Good day, ladies and gentlemen and welcome to The Carlyle Group Third Quarter 2016 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 introduce your host for today's conference call, Mr. Daniel Harris. You may begin, sir.

Thank you, Kevin. Good morning and welcome to Carlyle's third quarter 2016 earnings call. In the room with me on the call today are our Co-Chief Executive Officers, David Rubenstein and Bill Conway; and our Chief Financial Officer, Curt Buser. Earlier this morning, we issued a press release and detailed earnings presentation with our third 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. To ensure participation by all those on the call, please limit yourself to one question and return to the queue for any follow-ups. Please contact Investor Relations following this call with additional questions. 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 reconciliation to 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 for joining today’s call to discuss the Carlyle Group’s results for the third quarter of 2016. We hope to convey four primary messages on today's call, the first two of which I will cover and the second two of which Bill will cover. First Carlyle again delivered a strong distribution for our unitholders of $0.50 per common unit. Second, as a result of the positive momentum created by our solid quarterly performance as well as the ongoing investment pace of our largest funds we are at the beginning of a multiyear fundraising period, in which we expect to raise approximately $100 billion of new capital for our next generation of funds. Third, our existing portfolio of $56 billion in remaining fair value in our carry funds continues to strengthen and appreciate, thereby positioning us well to deliver future earnings and fourth, we have decided to focus our GMS platform on global credit and we will spend much more of our energy and resources into enhancing our capabilities in this area. First let me address our results for the quarter. The third quarter followed a consistent pattern to that of our second-quarter with a high level of realized proceeds, attractive cash earnings and solid appreciation across our main carry funds. Specifically, distributable earnings for the quarter were $228 million or $0.66 per unit resulting in a per common unit distribution of $0.50. Year-to-date we have distributed a $1.39 per common unit, and since our IPO we have distributed in average of approximately $0.47 per quarter. Our quarterly distribution was driven once again by a high level of realizations from our carry funds; specifically we realized proceeds for investors of approximately $6.6 billion for the quarter and more than $19 billion in the last 12 months. And while we remain…

Thank you, David. To continue with our third major message mentioned by David, we have continued to execute on our mandate to invest our Limited Partners capital wisely, create value in our portfolio, and ultimately realize investments and healthy rates of return. This is particularly true with respect to appreciation in our newer funds; those funds that will drive earnings in the future. On the investing front, we are being selective but thanks to the breath and diversity of our global platform, we continue to find attractive opportunities. During the quarter, we made three new private equity investments in Europe, the Cupa Group, a global manufacturer of roofing slate based in Spain; Exocad, a German computer-aided design software company; and AA Ireland, an Irish roadside assistance provider. We invested more than $300 million in a variety of real estate projects. We are particularly focused on areas like senior living and rental properties, categories that we believe will benefit from demographic tailwinds that drive demands. And NGP invested approximately $700 million in various natural resource opportunities in high quality basins like the Permian basin and the Eagle Ford. We also recently signed transactions totaling more than $4 billion in equity commitments that we expect we close and deploy in future quarters. Turning to our portfolio, our carry funds appreciated 3% in the quarter and 9% year-to-date, buoyed by continued strong performance in natural resources and our current generation of regional buyout funds. This 9% appreciation compares to 5% year-to-date appreciation in the MSCI All Country World Index, and 6% year-to-date for the S&P 500. A few large funds in particular merit a mention and all are off to a strong start. In corporate private equity, Carlyle Partners VI, our $13 billion US buyout fund has committed or invested a little less…

Thank you, Bill. I'm going to make four general comments before discussing our specific segment results. First, we once again posted solid cash earnings for our unitholders. Distributable earnings were $228 million in the quarter marking the fourth quarter of the past six where our distributable earnings were more than $225 million. We generated net realized performance fees of $186 million and fee related earnings of $31 million. Second, our latest vintage funds are performing well and should drive our next generation of realized carryover time. As Bill mentioned, many of our current vintage carry funds are producing great results and are in an accrued carry position. These funds are beginning to support our net accrued carry balance, which stood at approximately $1.2 billion at the end of the quarter approximately in-line with the prior quarter. Another way to think about it, year-to-date in 2016, we have generated $490 million of net realized performance fees, while our net accrued carry has declined only $145 million or so since the end of last year. We continue to generate accrued carry with appreciation in our underlying funds, even as global equity markets have been difficult to navigate. Third, our fee earning assets under management and fee-related earnings will grow with our next major fund-raising cycle. We continue to be active sellers of our fund investments, and over the last 12 months we have realized $19.1 billion from our carry funds for our fund investors. As you know, as we exit those investments we generally stop collecting management fees on that invested capital. Fortunately this exit process is also the basis for realizing net performance fees. Combined with some asset outflows in our hedge funds and related products overall fund management fees were $52 million lower compared to last year’s third quarter. Also…

