Good day, ladies and gentlemen and welcome to The Carlyle Group First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to turn the call over to your host, Daniel Harris; please go ahead.

Thank you, Stephanie. Good morning and welcome to Carlyle's first quarter 2015 earnings call. With me on the call today are Co-Chief Executive Officers, Bill Conway and David Rubenstein; and our Chief Financial Officer, Curt Buser. Earlier this morning, we issued a press release and detailed earnings presentation with our first quarter 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 investors. As we have done in the past, please limit yourself to one question, and return to the queue for any follow-ups, so we can provide everyone on the line a chance to participate. Please contact Investor Relations following this call with additional questions. This call is being web cast, and a replay will be available on our web site. 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 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 Factors 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. With that, let me turn it over to our co-Chief Executive Officer, David Rubenstein.

Thank you very much, Dan. As we said on our last earnings call, 2014 was our best year as a public company and our underlying business is off to a strong start in the first quarter. During the quarter, our portfolio continued to appreciate. We continued to raise significant new commitments and we continued to exit investments at attractive levels and pace. Unfortunately, a foreign tax dispute, which we have disclosed since our IPO and our periodic filings, came to a hit [0:04:24] (1) in April and negatively impacted our financial results this quarter. Specifically, we received an adverse ruling from a French tax court, related to a real estate investment we fully exited in 2009. We disagree with the court's findings, and we will file an appeal. But under the French law, we are required to make the full payment of the amounts now owed in order to file this appeal. We will fund the required tax payment with some cash attributable to the first quarter's results. The effect of this, is to lower pre-tax distributable earnings by $80 million and economic net income by $34 million. This is a frustrating and disappointing outcome to an otherwise solid first quarter, but this isolated court decision does not detract from the performance of our underlying business and how we are positioned for the future. Curt will more fully discuss this issue in a few moments. Let me now focus on the key metrics for the first quarter, which we believe reflect the strength of our underlying business. We produced $228 million in pre-tax distributable earnings for the quarter, excluding the French tax payment, inclusive of the tax payment, distributable earnings was $148 million for the quarter, or $0.43 per unit. Over the past 12 months and even including the tax…

Thank you, David. In terms of the main drivers of the investment environment, asset prices continue to appreciate, interest rates remain historically low, the U.S. dollar continues to strengthen, energy prices have fallen dramatically, and credit remains abundant. Our activity for the quarter reflects these trends. We have been a very active seller, but a selective buyer. Our 750 investment professionals were busy with new investments this quarter, but most of the transactions were small and mid-sized deals. We did not make any new large buyout investments, in part, due to high asset valuations, particularly in the United States. As a result, the total amount we invested in the quarter, was lower than our run rate over the last year. Specifically, we invested $1.5 billion in capital in our carry funds in the quarter. We invested $850 million in corporate private equity, with new deals in our Asia buyout fund, our Japan buyout fund, our financial services fund, our Sub-Saharan Africa fund, our U.S. equity opportunity fund and our Europe buyout fund. We invested almost $600 million in real assets and our GMS carry funds invested about $50 million in the quarter. With respect to exits, we sold our final stake in Altice, generating almost $1.1 billion in proceeds, completing a turnaround from our investment that was held below cost for a number of years. We closed the sale of Veyance Technologies to Continental. We completed block sales in CommScope, Booz Allen, Central Pacific Financial, Nielsen, Nantong Heavy Rainbow, and Qube Logistics, and we've sold a number of real estate assets, including a large U.K. student housing investment for more than $400 million and exited several multifamily residential housing assets in the United States. In total, across all the segments, we realized $4.6 billion in proceeds in the quarter. Several…

Thank you, Bill. Our business is off to a good start in 2015, with distributable earnings of nearly 25% from last year, excluding the impact of the French tax judgment. This reflects a solid quarter of realization activity and healthy fee related earnings. As David mentioned, distributable earnings for this quarter were reduced by the French tax payment we will make. As background, we began consolidating our first European real estate fund into our financial statements in 2012. In 2013, we increased the loss reserve for this matter to $75 million at the fund, and recognized unrealized losses in economic net income, pronounced in excess of the funds remaining assets. Although the loss reserve at that time impacted economic net income and GAAP net income, it did not impact distributable earnings as it was unrealized. This quarter, the judgment adversely impacted our results as follows; distributable earnings by approximately $0.24 per unit, which you will see in realized investment loss, and economic net income b $0.11 per unit in investment loss, reflecting the incremental charge above the remaining assets at the funds, and preexisting unrealized loss reserves. Unrealized investment income this quarter includes the reversal of the previous accrual. Should we prevail in our appeal, any refund will be reflected on the quarterly results at that time. Moving on to the positive result of our underlying business; fee related earnings of $51 million were 38% higher than the first quarter of 2014. The increase was largely driven by $23 million in catch-up management fees in the current quarter, from fund closings in International Energy, U.S. Real Estate, our Europe and Japan buyout funds, as compared to $8 million in catch-up management fees on fund closings a year ago. This quarter also benefited from nearly $9 million less in external fundraising…

