
Loans payable of a consolidated real estate VIE |
122.1 | Discounted Cash Flow |
Discount to Expected Payment |
0% - 100% (45%) | ||||||
Discount Rate |
20% - 30% (23%) | |||||||||
Derivative instruments of Consolidated Funds |
13.1 | Counterparty Pricing |
Indicative Quotes (% of Notional Amount) |
1 - 31 (6) | ||||||
Contingent cash consideration(2) |
185.9 | Discounted Cash Flow |
Assumed % of Total Potential Contingent Payments |
0% - 100% (81%) | ||||||
Discount Rate |
1% - 32% (17%) | |||||||||
|
|
|||||||||
Total |
$ | 15,541.8 | ||||||||
|
|
(1) | Represents the Partnerships investments in funds that are valued using the NAV of the underlying fund. |
(2) | Related to contingent cash consideration associated with the acquisitions of Claren Road, AlpInvest, ESG, Vermillion and Metropolitan (see Note 9). |
31
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The significant unobservable inputs used in the fair value measurement of the Partnerships investments in equity securities include EBITDA, price-earnings and book value multiples, indicative quotes, discount rates and exit cap rates. Significant decreases in EBITDA multiples, price-earnings multiples, book value multiples or indicative quotes in isolation would result in a significantly lower fair value measurement. Significant increases in discount rates or exit cap rates in isolation would result in a significantly lower fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Partnerships investments in bonds and loans are market yields and indicative quotes. Significant increases in market yields in isolation 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 Partnerships trading securities and other investments include EBITDA multiples and discount rates. Significant decreases in EBITDA multiples or indicative quotes in isolation would result in a significantly lower fair value measurement. Significant increases in discount rates in isolation would result in a significantly lower fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Partnerships restricted securities of Consolidated Funds include indicative quotes. Significant decreases in indicative quotes in isolation would result in a significantly lower fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Partnerships loans payable of Consolidated Funds are discount rates, default rates, recovery rates and indicative quotes. Significant increases in discount rates or default rates in isolation would result in a significantly lower fair value measurement, while a significant increase in recovery rates and indicative quotes in isolation would result in a significantly higher fair value.
The significant unobservable inputs used in the fair value measurement of the Partnerships loans payable of a consolidated real estate VIE are discounts to expected payment and discount rate. A significant increase in either of these inputs in isolation would result in a significantly lower fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Partnerships derivative instruments of Consolidated Funds include indicative quotes. Significant decreases in indicative quotes in isolation would result in a significantly lower fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Partnerships 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.
32
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
5. Accrued Performance Fees
The components of accrued performance fees are as follows:
As of | ||||||||
March 31, 2014 |
December 31, 2013 |
|||||||
(Dollars in millions) | ||||||||
Corporate Private Equity |
$ | 2,912.2 | $ | 2,830.4 | ||||
Global Market Strategies |
122.8 | 167.2 | ||||||
Real Assets |
291.2 | 277.2 | ||||||
Solutions |
450.4 | 378.8 | ||||||
|
|
|
|
|||||
Total |
$ | 3,776.6 | $ | 3,653.6 | ||||
|
|
|
|
Approximately 63% and 62% of accrued performance fees at March 31, 2014 and December 31, 2013, respectively, are related to Carlyle Partners IV, L.P., Carlyle Partners V, L.P. and Carlyle Europe Partners III, L.P., three of the Partnerships Corporate Private Equity funds.
Accrued performance fees are shown gross of the Partnerships 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 | ||||||||
March 31, 2014 |
December 31, 2013 |
|||||||
(Dollars in millions) | ||||||||
Corporate Private Equity |
$ | (8.7 | ) | $ | (10.4 | ) | ||
Global Market Strategies |
(2.1 | ) | (2.1 | ) | ||||
Real Assets |
(24.9 | ) | (27.1 | ) | ||||
|
|
|
|
|||||
Total |
$ | (35.7 | ) | $ | (39.6 | ) | ||
|
|
|
|
Performance Fees
The performance fees included in revenues are derived from the following segments:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Corporate Private Equity |
$ | 453.2 | $ | 434.7 | ||||
Global Market Strategies |
66.1 | 108.5 | ||||||
Real Assets |
16.8 | 63.0 | ||||||
Solutions |
84.4 | 36.2 | ||||||
|
|
|
|
|||||
Total |
$ | 620.5 | $ | 642.4 | ||||
|
|
|
|
33
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Approximately 67% ($413.1 million) of performance fees for the three months ended March 31, 2014 are related to Carlyle Partners V, L.P. and Carlyle Europe Partners III, L.P., two of the Partnerships Corporate Private Equity funds. Total revenues recognized from Carlyle Partners V, L.P. and Carlyle Europe Partners III, L.P. were $270.6 million and $184.6 million, respectively, for the three months ended March 31, 2014.
Approximately 53% ($338.5 million) of performance fees for the three months ended March 31, 2013 are related to Carlyle Partners IV, L.P. and Carlyle Partners V, L.P., two of the Partnerships Corporate Private Equity funds. Total revenues recognized from Carlyle Partners IV, L.P. and Carlyle Partners V, L.P. were $188.3 million and $209.7 million, respectively, for the three months ended March 31, 2013.
6. Investments
Investments consist of the following:
As of | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Equity method investments, excluding accrued performance fees |
$ | 735.1 | $ | 751.1 | ||||
Trading securities and other investments |
12.9 | 14.2 | ||||||
|
|
|
|
|||||
Total investments |
$ | 748.0 | $ | 765.3 | ||||
|
|
|
|
Strategic Investment in NGP
On December 20, 2012, the Partnership entered into separate purchase agreements with ECM Capital, L.P. and Barclays Natural Resource Investments, a division of Barclays Bank PLC (BNRI), pursuant to which the Partnership agreed to invest in NGP Management Company, L.L.C. (NGP Management and, together with its affiliates, NGP). NGP is an Irving, Texas-based energy investor.
The Partnerships equity interests in NGP Management entitle the Partnership to an allocation of income equal to 47.5% of the management fee-related revenues of the NGP entities that serve as the advisors to certain private equity funds, and future interests in the general partners of certain future carry funds advised by NGP that entitle the Partnership to an allocation of income equal to 7.5% of the carried interest received by such fund general partners. In addition, following the termination of the investment period of the NGP Natural Resources X, L.P. fund (NGP X), the Partnership will pay $7.5 million to acquire an additional 7.5% equity interest in NGP Management that, together with the initial interests described above, will entitle the Partnership to an allocation of income equal to 55% of the management fee-related revenues of the NGP entities that serve as the advisors to certain private equity funds.
The sellers also granted the Partnership options to purchase additional interests in NGP. Specifically, the Partnership acquired (1) an option, exercisable by the Partnership between July 1, 2014 and July 1, 2015, to purchase from BNRI, for a purchase price in cash that is estimated to be between $61.0 million to $70.1 million plus the net capital amount that has been contributed by BNRI, interests in the general partner of NGP X entitling the Partnership to an allocation of income equal to 40% of the carried interest received by such funds general partner; (2) an option, exercisable by the Partnership from December 20, 2012 until January 1, 2015, to purchase from BNRI, for a purchase price in cash that is estimated to be between $34.0 million to $38.0 million, additional interests in the general partners of all future carry funds advised by NGP entitling the Partnership to an additional equity allocation equal to 40% of the carried interest received by such fund general partners; and (3) an option, exercisable by the Partnership in approximately 13 years, to purchase from ECM Capital, L.P. and its affiliates, for a formulaic purchase price in cash based upon a measure of the earnings of NGP, the remaining equity interests in NGP Management.
34
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
In consideration for these interests and options, the Partnership paid an aggregate of $384.0 million in cash to ECM Capital, L.P. and BNRI, and issued 996,572 Carlyle Holdings partnership units to ECM Capital, L.P. that vest ratably over a period of five years. The Partnership will also pay consideration of $7.5 million upon the termination of the investment period of the NGP X fund. The transaction also includes contingent consideration payable to ECM Capital, L.P. of up to $45.0 million in cash, 597,944 Carlyle Holdings partnership units that were issued at closing but vest upon the achievement of performance conditions, and contingently issuable Carlyle Holdings partnership units up to $15.0 million that will be issued if the performance conditions are met. Additionally, the transaction includes contingent consideration payable to BNRI of up to $183.0 million, which will be payable partly in cash and partly by a promissory note issued by the Partnership, if the performance conditions are met. The contingent consideration is payable from 2015 through 2018, depending on NGPs achievement of certain business performance goals.
The Partnership also entered into a senior advisor consulting agreement with the chief executive officer of NGP and granted deferred restricted common units to a group of NGP personnel who are providing the Partnership with consulting services.
The Partnership accounts for its investment in NGP Management under the equity method of accounting. The Partnership recorded its investment in NGP Management initially at cost, excluding any elements in the transaction that were deemed to be compensatory arrangements to NGP personnel. The Carlyle Holdings partnership units issued in the transaction, the contingently issuable Carlyle Holdings partnership units, and the deferred restricted common units were deemed to be compensatory arrangements; these elements are recognized as an expense under applicable U.S. GAAP.
The Partnership records realized investment income for its equity income allocation from NGP, and also records, as a reduction of realized investment income, its share of any allocated expenses from NGP Management, expenses associated with the compensatory elements of the transaction, and the amortization of the basis differences related to the definitive-lived identifiable intangible assets of NGP Management. For the three months ended March 31, 2014, the Partnership recognized $4.3 million of realized net investment loss from the investment in NGP Management, comprised of investment earnings of $14.4 million less $18.7 million of expenses associated with the compensatory elements of the transaction and amortization of basis differences. For the three months ended March 31, 2013, the Partnership recognized $1.0 million of realized net investment loss from the investment in NGP Management, comprised of investment earnings of $16.2 million less $17.2 million of expenses associated with the compensatory elements of the transaction and amortization of basis differences.
The difference between the Partnerships carrying value of its investment and its share of the underlying net assets of the investee was $185.1 million and $199.6 million as of March 31, 2014 and December 31, 2013, respectively; these differences are amortized over a period of ten years from the initial investment date.
In April 2014, the Partnership provided notice to BNRI that it would exercise the option to acquire additional interests in the general partners of all future carry funds advised by NGP, which will entitle the Partnership to an additional equity allocation equal to 40% of the carried interest received by such fund general partners. The exercise price for this option is approximately $35 million, and the transaction is expected to be completed in May 2014. Although the Partnership is under no obligation to exercise its other option to acquire the additional interests in the general partner of NGP X, the Partnership currently expects to exercise this option before its expiration. When the Partnership exercises these options, the amount paid will be included in the carrying value of the Partnerships equity-method investment in NGP at such time.
35
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Equity-Method Investments
The Partnerships equity method investments include its fund investments in Corporate Private Equity, Global Market Strategies and Real Assets, typically as general partner interests, and its investment in NGP Management (included within Real Assets), which are not consolidated but in which the Partnership exerts significant influence. Investments are related to the following segments:
As of | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Corporate Private Equity |
$ | 222.6 | $ | 206.5 | ||||
Global Market Strategies |
24.3 | 25.1 | ||||||
Real Assets |
488.2 | 519.5 | ||||||
|
|
|
|
|||||
Total |
$ | 735.1 | $ | 751.1 | ||||
|
|
|
|
The Partnership evaluates each of its equity method investments to determine if disclosure of summarized income statement information is required under Article 10 of Regulation S-X. As of March 31, 2014 and for the three months then ended, no individual equity method investment held by the Partnership was significant based on the disclosure criteria.
