Good day, ladies and gentlemen, and welcome to the Carlyle Group Third Quarter 2012 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to today's host, Daniel Harris. Sir, you may begin.

Thank you. Good morning, and welcome to Carlyle's Third Quarter 2012 Earnings Call. My name is Dan Harris, and I'm the Head of Public Market Investor Relations at Carlyle. With me on the call today are our Co-Chief Executive Officers, Bill Conway and David Rubenstein; and our Chief Financial Officer, Adena Friedman. If you have not received or seen the earnings release, which we published this morning detailing our third quarter results, it is available on the Investor Relations portion of our website or on Form 8-K filed with the Securities and Exchange Commission. Following our prepared remarks, we will hold a question-and-answer session for analysts and institutional unitholders. This call is being webcast, and a replay will be available on our website immediately following the conclusion of today's call. We will refer to certain non-GAAP financial measures in today's remarks, including distributable earnings, economic net income and fee-related earnings. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are included in our earnings release. Please note that any forward-looking statements provided 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 that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our registration statement on Form S-1, and such factors may be updated from time to time in our SEC filings. Carlyle assumes no obligation to update any forward-looking statements. With that, let me turn it over to our Co-Chief Executive Officer, David Rubenstein.

Good morning, and thank you for joining us today. I'm pleased to report that Carlyle had a very strong quarter. We continue to see attractive opportunities for investments by and distributions from our funds. During the third quarter, we announced or completed a large number of what we believe will be highly attractive investments. We saw valuations increase appreciably. We continued our industry-leading pace of realizations and distributions, and we continued our strong fund-raising pace, and thus, we are very pleased with the quarter's results. But our performance should always be viewed over the long term, at a minimum on a rolling 12-month basis. With this type of long-term perspective in mind, we should also note that we are quite pleased with our year-to-date results. During our remarks, as we have done each quarter, we will focus on the underlying activities that drive distributable earnings, which we have always viewed and continue to view as the most important metric by which to evaluate the current and future strength of our business. I say current metric because distributable earnings clearly show the results of our recent investment performance. And I say future metric because current distributable earnings reflect profitable realizations for our fund investors. And when these investors receive distributions, they tend to reinvest with us. And by doing so, they restart the cycle, enabling us to invest, create value and distribute more to our investors. In turn, we can produce distributable earnings to our unitholders. Of course, we cannot guarantee that our having significant amounts of capital to invest will always produce an attractive level of distributions to our investors and then to our unitholders, but we believe our ability to produce strong and consistent distributions is second to none in our industry, and we remain confident in our ability…

Thank you, David. I'd like to start by offering a few thoughts on the overall economic environment and then move to our new investments, the state of our portfolio and our recent exit activity. As you know, we collect and analyze data from our 200-plus portfolio companies, providing us insight into the state of the global economy. In the United States, the economy continues to expand at a stable, yet unsatisfyingly slow rate. We are seeing some interesting trends. Capital spending and industrial production declined in the third quarter, showing continued caution by corporate management teams, who have taken action to reduce inventories and limit unused capacity. In contrast, we have seen a notable acceleration in fixed residential investment and stronger-than-expected household spending. We remain cautiously optimistic that the combination of very low interest rates, the strengthening housing market and the benefits of significant domestic energy discoveries will provide a catalyst for stronger U.S. economic growth over the medium term. The trajectory of our internal data on Europe changed during the quarter. Rather than steep declines, as had been the case for most of 2012, recent data suggest signs of stabilization. One of our proprietary European indicators, which accurately predicted about 5 months in advance the European contraction that began in October of 2011, is currently showing signs of modest growth. Conditions remain challenging, but our recent data are more favorable than what you read about in the headlines. To be clear, we aren't seeing strong evidence of a recovery, but European economies are not falling off the cliff. Rather, we believe we are witnessing a mild contraction. Our perspective on China has not changed materially since the second quarter. Incoming data have been volatile, with months of apparent stabilization followed by periods of renewed deceleration. We believe it is…

