The Carlyle Group Inc. (CG) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to The Carlyle Group Third Quarter 2013 Earnings Call. [Operator Instructions] I would now like to introduce your host for today's conference, Daniel Harris, Head of Investor Relations. You may begin.

Thank you, Marcie. Good morning, and welcome to The Carlyle's Third Quarter 2013 Earnings Call. With me on the call today are our Co-Chief Executive Officers, Bill Conway and David Rubenstein; and our Chief Financial Officer, Adena Friedman. Earlier this morning, we issued a press release with our third quarter 2000 (sic) [ 2013] results, a copy of which is available on the Investor Relations portion of our website. Following our remarks, we will hold a question-and-answer session for analysts and institutional unitholders. [Operator Instructions] This call is being webcast, and a replay will be available on our website. We will refer to certain non-GAAP financial measures during today's call. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. We have provided reconciliations to these measures -- of these measures to GAAP in our earnings release. Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the Risk Factor section of our annual report on Form 10-K, that could cause actual results to differ materially from those indicated. Carlyle assumes no obligation to update any forward-looking statements at any time. Before we move on to our quarterly remarks, I want to take a moment to remind investors in Carlyle, as well as the analysts that follow us, that we'll be hosting our first Investor Day next Monday beginning at 8:00 a.m. Eastern Time in New York and will be simultaneously webcast. Over the course of the day, you'll have the opportunity to hear from many of Carlyle's senior business leaders and fund managers. We are excited to have the opportunity to discuss the many positive developments at Carlyle over the past 18 months since our IPO and look forward to seeing many of you there. If you have further questions, please reach out to me following this call. In addition, we have reposted a copy of this morning's earnings release to our website, which addresses a minor error on Page 5 of the release. With that, let me turn it over to our Co-chief Executive Officer, David Rubenstein.

Thank you very much, Dan. Thank you very much for joining this quarter's earnings call. Our prepared remarks today are going to be briefer than our normal earnings call for we will be taking a deep dive into Carlyle at our Investor Day in New York on November 11. To summarize our current position and perspectives, fundraising remains exceptionally strong. Our portfolio continues to perform quite well. We are distributing significant amounts to our fund investors. Investing activity in our carry funds was up from the prior quarter, and we believe we are well positioned for strong performance in our key metrics for the future. With this high-level message in mind, let me now review the highlights for the quarter. Four key points: One, we continued our strong pace in fundraising with a third quarter total of $6.5 billion, giving us a total of $22.9 billion raised over the past 12 months. We believe that investors of all types and from all parts of the world are increasingly looking to Carlyle to address more of their alternative investment needs. Investors come in many types and sizes, and they can speak for themselves, of course. But we believe our fundraising success is due to our track record for over 26 years, our global brand, the reach of our firm and the quality and scale of our fundraising team. Two, we invested $1.9 billion across our carry funds in the quarter, slightly up from the third quarter over the second quarter. Three, our carry fund portfolio appreciated by 4% in the quarter and 17% over the past 12 months. Notably, carry funds in our largest segment, Corporate Private Equity, appreciated 5% in the quarter and a robust 25% over the past 12 months, driving substantial gains in accrued carry across our largest buyout funds. As of the end of the quarter, our net accrued carry position exceeded $1.6 billion, the highest level since our IPO and, actually, the highest level in the firm's history. Four, our production of realized proceeds also continue to be strong at approximately $3 billion for the quarter and $17.8 billion over the last 12 months. Even after realizing proceeds of $3 billion, total AUM now stands at a record $185 billion. As our key metrics show, the underpinnings of our business continue to strengthen and will ultimately result in increased harvesting of our investments for our fund investors and growth in our Distributable Earnings for unitholders over time. For the third quarter, Distributable Earnings were $105 million. Over the past 12 months, Carlyle's Distributable Earnings have been $627 million. Our activity rate in the fourth quarter is developing along the lines we anticipated throughout the year. Of course, we do not know precisely how our fourth quarter will develop. We're working on a number of exits, which are likely to produce healthy performance fees in the near term. Certain of these exits may close in December, but they could also slip into the first quarter of 2014. As we have always said, our business is inherently long term and not one driven by quarter-to-quarter milestones. Most importantly, our carry portfolio is strong, and we expect to be exiting a fair number of transactions in the not-too-distant future on attractive terms. We continue to be confident in our ability to generate future cash earnings for our fund investors and our unitholders. That optimism derives from our large accrued net carry position and the strong performance of the key investments in our key funds. Strong fund performance, especially in funds in carry, led to Economic Net Income of $195 million for the quarter. Economic Net Income on a last-12-months basis increased 15% to $926 million. Let me now make a couple of comments on fundraising. This year will be by far our best fundraising year since the financial crisis and the second best in our firm's history. We have 14 very attractive funds in the market, and we remain active in launching new strategies that will satisfy our investors' interests. Our latest vintage U.S. buyout fund, which is Carlyle's largest new fund and which we believe will be a major source of future year Distributable Earnings, will complete its fundraising process in the next few weeks. It is oversubscribed. The final size will be no less than $12.9 billion. We are finalizing allocations of legal work, and we'll announce the formal close of the fund in the coming weeks. We also continue to make progress on a number of other funds, including our Europe, Asia and Japan buyout funds, our sub-Saharan African Fund, our international Energy fund, our financial services fund and our business development company. In October, AlpInvest closed its fifth secondaries fund, bringing the total capital commitments in AlpInvest's secondaries program to $4.2 billion, with over $750 million in new external commitments. Finally, we closed a EUR 335 million CLO fund, our second of the year in Europe, and we are working now to close another CLO in the United States. In total, we expect to close more than $3 billion in new-issue CLOs for the year. We now manage over $17 billion in CLO assets. In late September, we announced our intention to buy Metropolitan Real Estate Management, a global real estate fund of funds. We closed that transaction earlier this month. Metropolitan will be the second significant fund of funds strategy we offer in Solutions segment, along with private equity fund of funds through AlpInvest. The addition of Metropolitan to our Solutions segment will better enable us to provide a more complete range of asset allocation services to institutional clients. Metropolitan has a strong management team, and we're excited to help the team expand its business. We view Solutions as a solid glow growing source of earnings for the firm. We continue to execute our strategy to grow the firm. While investors are still cautious with allocations, Carlyle's investment performance, the diversity and strength of our investment strategies and an improving macroeconomic backdrop have enabled us to grow continuously. We also see more upside over time as our new products gain traction and our recent new fund launches and acquisitions continue to scale. Specifically, we continue to focus on building our natural resources capabilities, our Global Market Strategies business and our still nascent but expanding Solutions business. Together with continued strong investment performance, we are focused on building an even stronger, better and more diversified firm that delivers strong returns for our fund investors and growth in Distributable Earnings for our unitholders. Bill?