Investment Income (Loss)
The components of investment income (loss) are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Income (loss) from equity investments |
$ | 4.0 | $ | (2.8 | ) | |||
Income from trading securities |
1.9 | 3.3 | ||||||
Other investment income (loss) |
0.2 | (0.1 | ) | |||||
|
|
|
|
|||||
Total |
$ | 6.1 | $ | 0.4 | ||||
|
|
|
|
Carlyles income (loss) from its equity-method investments is included in investment income (loss) in the condensed consolidated statements of operations and consists of:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Corporate Private Equity |
$ | 17.0 | $ | 12.9 | ||||
Global Market Strategies |
| 1.1 | ||||||
Real Assets |
(13.0 | ) | (16.8 | ) | ||||
|
|
|
|
|||||
Total |
$ | 4.0 | $ | (2.8 | ) | |||
|
|
|
|
36
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Trading Securities and Other Investments
Trading securities and other investments as of March 31, 2014 and December 31, 2013 primarily consisted of $12.9 million and $14.2 million, respectively, of investments in corporate mezzanine securities and bonds, as well as other cost method investments.
Investments of Consolidated Funds
During the three months ended March 31, 2014, 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 consolidated financial statements beginning on their respective closing dates. As of March 31, 2014, the total assets of these CLOs included in the Partnerships condensed consolidated financial statements were approximately $2.0 billion.
There were no individual investments with a fair value greater than five percent of the Partnerships total assets for any period presented.
Interest and Other Income of Consolidated Funds
The components of interest and other income of Consolidated Funds are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Interest income from investments |
$ | 221.2 | $ | 230.6 | ||||
Other income |
29.5 | 37.8 | ||||||
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|
|
|||||
Total |
$ | 250.7 | $ | 268.4 | ||||
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|
Net Investment Gains (Losses) of Consolidated Funds
Net investment gains (losses) of Consolidated Funds include net realized gains (losses) from sales of investments and unrealized gains (losses) resulting from changes in fair value of the Consolidated Funds investments. The components of net investment gains (losses) of Consolidated Funds are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Gains from investments of Consolidated Funds |
$ | 488.9 | $ | 599.4 | ||||
Losses from liabilities of CLOs |
(65.1 | ) | (386.9 | ) | ||||
Gains (losses) on other assets of CLOs |
0.2 | (1.0 | ) | |||||
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|
|
|||||
Total |
$ | 424.0 | $ | 211.5 | ||||
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table presents realized and unrealized gains (losses) earned from investments of the Consolidated Funds:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Realized gains |
$ | 732.3 | $ | 477.9 | ||||
Net change in unrealized gains (losses) |
(243.4 | ) | 121.5 | |||||
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|
|||||
Total |
$ | 488.9 | $ | 599.4 | ||||
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7. Intangible Assets and Goodwill
The following table summarizes the carrying amount of intangible assets as of March 31, 2014 and December 31, 2013:
As of | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Acquired contractual rights |
$ | 855.4 | $ | 826.1 | ||||
Acquired trademarks |
6.9 | 6.9 | ||||||
Accumulated amortization |
(342.7 | ) | (290.5 | ) | ||||
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|
|||||
Finite-lived intangible assets, net |
519.6 | 542.5 | ||||||
Goodwill |
49.0 | 40.3 | ||||||
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|
|||||
Intangible assets, net |
$ | 568.6 | $ | 582.8 | ||||
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|
The following table summarizes the changes in the carrying amount of goodwill by segment as of March 31, 2014. There was no goodwill associated with the Partnerships Corporate Private Equity and Real Assets segments.
Global Market Strategies |
Solutions | Total | ||||||||||
(Dollars in millions) | ||||||||||||
Balance as of December 31, 2013 |
$ | 28.0 | $ | 12.3 | $ | 40.3 | ||||||
Goodwill acquired during the period |
| 8.6 | 8.6 | |||||||||
Foreign currency translation |
| 0.1 | 0.1 | |||||||||
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|
|||||||
Balance as of March 31, 2014 |
$ | 28.0 | $ | 21.0 | $ | 49.0 | ||||||
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|
As part of the accounting for the acquisition of DGAM, the Partnership recorded $8.6 million of goodwill. See Note 3 for more information on this acquisition.
During the three months ended March 31, 2014, the Partnership evaluated for impairment certain intangible assets associated with acquired contractual rights for fee income based on revisions to the related expected future cash flow. The intangible assets are included in the Global Market Strategies segment. The Partnership recorded an impairment loss of $24.6 million to reduce the carrying value of the intangible assets to their estimated fair value. Fair value was based on a probability-weighted discounted cash flow model. This fair value measurement was based
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
on significant inputs not observable in the market and thus represented a Level III measurement as defined in the accounting guidance for fair value measurements. The impairment loss was included in general, administrative and other expenses in the accompanying condensed consolidated financial statements for the three months ended March 31, 2014.
Intangible asset amortization expense, excluding impairment losses, was $27.5 million and $37.0 million for the three months ended March 31, 2014 and 2013, 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 2014 through 2018 and thereafter (Dollars in millions):
2014 |
$ | 102.5 | ||
2015 |
96.6 | |||
2016 |
84.5 | |||
2017 |
78.7 | |||
2018 |
71.6 | |||
Thereafter |
113.0 | |||
|
|
|||
$ | 546.9 | |||
|
|
8. Borrowings
The Partnership borrows and enters into credit agreements for its general operating and investment purposes. The Partnerships borrowings consist of the following (Dollars in millions):
As of March 31, 2014 | As of December 31, 2013 | |||||||||||||||
Borrowing | Carrying | Borrowing | Carrying | |||||||||||||
Outstanding | Value | Outstanding | Value | |||||||||||||
Term Loan Due 8/09/2018 |
$ | 25.0 | $ | 25.0 | $ | 25.0 | $ | 25.0 | ||||||||
Term Loan (1) |
17.4 | 17.4 | 17.4 | 17.4 | ||||||||||||
3.875% Senior Notes Due 2/01/2023 |
500.0 | 499.8 | 500.0 | 499.8 | ||||||||||||
5.625% Senior Notes Due 3/30/2043 |
600.0 | 607.0 | 400.0 | 398.4 | ||||||||||||
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|
|||||||||
$ | 1,142.4 | $ | 1,149.2 | $ | 942.4 | $ | 940.6 | |||||||||
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(1) | Due the earlier of September 28, 2018 or the date that the CLO is dissolved. |
Senior Credit Facility
The 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 August 9, 2018. Principal amounts outstanding under the term loan and revolving credit facility accrue interest, at the option of the borrowers, either (a) at an alternate base rate plus an applicable margin not to exceed 0.75%, or (b) at LIBOR plus an applicable margin not to exceed 1.75% (at March 31, 2014, the interest rate was 1.41%). During the first quarter of 2013, the Partnership prepaid $475.0 million of term loan principal that would have been due beginning in September 2014 and expensed $1.9 million of deferred financing costs in interest expense. The remaining outstanding principal amount under the term loan is payable on August 9, 2018. Total interest expense under the senior credit facility was $0.9 million and $4.2 million for the three months ended March 31, 2014 and 2013, respectively. The fair value of the outstanding balances of the term loan and revolving credit facility at March 31, 2014 and December 31, 2013 approximated par value based on current market rates for similar debt instruments and are classified as Level III within the fair value hierarchy.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Other Borrowings
On October 3, 2013, the Partnership borrowed 12.6 million ($17.4 million at March 31, 2014) under a new term loan and security agreement with a financial institution. Proceeds from the borrowing were used to fund the Partnerships investment in a CLO. Interest on the term loan accrues at EURIBOR plus 1.75% (2.06% at March 31, 2014). The Partnership may prepay the facility in whole or in part at any time without penalty. The facility is scheduled to mature on the earlier of five years after closing or the date that the CLO is dissolved. The facility is secured by the Partnerships investment in the CLO. Interest expense on the term loan was not significant for the three months ended March 31, 2014. The fair value of the outstanding balance of the term loan at March 31, 2014 and December 31, 2013 approximated par value based on current market rates for similar debt instruments and are classified as Level III within the fair value hierarchy.
3.875% Senior Notes
In January 2013, an indirect finance subsidiary of the Partnership issued $500.0 million in aggregate principal amount of 3.875% senior notes due February 1, 2023 at 99.966% of par. Interest is payable semi-annually on February 1 and August 1, beginning August 1, 2013. This subsidiary may redeem the senior notes in whole at any time or in part from time to time at a price equal to the greater of 100% of the principal amount of the notes being redeemed and the sum of the present values of the remaining scheduled payments of principal and interest on any notes being redeemed discounted to the redemption date on a semi-annual basis at the Treasury rate plus 30 basis points plus accrued and unpaid interest on the principal amounts being redeemed to the redemption date. Interest expense on the notes was $5.0 million and $4.0 million for the three months ended March 31, 2014 and 2013, respectively. At March 31, 2014 and December 31, 2013, the fair value of the notes was approximately $500.0 million and $479.6 million, respectively, based on indicative quotes and are classified as Level II within the fair value hierarchy.
5.625% Senior Notes
In March 2013, an indirect finance subsidiary of the Partnership issued $400.0 million in aggregate principal amount of 5.625% senior notes due March 30, 2043 at 99.583% of par. Interest is payable semi-annually on March 30 and September 30, beginning September 30, 2013. This subsidiary may redeem the senior notes in whole at any time or in part from time to time at a price equal to the greater of 100% of the principal amount of the notes being redeemed and the sum of the present values of the remaining scheduled payments of principal and interest on any notes being redeemed discounted to the redemption date on a semi-annual basis at the Treasury rate plus 40 basis points plus accrued and unpaid interest on the principal amounts being redeemed to the redemption date.
In March 2014, an indirect finance subsidiary of the Partnership issued $200.0 million of 5.625% Senior Notes due March 30, 2043 at 104.315% of par. The net proceeds from the issuance of these notes will be used for general corporate purposes, including investments in Carlyles funds as well as investment capital for acquisitions of new fund platforms and strategies or other growth initiatives, to drive innovation across the broader Carlyle platform. These notes were issued as additional 5.625% Senior Notes and will be treated as a single class with the already outstanding $400.0 million aggregate principal amount of these senior notes.
Interest expense on the notes was $6.3 million for the three months ended March 31, 2014. Interest expense on the notes for the three months ended March 31, 2013 was not material. At March 31, 2014 and December 31, 2013, the fair value of the notes was approximately $644.9 million and $398.1 million, respectively, based on indicative quotes and are classified as Level II within the fair value hierarchy.
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Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Interest Rate Swaps
The Partnership is subject to interest rate risk associated with its variable rate debt financing. To manage this risk, the Partnership has an outstanding interest rate swap to fix the base LIBOR interest rate on its term loan borrowings with a notional amount of $500.0 million at March 31, 2014 that amortizes through September 30, 2016.
In the first quarter of 2013, $475.0 million of term loan principal was prepaid. As a result of these term loan prepayments, the interest rate swap is no longer accounted for as a cash flow hedge; the interest rate swap is accounted for as a freestanding derivative instrument recorded at fair value each period with changes in fair value recorded through earnings. The pre-existing hedge losses included in accumulated other comprehensive loss for this interest rate swap of $8.8 million is being reclassified into earnings as the original forecasted transactions affect earnings.
In March 2013, the Partnership entered into a second interest rate swap with a notional amount of $475.0 million at March 31, 2014 that amortizes through September 30, 2016. This interest rate swap is accounted for as a freestanding derivative instrument recorded at fair value each period with changes in fair value recorded through earnings.