Thank you, Bill. Carlyle posted a strong quarter with $196 million in post tax distributable earnings or $0.63 per unit and post tax economic net income of $204 million or $0.66 per unit. As stated earlier, Carlyle declared a quarterly distribution per unit of $0.16, our first full quarterly distribution since the IPO in May. Over the past 2 quarters, our distributions to public unitholders have totaled $0.27 compared to our post-IPO distributable earnings of $0.91 per unit. Looking forward to year end, we intend to pay out a catch-up distribution to all unitholders based on the level of post tax distributable earnings generated since our IPO. Our intention is for our total distributions to unitholders in 2012, including our fixed distributions and year-end catch-up, to pay out a range of 75% to 85% of post tax, post-IPO distributable earnings, absent any unusual cash requirements from acquisitions, debt paydown or fund investments. As a reminder, we expect that we will announce the catch-up distribution in our fourth quarter earnings release in February 2013 with the cash distribution to follow in March. Comparing our results to prior periods, we posted pretax distributable earnings of $206 million compared to $115 million in the second quarter of 2012 and $244 million in the third quarter of 2011. Our realizations in carry-generating funds increased in the third quarter versus the second quarter of this year, whereas the third quarter of 2011 also experienced strong carry-generating realizations. Over the last 12-month basis -- on the last 12-month basis, distributable earnings of $748 million are roughly unchanged compared to the prior 12-month period, with net realized performance fees up 7% from the prior year, and fee-related earnings down 14% over the same period due to unfavorable foreign exchange adjustments, long-term growth initiatives and firm preparations for…

Thank you, Adena, and thanks to all of you for listening today. As I think you heard this morning, Carlyle's engine was active and successful throughout the third quarter. We raised $3.4 billion. We invested or committed over $5.6 billion, and our carry fund portfolio appreciated 3% and our realized proceeds totaled $5.1 billion. We are confident, actually very confident, about the state of our business today and quite optimistic about the future direction we are heading. We're now ready to take your questions.

[Operator Instructions] Our first question is from Howard Chen of Credit Suisse.

David, you touched on the broad-based success you've seen in fund raising across a variety of strategies, but I was curious, on a relative basis, do you feel or are you seeing any meaningful differences amongst those fund families? Where is fund raising proving to be incrementally more or less challenging today?

Well, I think that, clearly, people like our investors like funds that have track records. So if you've got a long track record, it's obviously easier to raise money for a track record like Carlyle Partners VI. It's obviously sixth generation. Second, it's easier to raise money today where there's some kind of fixed income or some distribution that's more regular than just a typical private equity fund, and I think our success in raising Energy Mezzanine fund reflects that. It's an equity fund, but also has a current coupon, in effect, from some of the investments. Clearly, all of the funds that we have today are ones that have made some resonance with investors, but nothing happens overnight. Even Carlyle Partners VI with a track record of 25 years can't be raised in a few months. So I'd say, overall, investors are coming back into the market. They recognize that alternative investments probably produce better returns for them than any other kind of alternative -- any kind of investment, but nobody is overnight just making large commitments that would welcome a fundraiser's heart. It does take some time. I think, overall, we're now quite pleased with the interest level of our investors in re-engaging. Sometimes, I'd say a year ago or so, some investors were not as interested in making new commitments. Now I think that they are, but still, you really have to work to get it.

And then, Bill, switching over to the meaningful step-up in deployment, I realize any one quarter's results can be lumpy and impacted by things like timing. But is this quarter's pace sustainable from the context of capacity of your investment team? I'm just trying to gain a sense of if we roll forward 12, 18 months, it's reasonable to think that deployment activity can trend higher from the capacity of you and your team.

I think the teams -- Howard, I think the teams have the capacity to invest at this pace and conceivably even higher. I would say that the U.S. team, which led a lot of the transactions done in the third quarter, they were very busy and now they have to actually close the deals that have already been agreed, which they'll be doing over the next 3 or 6 months. I would say, over time, I'm counting on other funds other than the U.S. buyout fund to step up their level of investing.