Thank you, David. Carlyle's investment pace picked up modestly in the third quarter to a total of $1.9 billion, up from $1.3 billion in the second quarter. Over the last 12 months, we have invested $9.1 billion in our carry funds in line with our long-term average, but benefiting from $3.3 billion we invested in the fourth quarter of 2012. We have been particularly active in Europe and believe that there have been excellent opportunities, particularly in midsize European companies, precisely at the time when some other investors are turning away from Europe. Over the last 12 months, we have completed 9 new investments in Europe across our buyout growth and distress funds. Despite the generally slow recovery of Europe, we see good value. And while it is still early, each of these investments is performing in accordance with or better than our original plan. We have a great team of investors in Europe, a long and successful track record and are focused on finding good investments in the region. Notable investments this quarter were 3 new European buyout investments: Alloheim, a German skilled nursing firm; Chesapeake Limited, a British packaging company; and Marelli Motori, an Italian manufacturer of industrial motors and generators. We also made an investment by our distressed fund in Klenk Holz, a German manufacturer of wood products. In Asia, 7 Days Group, a Chinese budget hotel group, was taken private by our Asia buyout fund and other investors. We made an investment with Interlink Maritime in fuel-efficient dry bulk ships. And 2 growth-oriented investments in China, including a cornerstone investment in the IPO of Tenwell International, a packaged food and beverage company. We also invested $640 million in our Real Assets segment. Slightly more than half of this amount was invested in real estate, with a particular focus on the United States with the balance in infrastructure and energy. We recently closed an investment on October 31 of approximately $500 million in Beats Electronics, a leading manufacturer and marketer of premium headphones and audio accessories. This was a minority investment by our U.S. buyout group in a company that is well positioned in a market experiencing significant growth. Our portfolio continues to strengthen. Our carry funds have appreciated 13% year-to-date and are up 17% over the past 12 months. Our private portfolio appreciated 2% in the quarter, while our public portfolio increased 10%. Our fourth and fifth U.S. buyout funds continue to perform well, appreciating 10% and 5%, respectively, in the quarter. Our financial services fund also appreciated 11% in the quarter, taking it further into accrued carry and positioning it to produce cash carry in the fourth quarter 2013. A number of our other key funds, including Carlyle Europe Partners III with a net IRR of 8%, Carlyle Asia Partners III with a net IRR of 7% and Carlyle Realty V with a net IRR of 7%, continued their movement toward exceeding their preferred return hurdles and producing performance fees. None of these funds is yet accruing carry. Our largest hedge funds remain well above their high watermarks for the year. Over our entire business, despite realizing net performance fees of over $320 million so far this year, our net accrued carry balance has grown by over $400 million and now stands at over $1.6 billion. Turning to realizations, we have produced $17.8 billion in realized proceeds over the last 12 months, with approximately $3 billion in the current quarter -- third quarter. Approximately half of these proceeds were in our Corporate Private Equity business, while real estate and Energy each contributed 20% to the third quarter realized proceeds. Notable realizations this quarter were the final exit of our positions in Boston Private and in SS&C. We also executed block sales in a number of companies, including Wesco and Allison Transmission. We closed the sale of 650 Madison, a marquee property in New York City, as well as numerous multifamily residential properties. We closed the sale of the Yashili, a Chinese infant formula company. We realized proceeds through the IPO of Kaiyuan Hotels, a China-based high-end hotel chain. And as usual, a number of our portfolio companies issued dividends in the quarter. At the end of the quarter, the publicly-traded portfolio in our carry funds exceeded $14 billion, and we have already taken 2 companies public in the fourth quarter of 2013, one of which, CommScope, has added more than $2 billion in market value to our quarter-end public portfolio. With such large liquid positions, we believe we will be ready to take advantage of opportunities to sell when the opportunity arises and the price is right. David has already mentioned our 2013 fundraising efforts. With $51 billion in dry powder, $31 billion of which is in our carry funds, we've been in the process of reloading our capital. Notwithstanding the present challenges of finding the right assets at the right prices, we are doing what we should be doing, building value across our portfolio and exiting when possible and appropriate. Our investment business model is built upon limiting our downside risks. While we are far from perfect, our job is to generate attractive absolute returns. And based on our experience in the most recent funds and our deep bench of investment professionals globally, I remain confident in our ability to put our dry powder to work. Let me now turn to Adena.