Debt Covenants
The Partnership is subject to various financial covenants under its loan agreements including, among other items, maintenance of a minimum amount of management fee-earning assets. The Partnership is also subject to various non-financial covenants under its loan agreements and the indentures governing its senior notes. The Partnership was in compliance with all financial and non-financial covenants under its various loan agreements as of March 31, 2014.
The consolidated real estate VIE was not in compliance with the debt covenants related to substantially all of its loans payable as of March 31, 2014 (see Note 17); such violations do not cause a default or event of default under the Partnerships senior credit facility, 2013 term loan, senior notes, or the loans payable of Consolidated Funds.
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.
As of March 31, 2014 and December 31, 2013, the following borrowings were outstanding, which includes preferred shares classified as liabilities (Dollars in millions):
As of March 31, 2014 | ||||||||||||||||
Borrowing Outstanding |
Fair Value | Weighted Average Interest Rate |
Weighted Average Remaining Maturity in Years |
|||||||||||||
Senior secured notes |
$ | 14,779.7 | $ | 14,408.7 | 1.48 | % | 9.04 | |||||||||
Subordinated notes, Income notes and Preferred shares |
1,331.2 | 1,254.1 | N/A | (a) | 7.88 | |||||||||||
Combination notes |
15.0 | 15.9 | N/A | (b) | 7.89 | |||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 16,125.9 | $ | 15,678.7 | ||||||||||||
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|
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Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
As of December 31, 2013 | ||||||||||||||||
Borrowing Outstanding |
Fair Value | Weighted Average Interest Rate |
Weighted Average Remaining Maturity in Years |
|||||||||||||
Senior secured notes |
$ | 14,319.8 | $ | 13,910.4 | 1.41 | % | 8.97 | |||||||||
Subordinated notes, Income notes and Preferred shares |
1,399.3 | 1,294.0 | N/A | (a) | 8.18 | |||||||||||
Combination notes |
15.2 | 16.3 | N/A | (b) | 8.13 | |||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 15,734.3 | $ | 15,220.7 | ||||||||||||
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|
(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 the securities specifically held to collateralize such combination notes. |
Loans payable of the CLOs are collateralized by the assets held by the CLOs and the assets of one CLO may not be used to satisfy the liabilities of another. This collateral consisted of cash and cash equivalents, corporate loans, corporate bonds and other securities. As of March 31, 2014 and December 31, 2013, the fair value of the CLO assets was $17.6 billion and $16.9 billion, respectively.
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. These liquidity facility agreements in the aggregate allow for a maximum borrowing of $6.9 million and bear weighted average interest at EURIBOR plus 0.25% per annum. Amounts borrowed under the liquidity facilities are repaid based on cash flows available subject to priority of payments under each CLOs governing documents. There were no borrowings outstanding under the liquidity facility agreements as of March 31, 2014 and December 31, 2013.
9. Contingent Consideration
The Partnership has contingent consideration obligations related to its business acquisitions and strategic investments. The changes in the contingent consideration liabilities are as follows:
Amounts payable to the sellers who are Carlyle professionals | Contingent | |||||||||||||||||||
cash and other | ||||||||||||||||||||
Performance-based | Performance-based | Employment-based | consideration | |||||||||||||||||
contingent cash | contingent equity | contingent cash | payable to non- | |||||||||||||||||
consideration | consideration | consideration | Carlyle personnel | Total | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Balance at December 31, 2013 |
$ | 152.2 | $ | 15.7 | $ | 148.7 | $ | 33.7 | $ | 350.3 | ||||||||||
Change in carrying value |
19.5 | 10.6 | 13.1 | 2.7 | 45.9 | |||||||||||||||
Payments |
(70.5 | ) | | | (2.2 | ) | (72.7 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at March 31, 2014 |
$ | 101.2 | $ | 26.3 | $ | 161.8 | $ | 34.2 | $ | 323.5 | ||||||||||
|
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|
|
|
|
|
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|
The fair value of the performance-based contingent cash and equity consideration payable to the sellers who are Carlyle professionals has been recorded in due to affiliates in the accompanying condensed consolidated balance sheets. These payments are not contingent upon the Carlyle professional being employed by Carlyle at the time that the performance conditions are met. Changes in the fair value of these amounts are recorded in other non-operating (income) expenses in the condensed consolidated statements of operations. The portion of the contingent consideration payment attributable to the initial amount included as part of the consideration transferred is classified as cash flows from financing activities. The portion of the contingent consideration payment that is attributable to the subsequent changes in the fair value of the contingent consideration is classified as cash flows from operating activities in the condensed consolidated statements of cash flows.
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Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The amount of employment-based contingent cash consideration payable to the sellers who are Carlyle professionals has been recorded as accrued compensation and benefits in the accompanying condensed consolidated balance sheets. Changes in the value of these amounts are recorded as compensation expense in the condensed consolidated statements of operations.
The fair value of contingent consideration payable to non-Carlyle personnel is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. Changes in the fair value of this contingent consideration are recorded in other non-operating (income) expenses in the condensed consolidated statements of operations.
The fair values of the performance-based contingent cash consideration were based on probability-weighted discounted cash flow models. These fair value measurements are based on significant inputs not observable in the market and thus represent Level III measurements as defined in the accounting guidance for fair value measurement. As of March 31, 2014 and December 31, 2013, the fair value of the contingently issuable Carlyle Holdings partnership units was based principally by reference to the quoted price of the Partnerships common units. This fair value measurement was based on inputs that are not directly observable but are corroborated by observable market data and thus represents a Level II measurement as defined in the accounting guidance for fair value measurement. Refer to Note 4 for additional disclosures related to the fair value of these instruments as of March 31, 2014 and December 31, 2013.
The following table represents the maximum amounts that could be paid from contingent cash obligations associated with the business acquisitions and the strategic investment in NGP Management and an estimated amount payable for the options related to NGP:
As of March 31, 2014 | ||||||||||||||||
Business Acquisitions |
NGP Investment |
Total | Liability Recognized on Financial Statements(1) |
|||||||||||||
(Dollars in millions) | ||||||||||||||||
Performance-based contingent cash consideration |
$ | 289.4 | $ | 183.0 | $ | 472.4 | $ | 135.4 | ||||||||
Employment-based contingent cash consideration |
436.4 | 45.0 | 481.4 | 161.8 | ||||||||||||
Options to acquire additional investments in NGP(2) |
| 96.4 | 96.4 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total maximum cash obligations |
$ | 725.8 | $ | 324.4 | $ | 1,050.2 | $ | 297.2 | ||||||||
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|
(1) | On the condensed consolidated balance sheet, the liability for performance-based contingent cash consideration is included in due to affiliates (for amounts owed to Carlyle professionals) and accounts payable, accrued expenses, and other liabilities (for amounts owed to other sellers), and the liability for employment-based contingent cash consideration is included in accrued compensation and benefits. Also, the amounts shown here exclude liabilities that have been recognized on the consolidated financial statements for performance-based contingent equity consideration. |
(2) | Refer to Note 6 for more information. |
Some of the employment-based contingent cash consideration agreements do not contain provisions limiting the amount that could be paid by the Partnership. For purposes of the table above, the Partnership has used its current estimate of the amount to be paid upon the determination dates for such payments. In the consolidated financial statements, the Partnership records the performance-based contingent cash consideration from business acquisitions at fair value at each reporting period. For the employment-based contingent cash consideration, the Partnership accrues the compensation liability over the implied service period.
When the Partnership exercises the options to acquire additional investments in NGP, the amount paid will be included in the carrying value of its equity-method investment in NGP at such time. The amount shown in the table is an estimate of the payment required to exercise the two options; the actual amount paid may be different as the payment amount is dependent on the timing of the Partnerships exercise of the options as well as the net contributed capital in the general partner of NGP Fund X at such time.
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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 | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Accrued performance fee-related compensation |
$ | 1,752.8 | $ | 1,661.8 | ||||
Accrued bonuses |
137.9 | 238.0 | ||||||
Employment-based contingent cash consideration |
161.8 | 148.7 | ||||||
Other |
140.8 | 204.5 | ||||||
|
|
|
|
|||||
Total |
$ | 2,193.3 | $ | 2,253.0 | ||||
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|
|
|
11. Commitments and Contingencies
Capital Commitments
The Partnership and its unconsolidated affiliates have unfunded commitments to entities within the following segments as of March 31, 2014 (Dollars in millions):
Unfunded | ||||
Commitments | ||||
Corporate Private Equity |
$ | 2,220.1 | ||
Global Market Strategies |
213.7 | |||
Real Assets |
589.3 | |||
Solutions |
28.7 | |||
|
|
|||
$ | 3,051.8 | |||
|
|
Of the $3.1 billion of unfunded commitments, approximately $2.8 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 $16.4 million, and accrues interest at the lower of the prime rate, as defined, or three-month LIBOR plus 2%, reset quarterly (3.24% weighted-average rate at March 31, 2014). As of March 31, 2014 and December 31, 2013, approximately $7.6 million and $9.0 million, respectively, were outstanding under the credit facility and payable by the employees. The amount funded by the Partnership under this guarantee as of March 31, 2014 was not material. The Partnership believes the likelihood of any material funding under this guarantee to be remote. The fair value of this guarantee is not significant to the consolidated financial statements.
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Table of Contents
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 March 31, 2014 and December 31, 2013, $13.2 million were 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 $35.7 million at March 31, 2014, 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 March 31, 2014. However, the ultimate giveback obligation, if any, does not become realized until the end of a funds life (see Note 2). The Partnership has recorded $14.8 million and $17.6 million of unbilled receivables from former and current employees and senior Carlyle professionals as of March 31, 2014 and December 31, 2013, 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, $352.1 million and $345.1 million have been withheld from distributions of carried interest to senior Carlyle professionals and employees for potential giveback obligations as of March 31, 2014 and December 31, 2013, respectively. Such amounts are held by an entity not included in the accompanying condensed consolidated balance sheets.
During the first quarter of 2013, the Partnership repaid $23.8 million of giveback obligations to certain funds. These amounts were funded primarily through collection of employee receivables related to giveback obligations and from contributions from non-controlling interests for their portion of the obligation. The Partnership had previously recognized these liabilities as unrealized performance fee losses. As a result of the giveback repayments, the Partnership reclassified these amounts to realized performance fee losses for the three months ended March 31, 2013.
If, at March 31, 2014, all of the investments held by the Partnerships 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 2014 through 2025. These leases are accounted for as operating leases. Rent expense was approximately $12.9 million and $12.2 million for the three months ended March 31, 2014 and 2013, respectively, and is included in general, administrative and other expenses in the condensed consolidated statements of operations.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The future minimum commitments for the leases are as follows (Dollars in millions):
2014 |
$ | 39.4 | ||
2015 |
48.1 | |||
2016 |
39.7 | |||
2017 |
36.7 | |||
2018 |
32.5 | |||
Thereafter |
98.3 | |||
|
|
|||
$ | 294.7 | |||
|
|
Total minimum rentals to be received in the future under non-cancelable subleases as of March 31, 2014 were $10.4 million.
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 $34.7 million and $34.8 million as of March 31, 2014 and December 31, 2013, respectively, and is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.
In April 2014, the Partnership entered into a new lease agreement to extend the term and expand its occupancy of certain office space in New York City through May 31, 2031. The lease was previously scheduled to terminate on May 31, 2020. The new lease will be accounted for as an operating lease and the incremental minimum lease payments on the new lease is approximately $206 million.
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. The Partnership believes that the matters described below are without merit and intends to vigorously contest all such allegations.