As our comments on this call reflect, our underlying business remains robust and that was evident in so many of our key metrics during the quarter. We are also pleased, that the early results from exits in the second quarter, reflect what we believe will be an attractive quarter as measured by our key metrics. Now, we are happy to have your questions.

Thank you. [Operator Instructions]. Our first question comes from Brennan Hawken with UBS. Your line is open.

Good morning. Thanks.

Good morning Brennan.

So quick question on the wide bid/ask spread that you guys commented in the energy sector. Could you maybe give a little more color on that, so far as maybe some of the different energy markets, and how you're assessing that opportunity? And maybe, put a guess around how long you think it will take before that bid/ask spread starts to narrow?

Thank you, Brennan. This is Bill. I'd say that, the bid/ask spread is maybe 20% in terms of what people think their assets maybe worth versus what some sellers are willing to pay. Frequently, when I look at models of what's likely to happen to a particular business, it shows not only prices going up over time, but production going over time for that particular company. So I think that is a thing that just causes one to scratch my head and say, well how can it be that everybody is going to produce more and somehow the prices are going to go up in a market, that is right now in a significant oversupply of position. In terms of how long it will go on, obviously, the fall in the rig count of the United States will eventually take its toll. But people that have drilled a well, and that's producing, they tend to just continue to keep producing. So I think this spread could go on for a while, maybe a year, maybe two.

Well, okay. Thanks for the color.

You're welcome.

Your next question comes from Mike Carrier with Bank of America Merrill Lynch. Your line is open.

Thanks guys. As a strong quarter on the CP side and even the realizations, I mean, I just wanted to get your take on the outlook for the net, maybe fee growth and even FRE growth. It seems like there is a couple kind of items, like you got catch-up fees that could moderate, although fundraising continues to be active. On the other side, I think on the real assets segment, you mentioned that the energy fund didn't start to generate fees, so that's a positive. And then it sounds like on expenses with cash count being just incrementally growing this year, and then it seems like non-comp was definitely lower than what we were expecting. So just wanted to get your sense on the growth outlook on fee earning AUM and then FRE from here, given a bunch of moving pieces and not just for the next quarter, but just over the next couple of years?

Sure. Mike, this is Curt. So thanks for your questions. I will cover fee earning AUM first. So if you look back in time, we have been pretty successfully at growing fee earning AUM as well as total assets under management. Both by, what we have one done internally. We are starting new funds, and follow-on fund, as well as through acquisitions. If you look back, whether its over the last quarter or the last year, you take out the effect of foreign exchange and the redemptions that we told you about before with respect to the hedge funds. And then you add in the $10 billion of capital that we have raised, mostly in the energy funds that we haven't turned on; so that's going to turn on, as we invested or as the fee holiday expires over the next year. We have really raised fee earning AUMs by about 7%. As we look forward, I think we will continue to go up long term. There will be periods, both in terms of how -- both exits, and this is a strong exit market right now, as well as fundraising comes into play and we have been very successful in raising capital. So the timing of how both exits and fundraising will play, will create some volatility in the short term, but will continue to grow. As we turn to the second part of your question on fee related earnings, as I think about really revenues and expenses in total. This quarter, we did $51 million of fee-related earnings, up from Q1 of last year. But in any given quarter, you can have items toggle within revenues, that's going to be -- as we have talked in terms of management fees and transaction fees. So that can toggle, $10…

Okay. Thanks a lot.

Our next question comes from Ken Worthington with JP Morgan. Your line is open.

Hi, good morning. Thank you. I will take a shot. Is Mike Cavanagh in the room by any chance, and like he'd be available for question?

Here I am. Sure.

Awesome. Okay. So Mike, so you have been in Carlyle for a while, you bring big company experience and Carlyle is growing into a big company. Maybe talk about what you see as priorities for the firm. How room do you see for improved efficiency, and maybe where do you see as kind of a new insider, but formerly an outsider opportunities for growth that maybe Carlyle hasn't pursued in the past?