Thank you, Bill. With our Investor Day in just 5 days, I will keep my comments brief and make a few points about our results and overall financial position. Specifically, I want to discuss the quarter's financial results, spend some time on our accrued carry position and, finally, highlight the impact of recent acquisitions. As David mentioned, pretax Distributable Earnings were $105 million, which led to after-tax Distributable Earnings per unit of $0.32. Year-to-date, on a post-tax basis, Carlyle has generated $1.33 per unit of Distributable Earnings. Over the same period, we announced cash distributions of $0.48 per common unit for the first 3 quarters of 2013. Our fourth quarter fixed distribution is targeted at $0.16. And to reiterate our distribution policy, we will expect to distribute between 75% and 85% of our annual post-tax Distributable Earnings to unitholders, which will be accomplished through a true-up distribution based on our full year 2013 results. Fee-related earnings for the quarter were $40 million, up 52% compared to the second quarter and reflect the impact of strong year-to-date fundraising, as well as the impact of acquiring the remaining 40% interest in AlpInvest as of August 1. Over the last 12 months, our fee-related earnings are now up 22% compared to the prior 12-month period. With fundraising still running at a robust level, we expect to see ramping management fees coupled with associate expenses to raise that capital. In the short term, we will also benefit from catch-up management fees in funds that are in the process of fundraising over the next year, such as our latest Asia and Europe buyout funds. If we look at management fees, the $281 million in the third quarter of 2013 is up 20% compared to last year's third quarter, driven by $23 billion in new funds raised over the past year, as well as our partnership with NGP Energy Capital Management and our increased AlpInvest ownership position. The $80 million in G&A this quarter was slightly below the second quarter level, reflecting the sustained high level of fundraising activity in the firm, but also with a focus on managing expenses where possible. Base in equity compensation moved up to $157 million this quarter, reflecting the addition of the 40% of AlpInvest we did not own last quarter, as well as a slight adjustment to our expected full year compensation levels. Moving to accrued carry. Our net accrued carry balance reached $1.6 billion this quarter, an 11% increase over the prior quarter. Our balance grew not only because of the 4% appreciation in our carry funds, but also due to a more modest level of exit activity in the quarter, which would otherwise put downward pressure on accrued carry. As we've noted before, our accrued carry balance is a tremendous asset to the firm that is likely to produce robust future cash revenues as harvesting activities increase across our mature funds in future periods. The timing of exits is never an exact science, but we feel very good about the health of our portfolio and the resulting net accrued carry position, which is now up 34% since year-end 2012, all of which will benefit unitholders as profitable exits continue and funds in carry. Turning to our strategic investments this quarter. On August 1, we completed the acquisition of the remaining 40% interest in AlpInvest, resulting in an improvement of approximately $6 million in fee-related earnings to our results this quarter. Our interest in AlpInvest management fees now stands at 100%, while our interest in carry did not change from our original investment. We also closed the acquisition of Metropolitan Real Estate on November 1. Given the closing occurred after quarter end, Metropolitan did not impact our financial results this quarter. But in the fourth quarter, we will include this AUM in our metrics, along with the financial results. As of September 30, Metropolitan had $2.6 billion in capital commitments. We believe the strategic capabilities we acquired will be extremely beneficial as we continue to benefit -- build out our Solutions segment. You will hear more about the Solution strategy next week. We look forward to providing much more color on the state of our business next week in New York at -- in our Investor Day. And with that, I will turn it back over to David for some concluding remarks.