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. Count One of the complaint alleges an overarching conspiracy relating to certain large buyout transactions. Count Two of the complaint alleges a conspiracy with regard to the buyout of Healthcare Corporation of America. The plaintiffs seek damages as provided for in Section 4 of the Clayton Act and an injunction against such conduct in restraint of trade in the future. The defendants moved for summary judgment on both counts. On March 13, 2013, the U.S. District Court for the District of Massachusetts ruled that plaintiffs could proceed on Count One solely on the basis of an alleged conspiracy to refrain from jumping announced proprietary (i.e., non-auction) deals. The Court stated that it would entertain further summary judgment motions by individual defendants as to their participation in the more narrowly defined alleged conspiracy. The Court also denied summary judgment as to Count Two. On April 16, 2013, Carlyle filed a consolidated motion, renewing its motion for summary judgment on Count One, and moving for reconsideration on Count Two. On April 22, 2013, Carlyle joined a motion seeking reconsideration on Count Two filed on behalf of all Count Two defendants. On June 20, 2013, the Court denied the motion for reconsideration on Count Two filed by the Count Two defendants. On July 18, 2013, the Court denied Carlyles individual summary judgment motion regarding its participation in the conspiracy alleged in Count One. The plaintiffs moved to certify the class on October 21, 2013. The case management order calls for a hearing on class certification sometime after May 19, 2014 and a jury trial commencing in November 2014, which could be delayed in the event an appeal to the U.S. Court of Appeals for the First Circuit on the class certification issue should become necessary. Carlyle believes that reasonable litigation and settlement costs that are not covered by applicable insurance are indemnifiable by one or more of our investment funds.
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Along with many other companies and individuals in the financial sector, Carlyle and Carlyle Mezzanine Partners, L.P. (CMP) are named as defendants in Foy v. Austin Capital, a case filed in June 2009, pending in the State of New Mexicos 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 Carlyle and CMP on the grounds 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.
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, on July 13, 2009, a former shareholder of CCC, claiming to have lost $20.0 million, filed a claim against CCC, Carlyle and certain affiliates and one of the Partnerships officers (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 sought treble damages, interest, expenses, attorneys fees and to have the subscription agreement deemed null and void and to receive a full refund of the investment. The plaintiff has since dismissed his claim without any monetary compensation, in exchange for Carlyles dismissal of its counterclaim against him for violation of the forum selection clause.
Second, in November 2009, another CCC investor, National Industries Group (Holding) (National Industries) instituted legal proceedings on similar grounds in Kuwaits 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 National Industries from proceeding in Kuwait on any CCC-related claims based on the forum selection clause in National Industries subscription agreement, which provided for exclusive jurisdiction in the Delaware courts. In September 2011, National Industries 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. In April 2013, the court in Kuwait dismissed National Industries claim without prejudice for failure to serve process. Hearings in the case and related to the case have nevertheless taken place on several occasions since that time, most recently in September 2013. Meanwhile, in August 2012, National Industries had filed a motion to vacate the Delaware Court of Chancerys decision. The Partnership successfully opposed that motion and the Courts injunction remained in effect. In November 2012, National Industries appealed that decision to the Delaware Supreme Court. On May 29, 2013, the Delaware Supreme Court affirmed the Chancery Courts decision and upheld the 2011 injunction barring National Industries from filing or prosecuting any CCC-related action in any forum other than the courts of Delaware.
Third, the Guernsey liquidators who took control of CCC in March 2008 filed four suits on July 7, 2010 against Carlyle, 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 Carlyle 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 Carlyle put the interests of Carlyle ahead of the interests of CCC and its shareholders and gave priority to preserving and enhancing Carlyles reputation and its brand over the best interests of CCC. In July 2011, the Royal Court of Guernsey held that the case should be
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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. Two claims in that case, which sought the return of certain documents and other property purportedly belonging to CCC, were resolved by agreement of the parties and order of the Royal Court of Guernsey in December 2012. Carlyle has now completed its document production pursuant to that order. On July 24, 2013, plaintiffs filed an amended complaint, which contained further detail in support of the existing claims but no new defendants or claims. On December 20, 2013, defendants filed a defense to the amended complaint. Carlyle expects that plaintiffs will file a reply in the next several months. In addition, the liquidators lawsuits in New York and the District of Columbia were dismissed in December 2011 without prejudice.
Fourth, on June 21, 2011, August 24, 2011 and September 1, 2011, respectively, three putative shareholder class actions were filed against Carlyle, 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 compensatory damages sustained as a result of the alleged misrepresentations, costs and expenses, as well as reasonable attorneys fees. On August 13, 2012, the United States District Court for the District of Columbia dismissed both the D.C. and New York shareholder class actions. The plaintiffs moved for leave to amend their complaint and/or for amendment of the Courts decision, but the trial court denied that motion on June 4, 2013. The plaintiffs previously filed notice of appeal to the Court of Appeals for the District of Columbia Circuit was then automatically reinstated and oral arguments on this appeal were held on February 19, 2014.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings, and some of the matters discussed above seek potentially large and/or indeterminate amounts. As of such date, based on information known by management, management has not concluded that the final resolutions of the matters above will have a material effect upon the Partnerships condensed consolidated financial statements. However, given the potentially large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of investigations and litigations, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on our financial results in any particular period.
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 issued a tax assessment seeking to collect approximately 97.0 million, consisting of taxes, interest and penalties. Additionally, the French Ministry of Justice has commenced an investigation regarding the legality under French law of claiming the exemptions under the tax treaty.
CEREP I and its subsidiaries are contesting the French tax assessment. In July 2012, the Partnership provided a guarantee to the French tax authorities as credit support for the 45.7 million tax assessment and in October 2012, placed an additional 4.4 million in escrow, in each case, related to CEREP I. The Partnership expects to incur costs on behalf of CEREP I and its related entities. The Partnership will attempt to recover any amounts advanced or paid from proceeds of subsequent portfolio dispositions by CEREP I. Commencing with the issuance of the credit support on behalf of CEREP I in July 2012, the Partnership consolidated the fund into its consolidated financial statements. As of March 31, 2014, CEREP I had accrued 75.0 million ($103.3 million as of March 31, 2014) related to this contingency, which is included in other liabilities of Consolidated Funds in the condensed consolidated financial statements.
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Indemnifications
In the normal course of business, the Partnership and its subsidiaries enter into contracts that contain a variety of representations and warranties and provide general indemnifications. The Partnerships maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Partnership that have not yet occurred. However, based on experience, the Partnership believes the risk of material loss to be remote.
Risks and Uncertainties
Carlyles funds seek investment opportunities that offer the possibility of attaining substantial capital appreciation. Certain events particular to each industry in which the underlying investees conduct their operations, as well as general economic conditions, may have a significant negative impact on the Partnerships investments and profitability. Such events are beyond the Partnerships control, and the likelihood that they may occur and the effect on the Partnership cannot be predicted.
Furthermore, certain of the funds investments are made in private companies and there are generally no public markets for the underlying securities at the current time. The funds ability to liquidate their publicly-traded investments are often subject to limitations, including discounts that may be required to be taken on quoted prices due to the number of shares being sold. The funds ability to liquidate their investments and realize value is subject to significant limitations and uncertainties, including among others currency fluctuations and natural disasters.
The funds make investments outside of the United States. Investments outside the U.S. may be subject to less developed bankruptcy, corporate, partnership and other laws (which may have the effect of disregarding or otherwise circumventing the limited liability structures potentially causing the actions or liabilities of one fund or a portfolio company to adversely impact the Partnership or an unrelated fund or portfolio company). Non-U.S. investments are subject to the same risks associated with the Partnerships U.S. investments as well as additional risks, such as fluctuations in foreign currency exchange rates, unexpected changes in regulatory requirements, heightened risk of political and economic instability, difficulties in managing non-U.S. investments, potentially adverse tax consequences and the burden of complying with a wide variety of foreign laws.
Furthermore, Carlyle is exposed to economic risk concentrations related to certain large investments as well as concentrations of investments in certain industries and geographies.
Additionally, the Partnership encounters credit risk. Credit risk is the risk of default by a counterparty in the Partnerships investments in debt securities, loans, leases and derivatives that result from a borrowers, lessees or derivative counterpartys inability or unwillingness to make required or expected payments.
The Partnership considers cash, cash equivalents, securities, receivables, equity-method investments, accounts payable, accrued expenses, other liabilities, loans payable, senior notes, assets and liabilities of Consolidated Funds and contingent and other consideration for acquisitions to be its financial instruments. The carrying amounts reported in the condensed consolidated balance sheets for these financial instruments equal or closely approximate their fair values.
Termination Costs
Employee and office lease termination costs are included in accrued compensation and benefits and accounts payable, accrued expenses and other liabilities in the condensed consolidated balance sheets as well as general, administrative and other expenses in the condensed consolidated statements of operations. As of March 31, 2014 and December 31, 2013, the accrual for termination costs primarily represents (1) lease obligations associated with closed offices, and (2) severance costs related to terminated employees, which represents managements estimate of the total amount expected to be incurred. The changes in the accrual for termination costs for the three months ended March 31, 2014 and 2013 are as follows:
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Balance, beginning of period |
$ | 10.6 | $ | 13.6 | ||||
Compensation expense |
0.6 | 0.6 | ||||||
Contract termination costs |
0.1 | (0.1 | ) | |||||
Costs paid or settled |
(2.1 | ) | (2.2 | ) | ||||
|
|
|
|
|||||
Balance, end of period |
$ | 9.2 | $ | 11.9 | ||||
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|
|
|
12. Related Party Transactions
Due from Affiliates and Other Receivables, Net
The Partnership had the following due from affiliates and other receivables at March 31, 2014 and December 31, 2013:
As of | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Unbilled receivable for giveback obligations from current and former employees |
$ | 14.8 | $ | 17.6 | ||||
Notes receivable and accrued interest from affiliates |
7.0 | 15.4 | ||||||
Other receivables from unconsolidated funds and affiliates, net |
143.5 | 142.9 | ||||||
|
|
|
|
|||||
Total |
$ | 165.3 | $ | 175.9 | ||||
|
|
|
|
Notes receivable represent loans that the Partnership has provided to certain unconsolidated funds to meet short-term obligations to purchase investments. Other receivables from certain of the unconsolidated funds and portfolio companies relate to management fees receivable from limited partners, advisory fees receivable and expenses paid on behalf of these entities. These costs represent costs related to the pursuit of actual or proposed investments, professional fees and expenses associated with the acquisition, holding and disposition of the investments. The affiliates are obligated at the discretion of the Partnership to reimburse the expenses. Based on managements determination, the Partnership accrues and charges interest on amounts due from affiliate accounts at interest rates ranging up to 7.21% as of March 31, 2014. The accrued and charged interest to the affiliates was not significant for any period presented.
These receivables are assessed regularly for collectability and amounts determined to be uncollectible are charged directly to general, administrative and other expenses in the condensed consolidated statements of operations. A corresponding allowance for doubtful accounts is recorded and such amounts were not significant for any period presented.
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Due to Affiliates
The Partnership had the following due to affiliates balances at March 31, 2014 and December 31, 2013:
As of | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Due to affiliates of Consolidated Funds |
$ | 0.8 | $ | 51.8 | ||||
Due to non-consolidated affiliates |
35.8 | 130.2 | ||||||
Performance-based contingent cash and equity consideration related to acquisitions |
127.5 | 167.9 | ||||||
Amounts owed under the tax receivable agreement |
94.3 | 33.1 | ||||||
Other |
15.9 | 20.7 | ||||||
|
|
|
|
|||||
Total |
$ | 274.3 | $ | 403.7 | ||||
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|
|
|
The Partnership has recorded obligations for amounts due to certain of its affiliates. The Partnership periodically offsets expenses it has paid on behalf of its affiliates against these obligations. The amount owed under the tax receivable agreement is related primarily to the acquisition by the Partnership of 9,300,000 Carlyle Holdings partnership units in March 2014 (see Note 1), as well as the exchange in May 2012 by CalPERS of its Carlyle Holdings partnership units for Partnership common units.