So efficiency is there, as Curt just talked about. I think the whole team is focused on making sure we run an efficient place, and so that's making sure we tighten up on the variety of expansion ideas that have been underway here, and including the core business of PE, I think we have got a very solid management team. I am just one of many folks that are -- that work on this and some other newcomers as well, are focused on that side of things. So you see it in the numbers that Curt just talked about. I think the areas, nothing shocking in terms of growth areas other than the ones you've heard us talk about -- the team talk about here. Obviously, the GMS phase is one, where there are opportunities coming from the changes in banking landscape that we know well here, and I know well from my old world. So we intend to be a participant in that particularly through GMS, but not exclusively. In fact, our FIG fund did some investments that are targeted in that area as well. So that's the [indiscernible].

Okay. Great. Thank you very much.

Our next question comes from Craig Siegenthaler with Credit Suisse. Your line is open.

Thanks. Good morning everyone.

Good morning Craig.

So I know there are lot of variables here, especially where each of the four energy funds that are on callback are marked, and also how fundamentals are trending in the second quarter. But when do you think that real asset segment can reasonably return to positive profits on an E&I basis?

Craig, this is Curt. So if you look at kind of what we are already experiencing, our real estate business is going well. You see that both in terms of Fund VI generating carry; Fund V now being in carry; Fund III has been in carry and will continue to contribute. There is some items also within Europe, that will favorably contribute as well. Some of the challenges that we have had historically within Europe real estate are hopefully -- largely behind us, but we will continue to work on that. As we look at kind of on the energy front, most of what you're seeing is, our legacy portfolio, which is really in run-off mode. You will see the drop in value was much larger in the fourth quarter than it is here in this quarter, and we are very excited about our $11 billion that we have of drypowder within the energy space, and be able to invest that. I think as we invest that, and as that kind of plays through, I think the growth prospects for this segment are strong.

Thank you.

Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Yes, can you hear me?

Yes, we hear you Brian.

Okay, great. If we -- maybe Bill, if you could just talk a little bit more about or expand your comments on the deployment opportunity, it sounds like on the energy side, like you said, the bid/asks are still wide, and that could persist for one to two years. Does that impact deployment opportunities on the overall private equity side, in other words, are you looking for other things in lieu of that, versus really more of an energy fund situation. And then just a clarification on the realizations that you talked about, $150 million net realized on those transactions and then you mentioned some other transactions in the second quarter happening, or just over and above the $150 million net?

Let me start with the last half of your question first, which is the $150 million, that amount pertains only to the net performance fees on the Axalta sales, it does not pertain to the other $1 billion plus of transactions that we have already done in the month of April. Is that responsive to that part?

Yup and any sense of -- maybe its too early to say whether $150 million would increase too then I guess, based on that?

Nice try. With regard to -- Axalta was just so big, we felt we had to say something on it. Across the rest of the portfolio, no comment at this time. Deployment opportunities, take a big step back, last year we deployed about $10 billion of the cost of the platform, that was energy in real assets, real estate. It was in our credit businesses as well, it was in CPE. And I would like to do that kind of amount going forward. However in the first quarter, we just found $1.5 billion of deals that we invested in. I would say that it is tough across the entire platform, to meet transactions that meet our goals for what we are trying to do for our LP investors and unitholders, its not just energy, it is credit for example. Credit spreads have really compressed, there are lots of alternatives to credit products, and it’s a very competitive business. People can raise equity, they can raise public debt, its tough in the credit platform. In the energy platform, as I said before, sellers expectations and buyers hopes just haven't quite met generally, I'd say. And then CPE, obviously our biggest fund, our longest serving fund, fund with the most investment professionals, is U.S. buyout funds. And in the first quarter, they really didn't do any deals, and so it was a -- and oftentimes frankly in the past, they have been -- I think a couple of years ago, they were $3 billion or $4 billion for the year. So significantly there. So I look around the universe of deals that get done, and its not like I say do this -- so and so did that deal, I wish we had done it or somebody did that other deal or wasn't that creative. I think the valuations are relatively high across the entire space, energy assets, credit assets and CPE. Now we are blessed by having a very -- by the way, its particularly tough in the United States; outside the United States, Japan, Asia, Europe, where we are strong in all those markets, I think buying opportunities are better there than they are in America at least at this time, and that can change over time. I would say that -- I expect that even in the current quarter, based upon what I see now, its unlikely we will do $2.5 billion in this quarter. So its just -- the run rate is tough. On the other hand, the business is pretty lumpy, and you can find times where you will find very significant action and opportunities to invest the money. And when we find them, we are willing to put money to where -- backing our opinions on them.

Great, that's great color. Thanks so much.

Our next question comes from Michael Kim with Sandler O'Neill. Your line is open.