Thank you, Adena. As you've heard, we will hold our Investor Day next week on the 11th in New York, and we'll have there the entire senior leadership team of the firm, along with many of the firm's leading investment professionals. We believe that program will provide those who were able to attend with a fuller sense of the breadth and depth of the firm, as well as our global reach. That occasion will provide a better forum than this call to provide more detailed information about our firm's activities and plans and will enable us to better respond in detail to your questions. However, we are certainly pleased now to take a few questions.

[Operator Instructions] Our first question is from Ken Worthington from JPMorgan.

David, just to extend your comments on fundraising. In terms of final closes of Carlyle funds, how do you evaluate the potential to increase the target size of fund? You mentioned CP V will be at least $12.9 billion. It's oversubscribed. So when is it right to actually increase the size of fund? And maybe when is that the wrong decision? And then given how good the fundraising environment seems to be, are you seeing kind of maybe less pressure on fees? I'm sure clients always want lower cost. But is -- are fees really not an issue given the demand for a number of your flagship products?

On the first question, obviously, when we set an internal target of what the level we'd like to raise is, that is based on what we expect our ability to invest over that period of time. In other words, we don't tend to say, "Well, we'll raise whatever we can raise, and we'll figure out later how to invest it." We do tend to go through very carefully what it is that we can invest over a period of time. At some points during the fundraising period, which may take 1 year or 2, our ability to invest more, in our view, may increase. Sometimes, it may decrease. But generally, we are within, I would say, 10% or 15% of where we're going to be ultimately. In other words, when we set a target, we might increase it by 10% or so if we think we can invest more money. Obviously, some investors are always interested in putting more into a particular fund than you might expect at the beginning. So it's not in -- a science. It's a bit of an art. We don't go out with very low targets and hope to increase them, showing everybody that we have such demand. We actually set targets that we think are realistic for the market and what we think we can invest. In the case of Carlyle Partners VI, we had a target initially of around $10 billion, but $1 billion -- or $900 million to $1 billion of internal kind of money, and we will have that. We'll have about -- we originally thought we'd have $10 billion of external capital and about $900 million to $1 billion of internal capital for about $11 billion. We'll be above that a bit. But over the period of time, I think our feeling is that we can get invest this over the 5-year period of time, then we have to invest. So that's kind of how we did it. Of the funds we currently have in the market now, many of them are relatively younger in their investment fundraising period. So it's hard for us to say whether we will need to increase them or we think we should increase them. In some cases, we have turned money away without increasing the CAP because we just didn't think we could invest the money. In terms of the second question, there are 3 types of fees that I think people should focus on: one is the management fee; a second is the carried interest; and the third is the deal fees, so-called. On the management fee, the pressure on that hasn't been as great as one might expect only because those fees are more or less repaid. So it's, in effect, an interest-free loan, you might say in some respects. So there's been less pressure on that. There has been more pressure in recent years on the so-called deal fees, and I think it's fairly standard now to have a deal fee of either 100-0 or 80-20 as opposed to, in the old days, 0-100, the other way or 50-50 in recent years. And I think our fund will probably be in that neighborhood of what's common, the big U.S. buyout fund. In terms of the carried interest, there really hasn't been much pressure on carried interest. I think, as a general view, that 20% seems fairly appropriate. Some people that get large managed accounts sometimes will take a 10% carried interest, but I'm talking about commingled funds, roughly 20%. I'd say the real hidden fees that are affecting Private Equity, but not as directly as you might think, are: one, the preferred return has stayed very high, and that is, in effect, a hidden fee because it's a very high hurdle that you have to make in this environment; and second, a lot of investors want unpromoted co-investment, and if they take that unpromoted co-investment, that will effectively reduce their fee in carry. So it's a difficult thing to measure. Does that answer your question?

Our next question is from Howard Chen from Crédit Suisse.

David, you highlighted the potential for a number of exits in the not-too-distant future in the remarks. Just have anything changed that makes you feature that pipeline now? Or is it just the right time given how long certain investments have been in the ground, and the value you've been able to create? And then Adena, a quick numbers question. The 11% expansion in the net accrued performance fees, how much of this quarter's increase was attributable to funds crossing over, and any sense of what percentage of those fees are coming from funds that are currently paying carry?

I'm going to let Bill pretty much answer that. I'll be just saying at the beginning though, we really -- we don't say we want to close a certain deal by a certain quarter and always able to do that because sometimes you have regulatory concerns and other factors. So we can't time precisely when these deals are going to close, and we just aren't able to do that. And that's really what I was referring to, but, Bill?