Other Related Party Transactions
In the normal course of business, the Partnership has made use of aircraft owned by entities controlled by senior Carlyle professionals. The senior Carlyle professionals paid for their purchases of the aircraft and bear all operating, personnel and maintenance costs associated with their operation for personal use. Payment by the Partnership for the business use of these aircraft by senior Carlyle professionals and other employees is made at market rates, which totaled $1.5 million and $2.7 million for the three months ended March 31, 2014 and 2013, respectively. These fees are included in general, administrative, and other expenses in the condensed consolidated statements of operations.
Senior Carlyle professionals and employees are permitted to participate in co-investment entities that invest in Carlyle funds or alongside Carlyle funds. In many cases, participation is limited by law to individuals who qualify under applicable legal requirements. These co-investment entities generally do not require senior Carlyle professionals and employees to pay management or performance fees, however, Carlyle professionals and employees are required to pay their portion of partnership expenses.
Carried interest income from the funds can be distributed to senior Carlyle professionals and employees on a current basis, but is subject to repayment by the subsidiary of the Partnership that acts as general partner of the fund in the event that certain specified return thresholds are not ultimately achieved. The senior Carlyle professionals and certain other investment professionals have personally guaranteed, subject to certain limitations, the obligation of these subsidiaries in respect of this general partner obligation. Such guarantees are several and not joint and are limited to a particular individuals distributions received.
The Partnership does business with some of its portfolio companies; all such arrangements are on a negotiated basis.
Substantially all revenue is earned from affiliates of Carlyle.
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
13. Income Taxes
The Partnership is organized as a series of pass through entities pursuant to the United States Internal Revenue Code. As such, the Partnership is not responsible for the tax liability due on certain income earned during the year. Such income is taxed at the unitholder and non-controlling interest holder level, and any income tax is the responsibility of the unitholders and is paid at that level. The Partnerships income tax expense was $16.0 million and $24.9 million for the three months ended March 31, 2014 and 2013, respectively.
In the normal course of business, the Partnership is subject to examination by federal and certain state, local and foreign tax regulators. As of March 31, 2014, the Partnerships U.S. federal income tax returns for the years 2010 through 2012 are open under the normal three-year statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2009 to 2012. Foreign tax returns are generally subject to audit from 2006 to 2012. Certain of the Partnerships foreign subsidiaries are currently under audit by foreign tax authorities.
The Partnership does not believe that the outcome of these audits will require it to record reserves for uncertain tax positions or that the outcome will have a material impact on the consolidated financial statements. The Partnership does not believe that it has any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.
14. Non-controlling Interests in Consolidated Entities
The components of the Partnerships non-controlling interests in consolidated entities are as follows:
As of | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Non-Carlyle interests in Consolidated Funds |
$ | 7,027.9 | $ | 7,354.0 | ||||
Non-Carlyle interests in majority-owned subsidiaries |
299.6 | 279.6 | ||||||
Non-controlling interest in carried interest and cash held for carried interest distributions |
44.4 | 63.0 | ||||||
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|
|
|
|||||
Non-controlling interests in consolidated entities |
$ | 7,371.9 | $ | 7,696.6 | ||||
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|
|
|
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The components of the Partnerships non-controlling interests in income (loss) of consolidated entities are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Non-Carlyle interests in Consolidated Funds |
$ | 352.9 | $ | 227.1 | ||||
Non-Carlyle interests in majority-owned subsidiaries |
(21.3 | ) | 3.5 | |||||
Non-controlling interest in carried interest and cash held for carried interest distributions |
8.0 | 17.3 | ||||||
|
|
|
|
|||||
Net income attributable to other non-controlling interests in consolidated entities |
339.6 | 247.9 | ||||||
Net loss attributable to partners capital appropriated for CLOs |
(82.1 | ) | (257.1 | ) | ||||
Net income attributable to redeemable non-controlling interests in consolidated entities |
67.0 | 177.2 | ||||||
|
|
|
|
|||||
Non-controlling interests in income (loss) of consolidated entities |
$ | 324.5 | $ | 168.0 | ||||
|
|
|
|
There have been no significant changes in the Partnerships ownership interests in its consolidated entities for the periods presented other than the Partnerships acquisition of 13,800,000 Carlyle Holdings partnership units in March 2014 (see Note 1).
15. Earnings Per Common Unit
The weighted-average common units outstanding, basic and diluted, are calculated as follows:
Three Months Ended | ||||||||
March 31, 2014 | ||||||||
Basic | Diluted | |||||||
The Carlyle Group L.P. weighted-average common units outstanding |
52,501,412 | 52,501,412 | ||||||
Unvested deferred restricted common units |
| 6,486,349 | ||||||
Contingently issuable Carlyle Holdings Partnership units |
| 465,909 | ||||||
|
|
|
|
|||||
Weighted-average common units outstanding |
52,501,412 | 59,453,670 | ||||||
|
|
|
|
|||||
Three Months Ended | ||||||||
March 31, 2013 | ||||||||
Basic | Diluted | |||||||
The Carlyle Group L.P. weighted-average common units outstanding |
43,343,268 | 43,343,268 | ||||||
Unvested deferred restricted common units |
| 5,393,646 | ||||||
Contingently issuable Carlyle Holdings Partnership units |
| 2,372,094 | ||||||
|
|
|
|
|||||
Weighted-average common units outstanding |
43,343,268 | 51,109,008 | ||||||
|
|
|
|
The weighted-average common units outstanding of The Carlyle Group L.P. includes vested deferred restricted common units for which issuance of the related common units is deferred until future periods.
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
On August 1, 2013, as part of acquiring the remaining 40% equity interests in AlpInvest, the Partnership issued 914,087 common units that are subject to vesting conditions. As of March 31, 2014, 833,145 common units remain unvested. The common units participate immediately in any Partnership distributions. Under ASC 260, these common units are considered participating securities and are required to be included in the computation of earnings per common unit pursuant to the two-class method.
The Partnership applies the treasury stock method to determine the dilutive weighted-average common units represented by the unvested deferred restricted common units. Also included in the determination of dilutive weighted-average common units are contingently issuable Carlyle Holdings partnership units and common units associated with the Claren Road, Vermillion, Metropolitan, and DGAM acquisitions. For purposes of determining the dilutive weighted-average common units, it is assumed that March 31, 2014 and 2013 represent the end of the contingency period, the if-converted method is applied to any Carlyle Holdings partnership units issuable therefrom, and the treasury stock method is applied.
The Partnership applies the if-converted method to the vested Carlyle Holdings partnership units to determine the dilutive weighted-average common units outstanding. The Partnership applies the treasury stock method to the unvested Carlyle Holdings partnership units and the if-converted method on the resulting number of additional Carlyle Holdings partnership units to determine the dilutive weighted-average common units represented by the unvested Carlyle Holdings partnership units.
In computing the dilutive effect that the exchange of Carlyle Holdings partnership units would have on earnings per common unit, the Partnership considered that net income available to holders of common units would increase due to the elimination of non-controlling interests in Carlyle Holdings (including any tax impact). Based on these calculations, the incremental 234,789,709 of vested and unvested Carlyle Holdings partnership units for the three months ended March 31, 2014 were antidilutive, and therefore have been excluded. For the three months ended March 31, 2013, the incremental 226,419,959 of vested and unvested Carlyle Holdings partnership units were antidilutive, and therefore have been excluded.
Basic and diluted net income per common unit are calculated as follows:
Three Months Ended | ||||||||
March 31, 2014 | ||||||||
Basic | Diluted | |||||||
Net income attributable to The Carlyle Group L.P. |
$ | 24,600,000 | $ | 24,600,000 | ||||
Dilution of earnings due to participating securities with distribution rights |
(432,600 | ) | (517,200 | ) | ||||
|
|
|
|
|||||
Net income per common unit |
$ | 24,167,400 | $ | 24,082,800 | ||||
|
|
|
|
|||||
Weighted-average common units outstanding |
52,501,412 | 59,453,670 | ||||||
|
|
|
|
|||||
Net income per common unit |
$ | 0.46 | $ | 0.41 | ||||
|
|
|
|
|||||
Three Months Ended | ||||||||
March 31, 2013 | ||||||||
Basic | Diluted | |||||||
Net income attributable to The Carlyle Group L.P. |
$ | 33,800,000 | $ | 33,800,000 | ||||
Weighted-average common units outstanding |
43,343,268 | 51,109,008 | ||||||
|
|
|
|
|||||
Net income per common unit |
$ | 0.78 | $ | 0.66 | ||||
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
16. Equity-Based Compensation
In May 2012, Carlyle Group Management L.L.C., the general partner of the Partnership, adopted The Carlyle Group L.P. 2012 Equity Incentive Plan (the Equity Incentive Plan). The Equity Incentive Plan is a source of new equity-based awards permitting the Partnership to grant to Carlyle employees, directors of the Partnerships general partner and consultants non-qualified options, unit appreciation rights, common units, restricted common units, deferred restricted common units, phantom restricted common units and other awards based on the Partnerships common units and Carlyle Holdings partnership units. The total number of the Partnerships common units and Carlyle Holdings partnership units which were initially available for grant under the Equity Incentive Plan was 30,450,000. The Equity Incentive Plan contains a provision which automatically increases the number of the Partnerships common units and Carlyle Holdings partnership units available for grant based on a pre-determined formula; this increase occurs annually on January 1. As of January 1, 2014, pursuant to the formula, the total number of the Partnerships common units and Carlyle Holdings partnership units available for grant under the Equity Incentive Plan was 31,151,826.
Unvested Partnership Common Units
On August 1, 2013, the Partnership acquired the remaining 40% equity interest in AlpInvest (see Note 3). As part of the transaction, the Partnership issued 914,087 common units to AlpInvest sellers who are employees of the Partnership that are subject to vesting conditions.
These newly issued common units were unvested at grant and vest over a period of up to five years. The unvested common units are accounted for as equity-based compensation in accordance with ASC Topic 718, Compensation Stock Compensation (ASC 718). The grant-date fair value of the unvested common units is charged to equity-based compensation on a straight-line basis over the required service period. Additionally, the calculation of the expense assumes a forfeiture rate of up to 5%. For the three months ended March 31, 2014, the Partnership recorded $2.1 million in equity-based compensation expense associated with these awards. As of March 31, 2014, the total unrecognized equity-based compensation expense related to unvested common units, considering estimated forfeitures, is $16.0 million, which is expected to be recognized over a weighted-average term of 1.9 years.
Unvested Carlyle Holdings Partnership Units
The unvested Carlyle Holdings partnership units are held by senior Carlyle professionals and other individuals engaged in Carlyles business and generally vest ratably over a six-year period. The unvested Carlyle Holdings partnership units are accounted for as equity-based compensation in accordance with ASC 718. The grant-date fair value of the unvested Carlyle Holdings partnership units are charged to equity-based compensation expense on a straight-line basis over the required service period. Additionally, the calculation of the expense for the three months ended March 31, 2014 and 2013 assumes a forfeiture rate of up to 2.5% and 7.5%, respectively. During the second quarter of 2013, the Partnership revised its estimated forfeiture rate to 2.5% from 7.5%. The Partnership recorded equity-based compensation expense associated with these awards of $44.8 million and $39.0 million for the three months ended March 31, 2014 and 2013, respectively. No tax benefits have been recorded related to the unvested Carlyle Holdings partnership units, as the vesting of these units does not result in a tax deduction to the corporate taxpayers.