Great, and then just continuing on deployment, Bill, you put a lot of money in the ground this quarter and amongst that activity did a few nonproprietary deals. Was just hoping you could comment on the pricing environment for deals that aren't purely proprietary sourced, and how you gain comfort with your value creation expectations exiting investment committee.

Well, I would say, Howard, that it's interesting, that the combination of available financing, relatively low rates, the global network and what we think we can do with the companies, has not led to any reduction in our expected rates of return on the new investments that we're making. I think one of the things that gives us a lot of comfort is that we've been doing this for 25 years. And over that period of time, we've made hundreds of investments, not that they all worked out, as you know. But I think, generally, we've got a lot of confidence in what we've done. I would also say that I wouldn't trade places with any other firm when it comes to the deals we've done and the portfolios that we have at Carlyle now.

Understood. And just finally from me, just touching on something you've mentioned a few times now with respect to the financing environment. I think you gave an example with respect to Getty Images and the attractive financing there, Bill. We realize what that's being fueled by in terms of the accommodative central banks. But at what point do you become concerned that -- and you see these signals that it gets a bit frothy? And what do you do in that scenario?

I would say, Howard, I'm concerned now that the markets are extremely frothy, that we've never seen rates this low. I would say the underwriting standards of the banks, though, are probably not as loose as they were in the 2008, '09 -- '07, '08, '09 period. But anytime we've got rates at these very, very low levels -- remember, what's fueling this is that the central banks print all this money, and investors everywhere are seeking return in yield. And first, they go to the sovereigns, and then they drive down the rates on U.S. Treasuries, Japanese JGBs, German bonds, you name it. And then they start looking through other asset categories. They'll go to high-yield corporate bonds, and we -- I saw it earlier this week, I think, a 10-year BBB was done at 2.33. It's just -- it's -- you'd have to be not very aware not to be watching what's happening. And I think from the standpoint of Carlyle's responsibility to our limited partners and our unitholders, we have responsibility to really take advantage of this while it's being offered. And on the other hand, we also have the responsibility to be positioned for the fact that it's not going to go on forever. And so, for example, you're not just trying to borrow money and use the benefit of these short-term very low rates, or in the short run very low, low rates, but also you're trying to make sure that you have confidence that give you extreme flexibility that you have revolvers that can be used maybe for a time when things aren't as cheap as they are today.

Our next question is from Ken Worthington of JPMorgan.

First, in terms of fund raising as well, you're in the market with CP VI. You mentioned Asian buyout with the first close coming, and I think a European buyout, CP IV, will start fund raising soon. So how does being in the market fund raising your big flagship products at the same time impact the ability to kind of meet or even exceed the fund-raising goals? It feels like it would make things more challenging, given market conditions, but I'd figure you'd know that and maybe there's actually even synergies out there. So would love to hear your comments.

Okay. Thanks for the question. First, these funds have long histories to them. They are not first funds and therefore, they have embedded investor base. And as you know, typically investors re-up with a fund that's been reasonably successful. So if we were raising 3 funds of these size that had no track records with them, I'd be more nervous. Second factor is that the funds have all done pretty well relatively speaking and in absolute terms as well. And therefore, I don't think it's going to be as difficult to raise these funds as it might be for some other organization that might be trying to raise 3 funds at the same time with a track record that not might be as good as this. Third, what we're now seeing is an influx of new investors into the private equity world or alternative world, and that is not only sovereign wealth funds which are stepping up, and they can invest large sums. But high net worth individuals, particularly those who are being rounded up in feeder funds, not unlike -- your organization or other organizations now have a pretty good business are rounding up high net worth individuals, putting them together in a so-called feeder fund, and investing in our funds, and that's a business that we're seeing kind of increase really dramatically. So we also have a very large fund-raising team and it's a large world. So at any given time, yes, these fund-raising teams are figuring out where the best place is for our fund heads to go. And since we have about 1,400 existing institutional investors from which to pick, plus new investors, it's not as challenging as it might seem. On the other hand, I don't want to make it sound like it's so easy that when we get our targets, nobody will tell me what a great job I've done.