Thank you, Curt. To summarize, Carlyle had another strong quarter in which we produced high levels of distributable earnings. Moreover, because of the strength of our portfolio and our investment performance, combined with the potential to raise even more significant amounts of money we are well positioned to deliver future earnings. Lastly, we made several decisions in the last couple of quarters that should help position the firm to perform even better in the future for our limited partners and for our unitholders. Now we are ready to take your questions.

[Operator Instructions] Our first question comes from Ken Worthington with JP Morgan.

Hi, good morning and thank you for taking my question. I appreciate Carlyle kind of pivoting GMS focus from hedge funds to credit. I think in hindsight you relate to hedge funds, made significant investments and it didn’t end well. So a couple of questions with regard to the focus on credit, one, why are you not lead to credit as well, I guess Bill mentioned that there was demand, that there is demand for credit from LPs, I recall that there is demand from your clients for hedge funds as well, so why is this different? Two, is there more, something more fundamental in terms of why you think you will be successful on the credit side and may be why you want the hedge funds? Three, how is your vision for credit compared with the credit businesses of your publicly traded peers and then lastly I’m sorry if I take here, if you plan to build or buy? Thank you.

Well, I think you made the great use of our one question, yes. So, let me try to take them first of all, do we think we’re late on credit, the answer that would be, I wish we would be further long where we are. I don’t we’re late really, we’ve got about $30 billion credit business. In the CLO business we’re I think number two, and we’re probably about the biggest issuer each year now of CLO. So in that part of the business we’re very strong, we’ve an excellent stress business as I mentioned in my prepared remarks we’re raising our fourth fund and the first three funds all want to carry with an average growth IRR of over 20%. So, we feel pretty good about that stress business, not as big as I’d like to be but it’s very successful. We’ve an energy mezzanine business, we’ve a BDC, we’ve a lot of the pieces, I think that we should scale better, we should be bigger and I think with Mark joining us, I think he will help us do that. I admit this is going to take some time, this is not all going to happen all at once. I would point out that in this time, may be back to your question about hedge funds as well. There is a difference on our credit businesses now as they’re really focused on the private markets rather than the public markets, areas where we think we’ve a very good expertise in the private equity business for example, it is virtually impossible for the equity to do well and the debt not to do well. And so, I think they tie together. Our vision is to build our credit business into one of the finest credit businesses in the world, we think with the base we’re starting from, the global network we have, we have 700 investment professionals around the world. We’re confident that we will be able to build into what our dreams are. May be when we started the hedge fund business we’ve high expectations about that business as well and in fact, early in the time we own the hedge funds they were wonderful performers for us having made hundreds of millions of dollars in 2011 and 2012 and that roughs approximate timeframe late, they performed very well. Now, I mentioned in my remarks that looked to me like the assets at the end of the year and hedge funds are going to be – in the range of a billion dollars. In terms of building or buying, I’d think so far we’re primarily build, Mark is running the segment, I’ve a lot of confidence in him so at the end spectacular idea in the buying segment, I think we look at it. But, I think our focus is probably going to be starting out on building.

Awesome, thank you for all those answers to, my one question, thank you.

You bet.

Our next question comes from Mike Carrier with Bank of America Merrill Lynch.

Good morning, everyone. This is Mike [indiscernible] for Mike Carrier. On the upcoming fundraising cycle can you may be drilldown into the drivers and timing of the next generation funds coming online you’ve a breakout in the last investor presentation – bigger could happen in 2017 and then some of the fundraising you’re applying apart from the next big, next generation fund?