In connection with the Partnerships investment in NGP Management in December 2012, the Partnership issued 996,572 Carlyle Holdings partnership units to ECM Capital, L.P. which vest ratably over a period of five years. The Partnership also issued 597,944 Carlyle Holdings partnership units to ECM Capital, L.P. that were issued at closing but vest upon the achievement of performance conditions. The fair value of these units will be recognized as a reduction to the Partnerships investment income in NGP Management over the relevant service or performance period, based on the fair value of the units on each reporting date and adjusted for the actual fair value of the units at each vesting date. For the Carlyle Holdings partnership units that vest based on the achievement of performance conditions, the Partnership uses the minimum number of partnership units within the range of potential values for measurement and recognition purposes.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
As of March 31, 2014, the total unrecognized equity-based compensation expense related to unvested Carlyle Holdings partnership units, considering estimated forfeitures, is $808.2 million, which is expected to be recognized over a weighted-average term of 4.1 years.
Deferred Restricted Common Units
The deferred restricted common units are unvested when granted and vest ratably over a service period, which ranges up to six years. The grant-date fair value of the deferred restricted common units granted to Carlyles employees is charged to equity-based compensation expense on a straight-line basis over the required service period. Additionally, the calculation of the expense assumes a forfeiture rate that generally ranges from 5.0% to 15.0% and a per unit discount that generally ranges from 7.5% to 25.0%, as these unvested awards do not participate in any Partnership distributions. The Partnership recorded compensation expense of $26.9 million and $12.3 million for the three months ended March 31, 2014 and 2013, with $2.0 million and $0.8 million of corresponding deferred tax benefits, respectively. As of March 31, 2014, the total unrecognized equity-based compensation expense related to unvested deferred restricted common units, considering estimated forfeitures, is $428.5 million, which is expected to be recognized over a weighted-average term of 3.9 years.
Equity-based awards issued to non-employees are recognized as general, administrative and other expenses. The expense associated with the deferred restricted common units granted to NGP personnel by the Partnership are recognized as a reduction of the Partnerships investment income in NGP Management. The grant-date fair value of deferred restricted common units granted to Carlyles non-employee directors is 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. 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. The expense for equity-based awards issued to non-employees was not significant for the three months ended March 31, 2014 and 2013.
The vesting of deferred restricted common units creates taxable income for the Partnerships employees in certain jurisdictions. Accordingly, the employees may elect to engage the Partnerships equity plan service provider to sell sufficient common units and generate proceeds to cover their minimum tax obligations.
In February 2014, the Partnership granted approximately 5.6 million deferred restricted common units across a significant number of the Partnerships employees. The total estimated grant-date fair value of these awards was approximately $172 million. The awards vest over a period of up to 6 years.
Phantom Deferred Restricted Common Units
The phantom deferred restricted common units are unvested when granted and vest ratably over a service period of three years. Upon vesting, the units will be settled in cash. As the phantom deferred restricted common units will be settled in cash, they are accounted for as liability awards. The fair value of the units is re-measured at each reporting period until settlement and charged to equity-based compensation expense over the vesting period. Additionally, the calculation of the expense assumes a forfeiture rate of 15.0%. For the three months ended March 31, 2014 and 2013, the Partnership recorded $0.4 million and $1.0 million in equity-based compensation expense associated with these awards, respectively, which is included in base compensation expense in the accompanying condensed consolidated financial statements. The tax benefits recognized from these awards was not material during these periods. As of March 31, 2014, the total unrecognized equity-based compensation expense related to unvested phantom deferred restricted common units, considering estimated forfeitures, is $4.4 million, which is expected to be recognized over a weighted-average term of 1.2 years.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
A summary of the status of the Partnerships non-vested equity-based awards as of March 31, 2014 and a summary of changes for the three months ended March 31, 2014, are presented below:
Carlyle Holdings | The Carlyle Group, L.P. | |||||||||||||||||||||||||||||||
Equity Settled Awards | Cash Settled Awards | |||||||||||||||||||||||||||||||
Unvested Units |
Partnership Units |
Weighted- Average Grant Date Fair Value |
Deferred Restricted Common Units |
Weighted- Average Grant Date Fair Value |
Unvested Common Units |
Weighted- Average Grant Date Fair Value |
Phantom Units |
Weighted- Average Grant Date Fair Value |
||||||||||||||||||||||||
Balance, December 31, 2013 |
47,202,803 | $ | 22.13 | 16,250,174 | $ | 23.91 | 872,060 | $ | 26.78 | 208,511 | $ | 22.12 | ||||||||||||||||||||
Granted |
| $ | | 5,633,804 | $ | 30.48 | | $ | | 12,204 | $ | 35.46 | ||||||||||||||||||||
Vested |
| $ | | 276,625 | $ | 30.63 | 38,915 | $ | 21.49 | | $ | | ||||||||||||||||||||
Forfeited |
146,109 | $ | 22.00 | 112,268 | $ | 23.61 | | $ | | 1,228 | $ | 22.00 | ||||||||||||||||||||
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Balance, March 31, 2014 |
47,056,694 | $ | 22.28 | 21,495,085 | $ | 25.55 | 833,145 | $ | 27.02 | 219,487 | $ | 22.84 | ||||||||||||||||||||
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17. Consolidation of a Real Estate Development Company
The Partnership, indirectly through certain Carlyle real estate investment funds, has an investment in Urbplan Desenvolvimento Urbano S.A. (Urbplan, formerly Scopel Desenvolvimento Urbano S.A.), a Brazilian residential subdivision and land development company. Historically, funding for Urbplans business plan was provided primarily by borrowings incurred directly by Urbplan and from capital provided by certain Carlyle real estate investment funds, which in turn were funded primarily by external limited partners and by the Partnership through its ownership of the general partner of such funds.
In late 2012, it was determined that Urbplan was facing serious liquidity problems and would require additional capital infusions to continue operations. The Partnership and certain of its senior Carlyle professionals provided capital to Urbplan through one of the Carlyle investment funds in the second quarter of 2013. During the third quarter of 2013, it became evident that Urbplans efforts to raise additional capital from unaffiliated sources would likely not meet its requirements. The Partnership and certain senior Carlyle professionals elected to make additional investments into Urbplan. The external limited partners of the Carlyle real estate investment funds have not participated in the 2013 capital funding. From April 17, 2013, the date of the first additional investment into Urbplan, through September 30, 2013, Urbplan received capital funding of $32.0 million, of which $6.4 million was funded by the Partnership and $25.6 million was funded by certain senior Carlyle professionals indirectly through the Partnership. As of September 30, 2013, the estimated fair value of all the investments made by the Partnership into Urbplan, aggregating $21.5 million, and all the investments made by senior Carlyle professionals, aggregating $33.2 million, was $0.
During the second quarter of 2013, the Partnership concluded that the Carlyle investment vehicle through which it funded capital into Urbplan was a VIE and that the Partnership was the primary beneficiary of the VIE; accordingly, the Partnership consolidated the investment vehicle in the second quarter of 2013. During the third quarter of 2013, the Partnership concluded that the decision to provide additional capital to Urbplan constituted a reconsideration event under ASC 810, Consolidation (ASC 810). The Partnership concluded that Urbplan was a VIE as of September 30, 2013 because Urbplans equity investment at risk was not sufficient to permit it to finance its activities without additional financial support. The Partnership also concluded that it was the primary beneficiary of Urbplan since the Partnership has the power to direct the activities of Urbplan that most significantly impact its economic performance and the Partnerships investments in Urbplan will absorb losses incurred by Urbplan. As such, the Partnership began consolidating Urbplan into its consolidated financial statements as of September 30, 2013.
Pursuant to ASC 810, the Partnership applied the accounting guidance applicable to business combinations under ASC 805, Business Combinations, to record the initial consolidation of Urbplan on September 30, 2013. The Partnership recorded the assets, liabilities and non-controlling interests of Urbplan at their estimated fair value. Due to the timing and availability of financial information from Urbplan, the Partnership consolidates the financial position and results of operations of Urbplan on a financial reporting lag of 90 days. The Partnership will disclose the effect of intervening events at Urbplan that materially affect the financial position or results of operations of the Partnership, if any.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The assets and liabilities of Urbplan are held in separate legal entities; the Partnership has not guaranteed or assumed any obligation for repayment of Urbplans liabilities nor are the assets of Urbplan available to meet the liquidity requirements of the Partnership. However, if Urbplan fails to complete its construction projects, customers, partners, government agencies or municipalities or other creditors in certain circumstances might seek to assert claims against the Partnership under certain consumer protection or other laws.
Urbplan is currently a party to various litigation, government investigations and proceedings, disputes and other potential claims. The Partnership does not believe it is probable that the outcome of any existing Urbplan litigation, disputes or other potential claims will materially affect the Partnership or these consolidated financial statements.
As of November 2013, Urbplan was expected to require additional funding of approximately $200 million to enable it to continue operations; however, the actual amount of additional funding necessary may exceed this estimate. From the Partnerships initial consolidation of Urbplan through April 15, 2014, $107.5 million has been funded to Urbplan, of which $89.5 million is a reduction of the $200 million estimate. The Partnership has funded $26.0 million of the $107.5 million and $81.5 million has been funded by senior Carlyle professionals indirectly through the Partnership. While no contractual or other obligations exist to provide additional financial support to Urbplan, the Partnership and its senior Carlyle professionals expect to provide additional capital funding to Urbplan in the future and Urbplan will continue to seek capital funding from unaffiliated parties. The Partnership and its senior Carlyle professionals will evaluate the possibility of further capital infusions based on the circumstances at the time (including levels of third-party funding participation). It is anticipated that the Partnership would fund 25% and its senior Carlyle professionals would fund 75% indirectly through the Partnership of any additional investments made by the Partnership and its senior Carlyle professionals.
The assets and liabilities recognized in the Partnerships condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013 related to Urbplan were as follows:
As of | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Dollars in millions) | ||||||||
Receivables and inventory of a consolidated real estate VIE: |
||||||||
Customer and other receivables |
$ | 113.2 | $ | 110.3 | ||||
Inventory costs in excess of billings and advances |
57.7 | 70.1 | ||||||
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$ | 170.9 | $ | 180.4 | |||||
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Other assets of a consolidated real estate VIE: |
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Restricted investments |
$ | 14.4 | $ | 7.0 | ||||
Fixed assets, net |
2.2 | 2.2 | ||||||
Deferred tax assets |
12.9 | 12.8 | ||||||
Other assets |
17.2 | 38.1 | ||||||
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$ | 46.7 | $ | 60.1 | |||||
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Loans payable of a consolidated real estate VIE, at fair value (principal amount of $278.3 and $305.3 as of March 31, 2014 and December 31, 2013, respectively) |
$ | 125.3 | $ | 122.1 | ||||
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Other liabilities of a consolidated real estate VIE: |
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Accounts payable |
$ | 36.1 | $ | 25.4 | ||||
Other liabilities |
61.9 | 72.3 | ||||||
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$ | 98.0 | $ | 97.7 | |||||
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The revenues and expenses recognized in the Partnerships condensed consolidated statements of operations for the three months ended March 31, 2014 related to Urbplan were as follows:
Three Months Ended | ||||
March 31, 2014 | ||||
(Dollars in millions) | ||||
Revenue of a consolidated real estate VIE |
||||
Land development services |
$ | 4.6 | ||
Investment income |
1.4 | |||
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$ | 6.0 | |||
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Interest and other expenses of a consolidated real estate VIE: |
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Costs of products sold and services rendered |
$ | 13.7 | ||
Interest expense |
11.2 | |||
Change in fair value of loans payable |
10.2 | |||
Compensation and benefits |
2.4 | |||
G&A and other expenses |
11.7 | |||
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$ | 49.2 | |||
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The following is a summary of the significant classifications of assets and liabilities of Urbplan:
Customer and other receivables This balance consists primarily of amounts owed for land development services using the completed contract method. Customer receivables accrue interest at rates ranging from 9% to 12% per year and are secured by the underlying real estate. Substantially all receivables are pledged as collateral for Urbplans borrowings. The carrying value of the receivables includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the balances. Urbplan calculates this allowance based on its history of write-offs, the level of past-due accounts based on the contractual terms of the receivables, and its relationships with, and the economic status of, Urbplans customers.