Well, a couple of things I might say, Howard, on the exit side. First of all, we have a public portfolio of about $16 billion now. And many of those companies are -- we've been in a while or we own a lot of stock. We're not somebody who really thinks that we have to get the last dollar out of each stock price when we sell it. A lot of times we're disappointed in the initial price that comes when we start taking companies public or selling blocks. People complain there's a big overhang or there's not enough liquidity in the stock or whatever. So one of our strategies generally has been to be selling all the way up. And if you were to look at the history of companies like Dunkin' Brands or SS&C, it kind of defines how we like to do that. We continue to have a lot of companies in the public portfolio, many of which you're aware of. In that $16 billion, CommScope, we just took public; HD Supply; Wesco; Allison Transmission. And we're taking companies public all the time. We hope to have in the next week or so at least one more IPO. Obviously, the public markets have been great. I would comment, again, that interestingly in the third quarter by our valuation methodologies our public portfolio appreciated 10% and our private portfolio appreciated only 2%. Now I don't think that there's such enormous precision on the private portfolio, but I would say that the public portfolio has tended to be more volatile than the public portfolio. It tends to move up more quickly than the private portfolio. It tends to move down more quickly than the private portfolio. So we think now is a pretty good time to be exiting. That doesn't mean any of those companies that we will do secondary blocks this quarter. But if the time and the price is right, I think we will. And that can obviously affect the carry balance -- the realized proceeds. Also affecting the realized proceeds is we have one large private company that we're hoping to take public -- hoping to sell this quarter. It's already been announced. It's in the -- it's been in the press. It's subject to a Hart-Scott-Rodino. Time will tell whether or not that deal is closed this year, and that's a pretty big swing factor in the current quarter.

Okay. In terms of the accrued carry, Howard, that I would say the large majority of the accrued carry are coming from funds that are currently in a position to take carry upon realization of funds. We had 1 fund cross into carry this quarter, but with a very small additional balance. It's just starting to move into a carry position. So even though it is in catch-up, it didn't have a big swing factor in the accrued carry balance. And so it's really -- the majority of what you're seeing is just a growth of the funds that are already in carry and are in a full carry position. And you're not seeing that swing coming in from a catch-up situation or anything like that.

But I might comment that, in my remarks, Howard, I spoke about CEP III, CAP III and Real Estate V. Those are big funds that are close to moving into accruing carry. And in most of our funds, once you pass over your hurdle rate and have returned the fees, as David said, then the catch-up is generally 100-0. So you begin getting every single dollar of appreciations going to the GP as opposed to the LP. And so we're hopeful, in the coming months and quarters, that we'll have funds that move into that accrued carry that are very significant movers. It'd be something I'd be watching if I were a security analyst following our stock.

The next question is from Michael Kim from Sandler O'Neill.

My question relates to deal flow. So it seems like most of the activity is still centered in real estate, energy, as well as overseas investments. So I know the environment is always in flux. But now that you've pretty much raised the U.S. buyout fund, any concerns around maybe a bit of a mismatch developing between sort of where you've got a big pool of dry powder versus where the best investment opportunities may be looking out over the next couple of years?

This is Bill. I'd say I wouldn't call it a mismatch at all, and I'm not worried about investing it over the period of the fund. Certainly, today, let's take last year's fourth quarter. United States was very, very busy in the buyouts that we did in that quarter. And in the third quarter of this year, it really didn't -- no buyouts. We announced Beats already that will be in the fourth quarter. But I don't see a mismatch. I'll say it's tough out there. Investing the money is -- as I said, finding the right assets at the right prices is tough. But this business is always tough.

Next question is from Robert Lee from KBW.

A quick question on the GMS segment, just kind of curious. Could you maybe talk through some of the moving parts there, where you -- it seems like you had maybe -- I don't know if it was some reversals of prior accruals in GMS where you had some negative unrealized performance. I'm just trying to understand, maybe some of the underlying mechanics that may have taken place that generated that.

Sure. So Rob, as you know, with the hedge funds, we have -- we basically accrued performance fees throughout the year. And then at the end of the year, based on their performance and whether or not they're over their high watermark, we then realize that carry all in 1 quarter. And as you're seeing throughout the year, you're seeing us -- basically, a pretty strong performance fee accrual. But every quarter, it's going to be a little bit different based on the performance in the quarter. In this particular quarter, they had -- some of the -- a couple of the funds had a slight decline, and other funds, frankly, did very well. But on balance, you're seeing a slight decline. I think that that's really what's happening within the quarter on the unrealized performance fees for the quarter in GMS. So there's nothing more than that. It's just a little bit of quarter-over-quarter movement.