Okay, and then just a little bit more high level, how do you address or manage reputational and brand risk when making investment decisions? And I'm not sure this is totally related, but Chemring has kind of made it into the press. Maybe give us some background there, but I'm really after kind of the brand and reputational risk, and how you think about that in the investment process.

Let me take that if I can, David and Ken. Carlyle, obviously, values our good name. It's our biggest asset. A lot of times, when our investment professionals or our fundraisers go to see someone, I want them to be able to put their business card down, and it says the Carlyle Group on it, and I want people to really think, well, that's a first-class organization. The thing that we have done, perhaps more in the last few years than in the early years of Carlyle, is now on every investment that we make, we'll have a checklist done on the various CSR issues: labor, the environment, anything, Foreign Corrupt Practices Act. We'll employ far more consultants to do things. Now there's no guarantees. You've got hundreds of portfolio companies, and you've got more than 1,000 people working for Carlyle all over the world. There aren't guarantees, but I think we have done a tremendous amount to try to ensure that we're playing by the rules. And I think, also, we've come to the belief that playing by the rules is good business. It's not bad business. It's good business. It doesn't make it tougher to do business, and it's a good thing. On the Chemring situation, I think that they've been putting out the various releases on the timing. Obviously, at a certain time and at a certain price, we had a certain interest in seeing if a transaction could be put together. Based upon the information we received or the information we didn't receive, we just decided this had gone long enough, and at this time, we're not interested in pursuing it.

Our next question is from Robert Lee of KBW.

Just had a couple of quick questions. First, maybe looking within GMS, where you've had some good success in fund raising your hedge fund strategies. Could -- maybe dive in a little bit deeper just -- I don't know, is there any 1 or 2 specific strategies, maybe it's 1 or 2 within Claren Road that's kind of accounting for the lion's share of the net subscriptions? Or is it pretty broad-based?

Well, I would say -- Adena will help me on this, but I would say that it's -- Claren Road is the biggest of the hedge funds, and it's got multiple strategies within that hedge fund, and different investors are looking for different exposures there. The main fund at Claren Road closed earlier this year to new investors. It can still take additional commitments from existing investors. So that is a factor. I don't know, Adena, if we've mentioned anything on any of the specific funds so...

In terms of specific funds, we do have funds that are in the significant fund table in terms of performance and size, but I would say generally, Rob, that the inflows have been -- ESG has definitely had a very good year in terms of net inflows, and Claren Road has as well despite the fact that the master fund is, in fact, closed to new investors. So it has been relatively broad-based. Remember, though, that each of those fund groups has multiple strategies. So there's no one strategy that's dominating right now mainly because, frankly, the master fund, which is the largest fund, is not currently open.

Let me add a point to that. When we acquire these hedge funds, we do so in part because we think they have a good track record, and they will add to our firm's overall value, but we also think that we can help them with fund raising. They all typically have raised money before or they wouldn't have the assets they have, but many of them don't have the international fund-raising base that we can often help them with. And so we have found with each of these that we have brought investors to them, and those investors are reasonably satisfied with the performance, and sometimes, they increase what they already have with them. So we think that we'll be able to do this as well with Vermillion as soon as that's closely -- a part of our firm as it -- it is now, but we haven't yet started really doing fund raising for them.

Okay, great. And maybe a question on the AlpInvest. I mean, you mentioned and we've clearly seen a nice pickup in capital formation there. But I think when you first did the transaction, one of the things I think you guys talked about was the ability to take their expertise and kind of apply it may be broadly across the firm in terms of doing more, I don't know, strategic accounts or multi-asset class products, and I think you had that. I forget which state it was, Wisconsin or one of them. Are you seeing -- are you starting to see more of that? Is that starting to impact their inflows, more of those kind of broader-based relationships?