Hey guys, good morning. Just coming back to the realization front, as you pointed out, you were active in terms of secondary offerings and strategic sales during the first quarter and that has followed through in the second quarter thus far. So just wondering, from a high level, how you're sort of thinking about the trajectory for distributable earnings looking beyond the second quarter, particularly in light of sort of what seems to be a still pretty favorable exit environment like you mentioned?

Well, we don't give guidance. But I would say, that it’s a really good time to be selling assets. And its not just in the United States, I mean, they have been -- for example, the stock markets in China are up by I think -- some of them, and one of our funds, I think was up 25% just since March 31. And so, we are an aggressive seller of our assets generally, but no prediction on performance fees going forward.

Okay. Great. Thank you.

Our next question comes from Bill Katz with Citi. Your line is open.

Good morning. This is actually Neil Stratton filling in for Bill. My question is on the Department of Labor and how their proposed rules have excluded private equity and some of the other products into the retirement market and IRA accounts. Just wanted to see, how this may impact the opportunity into the retirement channel going forward? Thanks.

Well this is Bill, David I don't know if you want to take a stab at it. But I would say so far, no impact. I think its -- obviously there are different standards that are being discussed in terms of fiduciary standards and best available investment standards or cheapest fee standards or whatever. But I think its pretty tough, given our performance over 25 years, where people say we are not a suitable, and also in fiduciary sense, a good investment for somebody to make that is being advised by a fiduciary. Next question please?

Our next question comes from Ann Dai with KBW. Your line is open.

Hi, thank you. This is Ann calling in for Rob Lee. Just had a quick question on the GMS hedge funds; I think you guys mentioned that redemption activity had slowed, and apologies if I misheard on that count, but can you tell us if those funds are net outflow, or if they have been able to offset those redemptions with new commitments and can you size that at all for us?

Ann, this is Curt. So the hedge funds had $2.1 billion in net redemptions in the current quarter. We foretold that last quarter. Generally, we only comment really on future activity, when its out of the normal realm. So there is nothing out of the normal realm at this juncture to comment on. But I would say is, in the quarter, just to reiterate Bill's comments, is the performance of the larger hedge funds are doing well, up above 2%.

Okay. Thanks so much.

Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Hey, good morning. Just have a follow-up there for Bill on the deployment outlook. Just curious if you could share any additional color around what you think the catalyst could be, that could potentially accelerate the deployment environment? It seems strategic M&A is picking up, corporates putting assets up for sale, which could present opportunities for Carlyle, and also with the dollar strengthening. How does it impact your thinking? Has there been any thoughts on maybe creating a global buyout fund as well?

Last part of the question, could you repeat that?

Last part was just thoughts around creating a global buyout fund?

Well, in terms of the deployment opportunities and what might the catalyst be to move the level up. I think, if you talked to the people, a lot of the big bangs, M&A activity is down significantly, or at least PE and sponsor activity is down significantly. The M&A activity by the strategic buyers, of course, cuts both ways. To some extent, they can outbid us on certain assets that they choose to when they become buyers. And when we are trying to sell, they can be a good buyer for assets that we want to sell. I would say, that I find that we are [indiscernible] the consensus with regard to the investment in the economic environment. And by that I mean, interest rates feel like they are low and they are going to stay low. Asset prices feel like they are high and they are going to stay high, energy prices are way down, and I don't see a big bounce moving up. The dollar is strong against other currencies, not as strong as it was maybe two or three weeks ago, but relatively a very strong currency over the last 12 months, and I expect that to continue. So having said that, I think we all have an anchoring by us, that is caused by the recent past. People always expect that today is going to be like yesterday and tomorrow is going to be like today and obviously it is most days, but some days it isn't. I think the catalyst that could happen, and you may even be seeing a little bit of it right now, is the strength of the dollar. The commerce department just reported the growth rate in the first quarter was about 0.2%, that's less than expectations, that's less than our…

Our next question comes from Patrick Davitt with Autonomous. Your line is open.

Hey good morning, thank you. It was initially reported that you are shuttering two of your retail mutual funds, which some of your competitors have had to do in the past as well. Can you kind of walk through, why you think that particular structure didn't work for you, and maybe what you learn as you go back to the drawing board to kind of tackle the retail opportunity?

This is David. In that particular case, we really hadn't raised very much money in that particular area. We had decided to pursue probably two different liquid alternative vehicles. And as we began to look at which one was likely to do better and was performing better, it was one that was run by our DGAM arm, which is part of Solutions. And we just felt that that would be, one that would have much greater investor interest that was doing quite well. The other was relatively small, and while we had filed to do a mutual fund with it, we didn't really put any real effort into getting that off the ground, and as we saw the performance of the DGAM product likely to do much better, we decided we put our eggs in that basket. So we are a big believer in the liquid alternatives opportunity and a lot of our investors are quite interested in it, and we felt we would make it easier for everybody to understand that we have one vehicle in that area, and not several.