And I don't know if I can add a quick follow-up. So how much of the accrued incentives are related to the GMS segment or the hedge funds, particularly?

So we don't -- we will provide that in the queue in terms of our break out of the accrued performance fees by segment. We don't provide that in the earnings release. But -- and so I don't have that right in front of me. But you can obviously see how much changed over the quarter. But the accrued carry balance itself is not provided in the earnings release.

Next question is from Matt Kelley from Morgan Stanley.

If I can come back to Rob's question for a second, within the GMS hedge funds, is there anything from a rate perspective where the hedge -- some of the larger hedge funds are positioned that we should be focused on for kind of going forward as we think about performance there?

From a -- I'm sorry, a rates perspective, you said?

Yes.

Not that we could comment on this call.

Okay. And then second, just a quick follow-up on the funds crossing hurdle rates or getting close. What's -- anything changing in your perspective of how cautious to be in terms of accruing versus actually paying cash carry on these funds at this point? And what sort of metrics should we be looking for in terms of how you guys think about it? Obviously, I understand that you're trying to be conservative.

So Matt, I'm actually going to spend some time on that on Monday so that we talk a little bit about the idea of taking -- of basically accruing carry and then kind of taking it to the point of being able to take carry and what do we look at when we make this decision. So we will spend some time on that on Monday. I'd like to make sure that we reserve the time to do it thoroughly. But I would say that we do have certain measures that we do examine when we decide to take carry after a fund has been accruing carry for a period of time, and we will spend some more time on that.

Yes, I don't think we're any more cautious than we were when we were a private company than we are now that we are a public company. The first step is to get the funds to make money. Second step is to get them over their hurdle rate. And then the third step is to get them enough over the hurdle rates that you're certain they're going to stay over the hurdle rate after fees, and changes in the valuations that can occur. So it isn't just getting through the hurdle rate. You have to be well through it or, really, right at the very end of the fund before you're going to be taking that last dollar of carry.

Let me just that everybody says they're conservative. Nobody says I'm liberal in taking accrued carry. So you wouldn't be surprised to hear us say we're conservative. But a best indicator of that is that in 26 years, I believe we have probably had a clawback of what less than...

Certainly less than, I would say, 30 million.

Less than $30 million. So we've distributed out to our investors about $90 billion over the 26 years. $90 billion back to investors, and we've had clawbacks of about $30 million. So we are pretty conservative. And again, this is probably an art more than a science, and you'll hear more about it on Monday.

The next question is from Warren Gardiner from Evercore.

So in both the traditional and alternative space, we've sort of seen -- we've been reminded recently of some of the importance of key man risk. I guess, in the alternative space you guys are kind of recently the beneficiary. And so I was just wondering how you guys manage that risk and how much of an advantage or disadvantage of being public has been. And now that some of your peers are public, I mean, is that kind of going to create more of a fluid situation on that front, where we could maybe see some more movement then in that?

So key man risk is something that obviously you're always worried about because you want to make sure that you're not going to lose your fund because people might have left or for whatever reason. We have never really had that problem, in part, because we tend to have a number of people running our funds. We often have co-heads. And therefore, if one person were to leave, it generally doesn't have the same impact. But we also have a fairly deep bench. And then the way our firm works is we have a lot of people involved in the oversight process. And so we've never had a situation in 26 years where somebody left and, all of a sudden, the fund dissolved or our ability to be the manager of the fund dissolved because we couldn't satisfy the investors on key man. So you always want to make sure that you have a deep bench, and you make sure your people are happy and they're well compensated. But this hasn't been a big problem for us, at least.

Yes, just to add, you can never have too much talent, though.

Next...

It's a special problem for us than, let's say, the analyst community because it's -- one of you -- at least one of your organizations, they often scrambled very quickly to find a replacement. We generally don't have as much of a problem, I would say.

The next question is from Brennan Hawken from UBS.

Just a follow-up on Howard's point and sorry if I missed this, but when you guys said that realizations may slip to 1Q, is that a potential update for your prior broad guidance about Distributable Earnings? I think you had said in the past that this year was going to be roughly equal to '12. So is the outlook now that maybe since some of these are slipping into next year, it might be a little bit lighter, or am I reading too much into that?

I'd say it might be lighter, it might be heavier, depending upon the timing of what happens with the sales of public companies and the private company I mentioned.

Okay. So basically no update to that previous guidance then?

I'd say no update other than what I just said.

The next question is from Marc Irizarry from Goldman Sachs.

Bill, for you, the -- you talked about good value in Europe. If -- I guess, if you look at the U.S., it seems like there's more growth equity capital investing going on than buyouts. What do you figure? Is there sort of -- when you look ahead, are there 1 or 2 things that might change that might help sort of change the mix in the way you're deploying capital in U.S. buyouts?