Inventory costs in excess of billings and advances This balance consists primarily of capitalized land development cost, net of approximately $192.0 million and $176.1 million of customer advances received as of March 31, 2014 and December 31, 2013, respectively. Urbplan records valuation adjustments on inventory when events and circumstances indicate that the inventory may be impaired and when the cash flows estimated to be generated by the real estate project are less than its carrying amount. Real estate projects that demonstrate potential impairment indicators are tested for impairment by Urbplan by comparing the expected undiscounted cash flows for the real estate project to its carrying value. For those real estate projects whose carrying values exceed the expected undiscounted cash flows, Urbplan estimates the fair value of the real estate projects. Impairment charges are recorded if the fair value of the inventory is less than its carrying value. The estimates used in the determination of the estimated fair value of the real estate projects were based on factors known to Urbplan at the time such estimates were made and the expectations of future operations and economic conditions. Should the estimates or expectations used in determining estimated fair value deteriorate in the future, Urbplan may be required to recognize additional impairment charges and write-offs related to real estate projects.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Loans payable of a consolidated real estate VIE This balance consists of Urbplans borrowings for its real estate development activities. The estimated fair value approximates 45% of the outstanding principal amounts of the loans. The fair value of the loans was based on discounted cash flow analyses which considered the liquidity and current financial condition of Urbplan and applicable discount rates. The Partnership has elected to re-measure the loans at fair value at each reporting period through the term of the loans. The principal amounts of the loans accrue interest at a variable rate based on an index plus an applicable margin. Interest rates are based on: (i) CDI plus a margin ranging from 4.0% to 8.0% (14.3% to 18.3% as of March 31, 2014); (ii) IGP-M plus a margin of 12.0% (17.8% as of March 31, 2014); or (iii) IPCA plus a margin ranging from 10.0% to 13.5% (15.7% to 19.2% as of March 31, 2014). Outstanding principal amounts on the loans based on current contractual terms are payable as follows (Dollars in millions):
2014 |
$ | 39.0 | ||
2015 |
37.2 | |||
2016 |
29.9 | |||
2017 |
23.5 | |||
2018 |
20.1 | |||
Thereafter |
128.6 | |||
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$ | 278.3 | |||
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Substantially all of Urbplans customer and other receivables and investments have been pledged as collateral for the loans. As of March 31, 2014, substantially all of Urbplans loans payable are not in compliance with their related debt covenants or are otherwise in technical default. These violations do not cause a default or event of default under the Partnerships senior credit facility or senior notes. Urbplan management is in discussions with the lenders to cure or re-negotiate the loans in default. Currently there are no outstanding notices of acceleration of payment on the loans in default.
All of the loans payable of Urbplan are contractually non-recourse to the Partnership.
Other liabilities This balance consists of amounts owed to landowners, commissions payable to brokers, real estate taxes, social charges and other liabilities.
Revenue of a consolidated real estate VIE This balance consists primarily of amounts earned for land development services using the completed contract method and investment income earned on Urbplans investments. Under the completed contract method of accounting, revenue is not recorded until the period in which the land development services contract is completed.
Interest and other expenses of a consolidated real estate VIE This balance consists primarily of interest expense on Urbplans borrowings, general and administrative expenses, compensation and benefits, and costs associated with land development services. Also included in this caption is the change in the Partnerships estimate of the fair value of Urbplans loans payable during the period. Interest expense is recorded on Urbplans borrowings at variable rates as defined. Costs related to Urbplans land development services activities are capitalized until the services are complete. Costs associated with advertising, marketing and other selling activities are expensed when incurred.
Impairment Urbplan evaluates its assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable, but not less than annually.
As of March 31, 2014, Urbplan had outstanding commitments for land development services with an estimated $170.2 million of future costs to be incurred.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
18. Segment Reporting
Carlyle conducts its operations through four reportable segments:
Corporate Private Equity The Corporate Private Equity segment is comprised of the Partnerships operations that advise a diverse group of funds that invest in buyout and growth capital transactions that focus on either a particular geography or a particular industry.
Global Market Strategies The Global Market Strategies segment advises a group of funds that pursue investment opportunities across various types of credit, equities and alternative instruments, and (as regards certain macroeconomic strategies) currencies, commodities, sovereign debt, and interest rate products and their derivatives.
Real Assets The Real Assets segment is comprised of the Partnerships operations that advise U.S. and international funds focused on real estate, infrastructure, energy and renewable energy transactions.
Solutions The Solutions segment was launched upon the Partnerships acquisition of a 60% equity interest in AlpInvest on July 1, 2011 and advises a global private equity fund of funds program and related co-investment and secondary activities. On August 1, 2013, the Partnership acquired the remaining 40% equity interest in AlpInvest. The Solutions segment also includes Metropolitan, a global manager of real estate fund of funds, and DGAM, the Partnerships fund of hedge funds platform. The Partnership acquired 100% of the equity interests in Metropolitan and DGAM on November 1, 2013 and February 3, 2014, respectively.
The Partnerships reportable business segments are differentiated by their various investment focuses and strategies. Overhead costs were allocated based on direct base compensation expense for the funds comprising each segment. The Partnership includes adjustments to reflect the Partnerships economic interests in Claren Road, ESG, Vermillion, and for periods prior to August 1, 2013, AlpInvest. Subsequent to August 1, 2013, the Partnership owns 100% of the economic interests in AlpInvest. The Partnerships earnings from its investment in NGP Management are presented in the respective operating captions within the Real Assets segment. The net income or loss from the consolidation of Urbplan allocable to the Partnership (after consideration of amounts allocable to non-controlling interests) is presented within investment income in the Real Assets segment.
Economic Net Income (ENI) and its components are key performance measures used by management to make operating decisions and assess the performance of the Partnerships reportable segments. ENI differs from income (loss) before provision for income taxes computed in accordance with U.S. GAAP in that it does not include net income (loss) attributable to non-Carlyle interests in Consolidated Funds or charges (credits) related to Carlyle corporate actions and non-recurring items. Charges (credits) related to Carlyle corporate actions and non-recurring items include: charges associated with equity-based compensation that was issued in the initial public offering in May 2012 or is issued in acquisitions or strategic investments, amortization associated with acquired intangible assets, transaction costs associated with acquisitions, gains and losses associated with the mark to market on contingent consideration issued in conjunction with acquisitions or strategic investments, gains and losses from the retirement of debt, charges associated with lease terminations and employee severance and settlements of legal claims.
Distributable earnings (DE) is a component of ENI and is used to assess performance and amounts potentially available for distribution. Distributable earnings differs from income (loss) before provision for income taxes computed in accordance with U.S. GAAP in that it adjusts for the items included in the calculation of ENI and also adjusts ENI for unrealized performance fees, unrealized investment income, the corresponding unrealized performance fee compensation expense and equity-based compensation.
Fee-related earnings (FRE) is a component of DE and is used to assess the ability of the business to cover direct base compensation and operating expenses from total fee revenues. FRE differs from income (loss) before provision for income taxes computed in accordance with U.S. GAAP in that it adjusts for the items included in the calculation of DE and also adjusts DE to exclude realized performance fees, realized investment income from investments in Carlyle funds, and realized performance fee related compensation.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
ENI and its components are used by management primarily in making resource deployment and compensation decisions across the Partnerships four reportable segments. Management makes operating decisions and assesses the performance of each of the Partnerships business segments based on financial and operating metrics and data that is presented without the consolidation of any of the Consolidated Funds. Consequently, ENI and all segment data exclude the assets, liabilities and operating results related to the Consolidated Funds.