Well, in 2017 some of the larger funds are likely to be in the market for the latter part of the year. Again, it depends on how fast they’re able to invest the current generation funds. We’ve three very large private equity funds that we anticipate sometime by the end of 2017 will be in the market that would be next US generation buyout fund, European buyout fund then our Asian by buyout fund and I suspect not far behind that will be our Japan buyout fund. Those would be our four big buyout funds and we’ve thought it might not be ideal to have them in the market at the same time on the other hand when they’re out of capital, not new funds. We’ve found that with some investors our interested adjusted US buyout or US buyout so it’s not necessarily as accountabilizing each other and also because these funds have a long track record they have a reservoir of investors who are pretty interested in going into them. So those would be the main things that I would say would be driving the fundraising process over the next couple of years. But we’ve many other funds that in 2018 and beyond will be coming into the market. And I would say, in our view as real estate business as well, which is quite large our next generation of US real estate opportunistic fund will be in the market and it’s actually doing some pre-,marketing now and the reception is going to be pretty good. So, I think our track record is good on these funds, but I think as good as our track record is, we can't be superhuman if there are no interest in any private equity funds then we are not going to be raising…

Okay. Thank you.

Our next question comes from Craig Siegenthaler with Credit Suisse.

Thanks. Just a follow-up on the last question, so if I add up US, Europe and Asia buyouts and assume the next fund is 20% larger than the last, I think you get about 25 billion of capital and then I heard what you said about US real estate in Japan that helps, but what other kind of products that may kind of get -- and then can you hear me okay?

Yes, I can. Well, let's go through our various segments. I focused a bit on corporate private equity. So corporate private equity I mentioned the big four funds that we have some others like our financial service industry fund and so forth. But let's try and talk about energy and natural resources and also real estate. In energy and natural resources, we have several funds that are likely to be in the market again and our power fund is doing quite well, but probably have another power fund in this period of time that we are talking about. Our international energy fund will probably have another fund during this period of time that we talked about and NGP we will have another fund during this period of time as well. We also are raising our infrastructure fund and the first generation of it will probably be raised before this period of time is over and maybe into the second generation by the time this four year period is over. In terms of our real estate fund, I did mentioned that our next opportunistic real estate fund is likely to be pretty likely to be bigger than the previous one and we have been raising this opportunistic funds every couple of year and I except by the end of this period of time, this four year period of time that I mentioned we might be into the next opportunistic real estate fund. So generally, I would say if you take a look at everything we have about a third will be in corporate private equity, about a third in real estate and energy and then we have two other segments, GMS which Bill addressed early which is our global credit business and that will be roughly 10% to 15% of everything…

Thank you, David.

Our next question comes from William Katz of Citigroup.

Thanks for taking my question this is Jack here filling in for Bill. Just a question on the longer term private equity fund and I guess longer term funds in general just curious on what you are seeing in terms of investor appetite for the longer data capital versus let's say the more traditional carriage fund you have historically raised?

Well let me start and Bill will – the longer term funds are still are relatively small part of the overall private equity market because not every investor is willing to let people hold on assets for 8 to 10 years. But there is a fair number of amount of interest in it and it made grow, but still the bulk of what we have done is shorter term. But the longer term things tend to be ones where you have current yield as well as some capital appreciation. And we have done four transactions Bill might discuss what we have done in that fund already and I suspect that the sovereign wealth funds, which don't have to pay off money quite as regularly as public pension funds will be big drivers of this kind of longer term investment business because they really have enormous amounts of capital and they can afford to have investment go for quite some time. So we see it as a reasonable growth business but it's not going to replace traditional corporate private equity any time soon in my view. Bill?

Yes, couple of thoughts. First of all, the fundraising and investment pace kind of assets always tie together on this type of thing. The fundraising was from just about ten investors, they were mostly sovereign wealth funds. They were as David said, longer dated, people thought about the long term investing. The terms of these longer data funds tend to be a little different than the terms of the other corporate private equity funds. They sometimes will have lower hurdles, they may have as David said, longer investment periods. They tend to have non-commitment fee on the commitment, but they tend to have a satisfactory fee on capital once it's deployed. So they are little different. Some advantages for us, some advantages for the LPs and obviously we are able to find pretty significant demand. The other side of it is can you find the place to put the money to work. And I would say that we don't necessarily think that the longer dated fund will have a lower rate of return than the standard buyout funds, it may or may not. The differentiating factors really maturating and time that the investment might well be held. I know in our time in Carlyle we have had many companies that we owned in our private equity business that we wish we could held forever, but unfortunately our model really required us to sell them. In terms of a couple examples of funds that are the first four investments we made in the longer dated fund. One was a large portfolio of corporate aviation assets that we bought from a big seller. It was a business that really tied a lot to other business that Carlyle knows as we have had a big business scenario space for a long time. So we are able to use the expertise. We had some of our aerospace team to help us vest the value of these assets in this pool of leases and sales and various other pieces of equipment associated with corporate aviation. The second one was a kind of investment in content, media content very long term licenses to show replace shows or syndications both United States and globally. It's a very long life asset and both of those have that in common. There certainly is a lot of demand what we have to be careful of is that maybe some people would like us to put the longer date fund just in competition with the buyout funds and really the big thing is that it's a much longer investment period usually.