Well, I think in all our buyout businesses, Marc, we have to be really creative today. Sometimes when you think about the competition that we face, we face competition from other private equity firms, the strategic investors, although they're more active than they were, they're not as active as I thought they might be. And I think you guys all know that the IPO market -- there've been more IPOs done in the third quarter than like any quarter since 2006 or '07, and the lineup is continuing to be strong for Carlyle and for everybody else. And some companies have the alternative of going public rather than taking capital from Carlyle. I think we had to be creative. Examples of the creativity that we had to do in the United States were, for example, our investment in Genesee & Wyoming when we did a $350 million pipe, or buying the Philadelphia Energy refinery or doing the minority investment in Beats. It's great to do those classic carve-outs that you like to do with Hamilton Sundstrand from UTC or Axalta from DuPont. And we're looking for those. I think we're actually pretty good at carving a business out from a big strategic because it's -- there's quite a work that has to be done to take somebody from historical or having been in a big co for a long time, and then now they're off, owned by a private equity firm. Right now, that pipeline is not that active, but it changes every day. And we still expect we'll be able to invest the fund and not cut our return targets. The same thing would be true, by the way, in Europe. We're not lowering our IRR targets there. If the current situation were to persist for months and years, things could be very different. But as I say, it's changing every day.

[Operator Instructions] Our next question is from William Katz from Citi.

This is actually Neil filling in for Bill. My question is I noticed the in-carry ratio declined a little bit quarter-over-quarter. Perhaps, that's due to maybe some better performing investments rolling off in 3Q. But maybe you could provide some more color.

Sure. So we have some younger funds that have been in carry. But as they continue to deploy capital, they're going to go -- they're going to toggle in and out of carry. Because as they get in a new investment, that new investment is generally marked just below cost, and that will take down the returns over the short term for a fund. So we actually had 2 of our newer funds, our more younger funds, come out of carry for the quarter as a -- it's continued to make some new investments. So they're very -- they are obviously very likely to go right back into carry over the next few months. So that takes that, that all of the AUM in that fund suddenly comes out, and that includes their dry powder. So it creates a little bit of a swing factor in that in-carry ratio that you see. But it's nothing any -- it's nothing significant.

We have a follow-up from Ken Worthington from JPMorgan.

So first, maybe, Adena, there were investment losses this quarter, I believe. Can you talk to us about the nature of that, if I got that correct? And then maybe for Bill, market conditions are important for the investment side and the realization activities of Carlyle. You guys sift through a tremendous amount of data. Can you share with us maybe your outlook for the public markets over the next 12 to 18 months in both -- or in North America, in Europe and in Asia just so we get a sense of how you're thinking about maybe investments and realizations over that time period?

Sure. So with regards to the investment loss, it was in our real estate area. We had a settlement of a matter in a particular fund that -- and a co-investment that we basically settled out. It's done. It's kind of a onetime thing, and we did have an investment loss that we've realized as a result of that settlement. So that's really what that was. In terms of the bigger question, Bill?

Well, in terms of the investment environment, Ken, globally and how it informs our behavior, we do have 200 portfolio companies roughly. And so we're constantly trying to mine those companies for data to help us make better decisions, both on investments and how we monitor our portfolio. Now you guys are, perhaps, more experts in public markets than I am, but I would say that we expect the public markets to be strong for the next year or so, particularly because we expect interest rates to be very, very low for the foreseeable future. And I think with very low interest rates and so much liquidity in the market, everybody can say, "Well, I don't like Europe because of -- I'm worried about the governance in Europe," or "I don't like gold because of some reason," or "I don't like U.S. equities because they've run up so much," or whatever. You can go around the world and say, "Geez, I don't like anything." But the truth is the money has to be invested somewhere. People have to put the money to work. They can put it in high yields, now low yield or they can put it in U.S. treasuries or Japanese government bonds or any of the other things that you look at. But I think with these low rates, I expect that the public equity markets in the United States and abroad will be pretty strong. Turning -- if I went around the world a little bit, I think the United States has had a great run so far this year. I think it's up about 25% year-to-date in the public equity markets. I saw a story last night on the news that indicated every time that the stock market has been up 25%, I think since 1929, it's been up 25% through the first 10 months of the year 12x. And 11x, it kept going up after that for the balance of the year on average, like another 5%. Now I'm not predicting what the market is going to do, but I think the U.S. equity markets will continue to be pretty strong. A lot of really good companies pay nice dividends, and I think that's a pretty attractive place to put money. I think, in Europe, our business there is strong. Our portfolio companies tend to do better than the headline growth rates that you see in the press. We've actually been able to take advantage of the fact that one of the big problems in Europe is the financing markets. And with our Global business, the way we've organized in Europe, some of the things that we've done, our CLOs and the like, we think that the European -- at least our portfolio is doing pretty well over there. I'd say that the European markets still take companies public as well, and we're hoping to take advantage of that. Japan, Abenomics speaks for itself. I think that although it's slowed down from its initial burst, I think Japan is still likely to have increasing public markets. And in China, although the public markets have been down and down pretty dramatically for the year -- last year or so, there are 600 companies in the queue right now waiting to go public in China. And so a lot of those companies are either coming to America to go public or going public in Hong Kong as opposed to going public in China per se. And we've actually taken advantage of the Hong Kong market ourselves. So I think that I'm pretty optimistic about public markets and what they're going to do. And what does that mean for us? Well, I think that $16 million public portfolio, a couple of things are going to happen. First of all, periodically, when the price is right, particularly when we own such giant positions of public companies, we'll be selling blocks and taking money off the table. Secondly, the portfolio will be increased because we'll be taking more and more companies public and adding to the public portfolio. I think it's a pretty good time to have our business model.