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The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table presents the financial data for the Partnerships four reportable segments as of and for the three months ended March 31, 2014:
March 31, 2014 and the Three Months Then Ended | ||||||||||||||||||||
Corporate Private Equity |
Global Market Strategies |
Real Assets |
Solutions | Total | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Segment Revenues |
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Fund level fee revenues |
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Fund management fees |
$ | 129.8 | $ | 63.2 | $ | 50.3 | $ | 44.5 | $ | 287.8 | ||||||||||
Portfolio advisory fees, net |
3.5 | 0.1 | 0.2 | | 3.8 | |||||||||||||||
Transaction fees, net |
3.2 | | | | 3.2 | |||||||||||||||
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Total fund level fee revenues |
136.5 | 63.3 | 50.5 | 44.5 | 294.8 | |||||||||||||||
Performance fees |
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Realized |
234.7 | 8.3 | 0.5 | 5.9 | 249.4 | |||||||||||||||
Unrealized |
212.9 | 49.5 | 14.0 | 79.3 | 355.7 | |||||||||||||||
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Total performance fees |
447.6 | 57.8 | 14.5 | 85.2 | 605.1 | |||||||||||||||
Investment income (loss) |
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Realized |
1.9 | 1.3 | 2.1 | | 5.3 | |||||||||||||||
Unrealized |
5.4 | 1.9 | (20.6 | ) | 0.1 | (13.2 | ) | |||||||||||||
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Total investment income (loss) |
7.3 | 3.2 | (18.5 | ) | 0.1 | (7.9 | ) | |||||||||||||
Interest and other income |
2.2 | 1.3 | 0.7 | 0.3 | 4.5 | |||||||||||||||
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Total revenues |
593.6 | 125.6 | 47.2 | 130.1 | 896.5 | |||||||||||||||
Segment Expenses |
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Compensation and benefits |
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Direct base compensation |
59.5 | 27.5 | 18.7 | 21.0 | 126.7 | |||||||||||||||
Indirect base compensation |
22.0 | 6.0 | 14.3 | 3.8 | 46.1 | |||||||||||||||
Equity-based compensation |
7.1 | 2.7 | 3.5 | 0.7 | 14.0 | |||||||||||||||
Performance fee related |
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Realized |
101.3 | 3.8 | 0.2 | 3.3 | 108.6 | |||||||||||||||
Unrealized |
100.5 | 14.8 | 8.4 | 66.2 | 189.9 | |||||||||||||||
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Total compensation and benefits |
290.4 | 54.8 | 45.1 | 95.0 | 485.3 | |||||||||||||||
General, administrative, and other indirect expenses |
35.4 | 11.6 | 15.5 | 9.2 | 71.7 | |||||||||||||||
Depreciation and amortization expense |
2.7 | 0.9 | 0.9 | 0.9 | 5.4 | |||||||||||||||
Interest expense |
6.7 | 2.1 | 2.2 | 1.2 | 12.2 | |||||||||||||||
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Total expenses |
335.2 | 69.4 | 63.7 | 106.3 | 574.6 | |||||||||||||||
Economic Net Income (Loss) |
$ | 258.4 | $ | 56.2 | $ | (16.5 | ) | $ | 23.8 | $ | 321.9 | |||||||||
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(-) Net Performance Fees |
245.8 | 39.2 | 5.9 | 15.7 | 306.6 | |||||||||||||||
(-) Investment Income (Loss) |
7.3 | 3.2 | (18.5 | ) | 0.1 | (7.9 | ) | |||||||||||||
(+) Equity-based Compensation |
7.1 | 2.7 | 3.5 | 0.7 | 14.0 | |||||||||||||||
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(=) Fee Related Earnings |
$ | 12.4 | $ | 16.5 | $ | (0.4 | ) | $ | 8.7 | $ | 37.2 | |||||||||
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(+) Realized Net Performance Fees |
133.4 | 4.5 | 0.3 | 2.6 | 140.8 | |||||||||||||||
(+) Realized Investment Income |
1.9 | 1.3 | 2.1 | | 5.3 | |||||||||||||||
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(=) Distributable Earnings |
$ | 147.7 | $ | 22.3 | $ | 2.0 | $ | 11.3 | $ | 183.3 | ||||||||||
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Segment assets as of March 31, 2014 |
$ | 4,014.6 | $ | 991.8 | $ | 1,256.0 | $ | 740.5 | $ | 7,002.9 | ||||||||||
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63
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following tables present the financial data for the Partnerships four reportable segments for the three months ended March 31, 2013:
Three Months Ended March 31, 2013 | ||||||||||||||||||||
Corporate Private Equity |
Global Market Strategies |
Real Assets |
Solutions | Total | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Segment Revenues |
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Fund level fee revenues |
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Fund management fees |
$ | 108.3 | $ | 66.3 | $ | 47.0 | $ | 18.5 | $ | 240.1 | ||||||||||
Portfolio advisory fees, net |
4.1 | 0.2 | 0.3 | | 4.6 | |||||||||||||||
Transaction fees, net |
10.4 | | | | 10.4 | |||||||||||||||
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Total fund level fee revenues |
122.8 | 66.5 | 47.3 | 18.5 | 255.1 | |||||||||||||||
Performance fees |
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Realized |
212.3 | 24.1 | 11.0 | 1.5 | 248.9 | |||||||||||||||
Unrealized |
207.6 | 64.3 | 49.5 | 21.3 | 342.7 | |||||||||||||||
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Total performance fees |
419.9 | 88.4 | 60.5 | 22.8 | 591.6 | |||||||||||||||
Investment income (loss) |
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Realized |
1.8 | 1.9 | (13.0 | ) | | (9.3 | ) | |||||||||||||
Unrealized |
2.8 | 5.1 | 4.5 | (0.1 | ) | 12.3 | ||||||||||||||
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Total investment income (loss) |
4.6 | 7.0 | (8.5 | ) | (0.1 | ) | 3.0 | |||||||||||||
Interest and other income |
1.0 | 1.1 | 0.3 | | 2.4 | |||||||||||||||
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Total revenues |
548.3 | 163.0 | 99.6 | 41.2 | 852.1 | |||||||||||||||
Segment Expenses |
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Compensation and benefits |
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Direct base compensation |
55.0 | 25.7 | 17.9 | 9.4 | 108.0 | |||||||||||||||
Indirect base compensation |
20.0 | 4.8 | 7.5 | 1.3 | 33.6 | |||||||||||||||
Equity-based compensation |
1.5 | 0.4 | 0.6 | 0.1 | 2.6 | |||||||||||||||
Performance fee related |
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Realized |
101.6 | 9.7 | (4.9 | ) | 1.0 | 107.4 | ||||||||||||||
Unrealized |
83.6 | 6.2 | 23.6 | 16.1 | 129.5 | |||||||||||||||
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Total compensation and benefits |
261.7 | 46.8 | 44.7 | 27.9 | 381.1 | |||||||||||||||
General, administrative, and other indirect expenses |
39.0 | 9.5 | 10.4 | 3.4 | 62.3 | |||||||||||||||
Depreciation and amortization expense |
3.5 | 1.2 | 1.1 | 0.5 | 6.3 | |||||||||||||||
Interest expense |
4.9 | 1.5 | 1.6 | 0.5 | 8.5 | |||||||||||||||
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Total expenses |
309.1 | 59.0 | 57.8 | 32.3 | 458.2 | |||||||||||||||
Economic Net Income |
$ | 239.2 | $ | 104.0 | $ | 41.8 | $ | 8.9 | $ | 393.9 | ||||||||||
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(-) Net Performance Fees |
234.7 | 72.5 | 41.8 | 5.7 | 354.7 | |||||||||||||||
(-) Investment Income (Loss) |
4.6 | 7.0 | (8.5 | ) | (0.1 | ) | 3.0 | |||||||||||||
(+) Equity-based Compensation |
1.5 | 0.4 | 0.6 | 0.1 | 2.6 | |||||||||||||||
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(=) Fee Related Earnings |
$ | 1.4 | $ | 24.9 | $ | 9.1 | $ | 3.4 | $ | 38.8 | ||||||||||
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(+) Realized Net Performance Fees |
110.7 | 14.4 | 15.9 | 0.5 | 141.5 | |||||||||||||||
(+) Realized Investment Income (Loss) |
1.8 | 1.9 | (13.0 | ) | | (9.3 | ) | |||||||||||||
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(=) Distributable Earnings |
$ | 113.9 | $ | 41.2 | $ | 12.0 | $ | 3.9 | $ | 171.0 | ||||||||||
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64
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table reconciles the Total Segments to the Partnerships Income Before Provision for Taxes as of and for the three months ended March 31, 2014:
March 31, 2014 and the Three Months Then Ended | ||||||||||||||||
Total Reportable Segments |
Consolidated Funds |
Reconciling Items |
Carlyle Consolidated |
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(Dollars in millions) | ||||||||||||||||
Revenues |
$ | 896.5 | $ | 250.7 | $ | 0.2 | (a) | $ | 1,147.4 | |||||||
Expenses |
$ | 574.6 | $ | 339.8 | $ | 184.6 | (b) | $ | 1,099.0 | |||||||
Other income |
$ | | $ | 426.9 | $ | (2.9 | )(c) | $ | 424.0 | |||||||
Economic net income |
$ | 321.9 | $ | 337.8 | $ | (187.3 | )(d) | $ | 472.4 | |||||||
Total assets |
$ | 7,002.9 | $ | 29,542.4 | $ | (196.8 | )(e) | $ | 36,348.5 |
The following table reconciles the Total Segments to the Partnerships Income Before Provision for Taxes for the three months ended March 31, 2013:
Three Months Ended March 31, 2013 | ||||||||||||||||
Total Reportable Segments |
Consolidated Funds |
Reconciling Items |
Carlyle Consolidated |
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(Dollars in millions) | ||||||||||||||||
Revenues |
$ | 852.1 | $ | 268.4 | $ | 24.5 | (a) | $ | 1,145.0 | |||||||
Expenses |
$ | 458.2 | $ | 333.2 | $ | 112.7 | (b) | $ | 904.1 | |||||||
Other income |
$ | | $ | 212.6 | $ | (1.1 | )(c) | $ | 211.5 | |||||||
Economic net income |
$ | 393.9 | $ | 147.8 | $ | (89.3 | )(d) | $ | 452.4 |
(a) | The Revenues adjustment principally represents fund management and performance fees earned from the Consolidated Funds which were eliminated in consolidation to arrive at the Partnerships total revenues, adjustments for amounts attributable to non-controlling interests in consolidated entities, adjustments related to expenses associated with the investment in NGP Management that are included in operating captions or are excluded from the segment results, adjustments to reflect the Partnerships share of Urbplans net losses as a component of investment income, and adjustments to reflect the Partnerships ownership interests in Claren Road, ESG, Vermillion and, for periods prior to August 1, 2013, AlpInvest which were included in Revenues in the Partnerships segment reporting. |
(b) | The Expenses adjustment represents the elimination of intercompany expenses of the Consolidated Funds payable to the Partnership, adjustments for partner compensation, adjustments related to expenses associated with the investment in NGP Management that are included in operating captions, adjustments to reflect the Partnerships share of Urbplans net losses as a component of investment income, charges and credits associated with Carlyle corporate actions and non-recurring items and adjustments to reflect the Partnerships economic interests in Claren Road, ESG, Vermillion and, for periods prior to August 1, 2013, AlpInvest as detailed below (Dollars in millions): |
65
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Equity-based compensation issued in conjuction with the initial public offering, acquisitions and strategic investments |
$ | 62.4 | $ | 52.1 | ||||
Acquisition related charges and amortization of intangibles |
80.1 | 62.5 | ||||||
Other non-operating (income) expenses |
30.2 | (2.4 | ) | |||||
Non-Carlyle economic interests in acquired business |
85.5 | 78.9 | ||||||
Other adjustments |
2.3 | 3.3 | ||||||
Elimination of expenses of Consolidated Funds |
(75.9 | ) | (81.7 | ) | ||||
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$ | 184.6 | $ | 112.7 | |||||
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(c) | The Other Income (Loss) adjustment results from the Consolidated Funds which were eliminated in consolidation to arrive at the Partnerships total Other Income (Loss). |
(d) | The following table is a reconciliation of Income Before Provision for Income Taxes to Economic Net Income, to Fee Related Earnings, and to Distributable Earnings (Dollars in millions): |
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Income before provision for income taxes |
$ | 472.4 | $ | 452.4 | ||||
Adjustments: |
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Equity-based compensation issued in conjuction with the initial public offering, acquisitions and strategic investments |
62.4 | 52.1 | ||||||
Acquisition related charges and amortization of intangibles |
80.1 | 62.5 | ||||||
Other non-operating (income) expenses |
30.2 | (2.4 | ) | |||||
Net income attributable to non-controlling interests in Consolidated entities |
(324.5 | ) | (168.0 | ) | ||||
Other adjustments(1) |
1.3 | (2.7 | ) | |||||
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Economic Net Income |
$ | 321.9 | $ | 393.9 | ||||
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Net performance fees(2) |
306.6 | 354.7 | ||||||
Investment income (loss)(2) |
(7.9 | ) | 3.0 | |||||
Equity-based compensation |
14.0 | 2.6 | ||||||
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Fee Related Earnings |
$ | 37.2 | $ | 38.8 | ||||
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Realized performance fees, net of related compensation |
140.8 | 141.5 | ||||||
Realized investment income (loss) |
5.3 | (9.3 | ) | |||||
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Distributable Earnings |
$ | 183.3 | $ | 171.0 | ||||
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66
Table of Contents
The Carlyle Group L.P.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(1) | Other adjustments were comprised of the following ($ in millions): |
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Losses associated with debt refinancing activities |
$ | | $ | 1.9 | ||||
Severance and lease terminations |
0.7 | 0.5 | ||||||
Provision for income taxes attributable to non-controlling interests in consolidated entities |
(1.0 | ) | (6.0 | ) | ||||
Other adjustments |
1.6 | 0.9 | ||||||
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$ | 1.3 | $ | (2.7 | ) | ||||
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(2) | See reconciliation to most directly comparable U.S. GAAP measure below: |
Three Months Ended March 31, 2014 | ||||||||||||
Carlyle Consolidated |
Adjustments(3) | Total Reportable Segments |
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(Dollars in millions) | ||||||||||||
Performance fees |
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Realized |
$ | 251.4 | $ | (2.0 | ) | $ | 249.4 | |||||
Unrealized |
369.1 | (13.4 | ) | 355.7 | ||||||||
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Total performance fees |
620.5 | (15.4 | ) | 605.1 | ||||||||
Performance fee related compensation expense |
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Realized |
108.7 | (0.1 | ) | 108.6 | ||||||||
Unrealized |
221.6 | (31.7 | ) | 189.9 | ||||||||
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Total performance fee related compensation expense |
330.3 |