I think there was some confusion across the firm in terms of the two vehicles. They are pretty similar, so we decided to pick one and drive that, and that was the DGAM vehicle.

All right. Makes sense. Thank you.

[Operator Instructions]. Our next question comes from Ken Worthington with JP Morgan. Your line is open.

Hi. Thank you for taking the follow-up. Wanted to dig into a little bit, the real estate business. So CRP V is back in carry, the unrealized smoke is high, its an older fund. We have got CRP VI doing extremely well. I would assume that CRP V coming back in carry, accelerates the realization process, all else being equal. So I guess first, is that fair? And can you compare the environment for real estate exits today in the markets in which you participate in real estate, versus where it was, say a year ago? And that will kind of help us to form a better outlook?

This is Bill. I don't think the realizations are affected by -- or a realization strategy is affected by whether or not the fund doesn't carry or not. Our realizations are a function of, is it the right time to sell, are we satisfied with the value, what's in the best interest of our LPs, and so then we decide to sell. Its not, whether its in carry or not, that would determine that. The real estate business is -- actually in responding to the first part of your question, I'd say the real estate business has actually been pretty steady for the last year or so, in terms of our ability to put money to work and our ability to get exits. Obviously, we are kind of heartened by the sale in April of part of the CoreSite's position, which was in, I think real estate funds III, IV and V, so its -- that's a part. But generally I'd say, it has been a relatively steady market for both asset acquisition and asset disposition in real estate.

Okay. Great. Thank you again.

Our next question comes from Mike Carrier with Bank of America Merrill Lynch. Your line is open.

Just two quick follow-ups; just in the GMS business, you mentioned the hedge fund performance for the quarter, but you also mentioned some of them not above the high watermark. Just wanted to get a sense, do you have any details on -- like what percentage of the assets are within a few percent of that, versus more. And then just on the $10 billion or so that's not generating fees, and particularly the energy bucket, is there anything that we should be looking at, in terms of catalyst to think about when the assets will start generating fees. Is it more opportunistic or is it certain funds being deployed and then that kicks in, just wanted to get a sense of that $10 billion and when we can expect the revenues?

Hey Mike, its Curt. Let me try it first. So on the GMS piece, with respect to the hedge funds, the thing to really focus on is, last year we talked about the challenges that our large hedge funds faced. We reversed the performance fees that they had accrued in the third and fourth quarters, and we talked about the redemptions. And so, here in the first quarter, actually performance is good. I mean, its up 2%, but we are below the high watermark, it will probably take, probably the better part of the year, to get back above, but predicting the exact timing, really hard. But I think they continue to do what they have been doing, we will be in good shape, and what you're seeing on the numbers is really the comparison of a year ago, when it was still in accrued carry, versus now, when it obviously reversed last year. With respect to looking at the energy funds, and when they will begin to contribute, I mean the first thing that I would say is, in the drypowder that we have, we have to put that to work and then see the appreciation. So the thing that I always spoke to [indiscernible] is really the appreciation from the underlying funds, and while NGP can, which has been invested, had a little bit of a decrease. Its still a fund that's in very good shape, and still has actually -- drypowder to invest on a follow-on basis. And most of the rest of the drypowder is really yet to go in, but there has been -- what has gone in, and especially in the power space and in international energy, we are seeing increases in value, and Bill mentioned that in his opening remarks.

Yeah I'd just like to add, Ken, the drypowder gets turned on for usually one of two reasons, or three maybe. First reason would be, you are investing Fund II and then you're raising money for Fund III. As long as you're investing in Fund II, we usually are not charging a fee on Fund III, that can be one reason. The second reason could be, on some funds, we might say -- we are not going to start charging a fee until the money has been invested. So invest the money, you earn the fee. And on some of those same fees, there might be a second trigger, which is the passage of time. So the fund would begin accruing carry on the earlier -- not accruing carry, earning management fees, on the earlier to occur of the deployment of the capital or the passage of time. So I think, most of the time passage would occur within the maximum of next year, and the pace at which we will put the money to work would be, how easy it is to find good place to put it to work.

Okay. Thanks a lot. That's helpful.

And by the way, it isn't just energy, its in other parts of the platform as well.

Yup.

I am showing no further questions, I will now turn the call back over to Daniel Harris for closing remarks.

Thank you for your time and attention today. Please contact investor relations, if you have any follow-ups after this, and we look forward to speaking with you again next quarter on the earnings call.

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and everyone have a great day.