We have a follow-up from Matt Kelley from Morgan Stanley.

I wanted to -- speaking of Europe, I wanted to get your sense for the hiring of Adam Metz from TPG. Should we kind of take that to -- as a sign that you could actually look to grow European and Asian real estate more than we -- than you might have thought a few quarters ago, given the kind of weaker performance of the couple of European funds that you've talked about, or maybe expansion into more real estate debt?

Adam Metz is an extremely talented real estate professional who has been in the in the investment business, he's been in the management business, and we had an opportunity to get him to join the firm. We were quite happy that he was willing to do so. His main focus is to help strengthen and grow what we're doing overseas in real estate. We have a base in Europe. We have a base in Asia. We'd like to strengthen those, expand those, and it may well include more than just equity, it could include debt. We haven't completely decided, but we need to assess exactly what we should be doing to strengthen those, the markets, and then, perhaps, other markets. But we were very pleased with our ability to be able to attract a high-quality investment professional such as Adam. And we'll just have to wait and see exactly what we're going to do. We can't be specific now. But it's likely that we'll do more international real estate than we have done in the past.

And we have a follow-up from Michael Kim from Sandler O'Neill.

On the fundraising side, it sounds like you continue to raise capital at a pretty healthy clip. So just trying to get a sense of maybe the relative contributions from the different factors driving that success in terms of maybe more targeted marketing versus continuing to expand the LP base in terms of new clients, as well as more non-U.S. LPs versus just higher demand for alternatives from the traditional pension plans.

All of those. I mean, every one of those. That's the answer. To be very serious, all those factors are at play. We have fairly significantly expanded our fundraising team. So when you have more fundraisers, it's like, as I say, it's more IRS agents. When you have more IRS agents, you collect more. When you have more fundraising people, you probably raise more. Obviously, you have to have a product that people want to invest in. But generally, we have more fundraising people, you will probably raise more money, and we've built up a pretty good-sized team. But not just the way we did it before. We have people now who are specialists in given areas. So we didn't use to have, several years ago, specialists in real estate, for example. Now we have specialists in real estate. We didn't, years ago, have specialists in GMS kind of products. Now we have specialists in those kind of products. So the specialization has been a factor. We have -- also have people who are in the fundraising team that aren't actually out fundraising so much, but they're doing a lot of the support work, which is so necessary. Today, as, for example, almost every significant investor wants a questionnaire to be answered, and somebody has to answer these questionnaires, and they are very, very lengthy. And we have a team of people that does that. Another factor is the increase in allocations that people who are making it to private equity and alternatives, and that's been a factor as well. I'd also think, you see, sovereign wealth funds are increasing their allocations, particularly significantly to private equity. And now for us, sovereign wealth funds represent a pretty big part of our investor base. I think it's now -- about 13% of our capital comes from sovereign wealth funds. We also see another phenomenon, which is that people like to invest with somebody they're comfortable with. And so increasingly, people who are already investing with us are giving us more money. I think, today, roughly 62% of our capital is coming from investors in 5 or more of our funds. If somebody likes the fund, then they will be more predisposed to go into another Carlyle fund. Also, the economic environment is reasonably good for fundraising now because investors seem to have more cash to invest, and they seem to think that alternatives will produce a pretty good rate of return in the future. So it's a combination of things. I do think our brand name is pretty good, and that probably helps a bit, so all those factors. And beyond that, I don't know what else I could be more specific about.

I'm not showing any further questions in the queue. I will now like to turn the call back to Daniel Harris for closing remarks.

Thank you very much for your time and attention this morning. We do look forward to seeing most of you next week at our Investor Day. If you have any follow-up questions after the call, please don't hesitate to contact us at any time. Thank you.

That does conclude today's conference call. You may now disconnect. Thank you, and have a great day.