Yes, to remind everybody, we have this relationship, and we own this organization, AlpInvest, that we bought from 2 Dutch pension funds, but they cannot invest in any of our funds, and we don't see any of the things that they do in terms of what they decide to invest in. However, we are able to help them in fund raising, and as you suggest. What you're referring to is the Michigan Municipal Employee Retirement System, MERS, and we were helpful in introducing MERS to AlpInvest, and they did become an investor with them. What AlpInvest does is, is it has 3 large commingled funds: one in secondaries, one in fund investments, and one in direct investments or so-called co-investments. They are beginning to build a business around so-called managed accounts. That isn't going to be gigantic for them because they already have a gigantic commingled business, but the managed account business is a business that is one that they're beginning to build, and I think that will have a lot of growth potential. And we're helping them on that because we have a fair amount of expertise within our fund-raising group in how to help with managed accounts. Does that answer your question?

Yes, it does. And just to confirm, I think, if I remember correctly, the original terms of the transaction, the assets they raise now, you have a greater future participation in, at least, any performance-fee generation to the extent that's a part of the fee structure. Is that correct?

You have a good memory.

Okay. Let's see, I think -- and last one, maybe for Adena, I don't know to what extent you could maybe just provide some color if there's any kind of already-known or announced realizations in Q4 that we should be thinking about as we look at our DE forecast for the quarter.

Well, we have continued to remain active in terms of realizations. And in terms of some of them, we will be realizing proceeds for LPs on other dividend-type of situations like we did with Booz Allen. Those are distributions to LPs, but they are really return of capital to them. In terms of exits, we have done additional secondaries, and those are generally publicly available. And I think that, obviously, we don't -- we are not going to give you any projections over the rest of the quarter, but we have remained active so far this quarter.

Our next question is from Marc Irizarry of Goldman Sachs.

Just a question on carry interest taxation. Obviously, it's been a long-dated issue. When you think about compensation for employees in the private equity business, if you will, and just your franchise that you've built in your sort of overall firm equity that you can provide, how should we think about, if at all, the changes in carry taxation could affect the way you think about compensating private equity professionals?

Well, of course, we don't know that there's going to be any change anytime soon, and I would point out that under numbers that are apparent from the president's budget numbers and CBO, the amount of money that would be picked up by carry interest taxation being changed from capital gain to ordinary, is a modest amount. If you eliminate the enterprise tax from consideration, you probably would pick up no more than $10 billion over 10 years. We projected to have $10 trillion of additional debt over the next 10 years. This would pick up an insignificant amount. So I don't think that it will be seen as a major revenue raiser. And of course, if other tax rates go up, capital gains rate were to go up, and with the health-care tax coming in, the amount of money that would be picked up by the change would be relatively less than the $10 billion, maybe half of that because of the differential being smaller. In terms of compensating employees, obviously, we're in the same situation as other firms so that if the rate were to change, we don't expect that people will leave our firm to go to a competing firm because they'd have the same tax issues. Will people leave the private equity business and go to some other business? We can't say for sure. Obviously, it's a business that people like to do for reasons other than just tax rates, but that's one of the concerns that we've always had about this issue, the law of unintended consequences. And so you don't really know whether if you change the way that we're taxed, whether the fact that the United States is the dominant private equity country in the world and dominant venture capital country in the world, whether that will change or not. We don't know. And that's the debate that Congress has had. I expect that because these issues are so complicated, no resolution will occur in the very near term. Again, it doesn't pick up that much revenue, and it's complicated what the impact will be on these important industries. But in terms of thinking about it in terms of our compensation, our employees, we haven't had to really focus on it, really, because we don't think any change is imminent. Bill?

And then just if we -- if we think about the fund-raising environment out there today, David, I don't know, is the J-curve effect impacting fund raising for the bigger private equity funds? And as you sort of pick up, I guess, the investing pace, does that become maybe less of an issue in terms of maybe some LPs are sidelined right now, maybe thinking that some of the -- getting the election fiscal cliff behind us, maybe there'll be more investment opportunities going forward. Do you sense that maybe there's sort of a pickup in fund raising that'll happen as maybe your LPs think that money will be put to work even faster than it is today?

Well, we hope that'll be the case for sure. There's no doubt that the U.S. economy slowed down a bit in the second and third quarter compared to what had been projected, and I think some of that was uncertainty about where the election was going, and now that, that's resolved, I expect that people will say, "Okay, I'm not going to wait for 4 more years for another president. I'm going to start doing capital expenditures and investing again." I think the biggest complication in the fundraising market for private equity has been the mega funds, and when I say mega funds, I mean funds above $10 billion. I think it's very difficult today to go out and try to raise a $12 billion, $15 billion, $20 billion fund, and really, nobody's really trying to do so. There's been a kind of feeling that those funds might have been too big to be deployed sensibly. And as a result, people who are raising their large U.S. buyout funds are really raising funds that are going to be smaller than those funds that were their predecessor funds, and that is a major change in the industry, as you probably know. Historically, if you had a good fund, you would raise a successor fund that was bigger. Now if you have a good fund, you often raise a successor fund that is smaller. In Carlyle Partners V, for example, we have a top quartile performer. It was a $13.7 billion fund. We're out now raising a $10 billion fund. In a more normalized environment years ago, we would be raising a much bigger fund. So that's the biggest complication in the fund-raising market is just that investors tend to not want to be in gigantic funds, as they were before, and therefore, you have to offer things that are smaller and more diverse products, I think.

Okay. And then just one more, if I could. When you think about just building the diversification of your platform, how are you sort of viewing acquisitions at this point? Are there some areas where you're focusing on building out sooner rather than later? And how do you think about buying versus building in some of the areas where maybe you want to expand the business?

Well, we don't have any preconceived notions. We look at each thing separately. Clearly, what we have shown is that we are willing to make some acquisitions where we think we didn't have a presence that we thought was important to have, but we recognize, though, that you don't want to make acquisitions repeatedly if it's going to change dramatically the culture of your firm, and one of our strengths is our one Carlyle culture. And if you just spend all your time making acquisitions, you're not going to make sure you're going to -- you're not going to have that culture as permeating in the organization as much as you might like. So we don't want to make acquisitions that are going to change the culture or going to do things that are going to duplicate what we have elsewhere. So we do it judiciously. And while we've made a number of them in the grand scheme of things, most of the new assets that we have under management is really coming from organic growth or successor funds to our existing kind of businesses.

And I would also add that on -- we call -- we've used the word acquisitions, but really, what happens in places like Claren Road, Vermillion, ESG, AlpInvest, is that they're not acquisitions as you might think about it. In those businesses, we typically acquire about 55% or 60% of the business. The people that have helped build those businesses to that point in time are our partners in helping to build the business even further. They see Carlyle's global network, our fund-raising capability and other things that can help them grow and perhaps, be better and perform better, but they're not acquisitions in a normal sense. And I would also say that we are very culture sensitive. We spent 25 years trying to build Carlyle to what it is, and I think it's -- we don't want anything to destroy that culture at all. And in another part of your question, I would say in terms of organic growth versus acquisitions, it depends on the circumstance. I would say, for example, a business that we built from scratch was our Energy Mezzanine business. Two years ago, it really didn't exist. Mitch Petrick and the team at GMS recruited some people to begin to build the business. We did a couple of interesting deals. Our fund-raising teams went to work. The global network supported them, and 18 months or so later, we have a fund of about $1.1 billion. I think that's the kind of thing we can do when we've got all of Carlyle working together.

[Operator Instructions] I'm showing no further questions at this time. I would now like to turn the conference back over to Daniel Harris for closing remarks.

Thank you, all, for participating. We look forward to talking to you guys next quarter.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.