Thanks for taking my question.

Our next question comes from Chris Kotowski with Oppenheimer.

I wonder if you can give any color around the litigation charge and/or reserve and help us put a bread box around it and historically I guess since most of the activity, business activity is conducted within funds, usually the funds are liable for any litigation. So what made you take a charge or the reserve at the parent?

Chris, thank you. This is Curt. So as you know we have a number of contingent matters all of which we previously disclosed and discussed in our public filings. These matters are in different stages of resolution, some of them are in their early stage, some of them are in middle or later stage. Each still has a pretty wide range of possible outcomes with one and typically being zero. But this wide range makes it difficult to come up with the precise estimate for the outcome. That said we thought it was appropriate to increase our reserve and accordingly we recorded a $100 million charge. That went both through our GAAP earnings and economic net income. Because of the nature of these matters it's really limited to what else that we can say I would encourage you to again to look at the public filings where we have talked about these matters before. In terms of the second part to your question firm versus funds I think that's made fairly clear in the public filings in terms of the distinction between those two.

Okay. Well, never mind I will get in queue. Thanks.

Our next question comes from Glenn Schorr with Evercore ISI.

Hi, this is Kaimon Chung in for Glenn Schorr. So, couple of little like this quarter and I know you highlighted some transactions when it's closed. Not sure if I missed it, but can you just size the deals in the pipeline and just bigger picture again just talk about the current investment environment, how you find good investment opportunities given this pace of market evaluations and what type are purchase multiples are you transacting at? Thanks.

You must have gone to Ken Worthington School question asking. Let me try. Capital commitments that they were about $1.6 billion in the quarter, I would say on almost any metric of Carlyle’s it is difficult to judge our performance based on any one quarter. And so, I wouldn't say light or heavy or anything just it's not so much random, but it just can vary enormously by quarter. In terms of, I mentioned in my remarks we had $4 billion of committed transaction, these are not deals in the pipeline if you will. It's a deal that we committed it to do and add some really unforeseen development let's say an anti-trust issue or something that or some global regulator said something I think that those deals are all likely to close. The biggest one which we did announce was the purchase of [indiscernible] and it was for a price of approximately $3 billion so you can work out the size equity check so that would employ that's a big part of it. We think that will close some time in the beginning of 2017. We have got a variety of other deals in the pipeline and but I think that's one I would call up. In terms of purchase multiples that we are seeing, I would describe them as high. We are regularly beaten out by our competitors and strategic and the public market. I suspect whenever we win one some of our competitors are saying, well Carlyle are really overpaid for that. Frankly sometimes we lose we are wondering where our competitor saw that we didn't see in a particular asset. Generally, of course, the transaction that in order to work it relatively high multiples and let me also say that if you can't really generalize I…

Let me just add to that. Yes, EBITDA multiples today are somewhat higher than they were before the great bubble burst on 2007 or 2008. Now, interest rates are lower, so therefore it's not really apples and apples. But the most important, Bill, is really addressing, is that while in returns might come down, investor expectations of returns coming down are pretty significant. In other words, investors, because they have so few other options are actually saying while different rates of return are lower than they were a couple of years ago, we're find with that because we have nothing else that we can get better return at. So, when money is coming into our industry, dramatically into our funds, but it's because investors really don’t see better alternative. So, even if our rates of return of other induce and other firm's compromise will have lower rates of return. I don’t think investors would be unduly surprised or upset. They actually think that the rates of return that these multiples will likely be ease our yield are still very attractive.

Thank you.

Our next question comes from Michael Cyprys from Morgan Stanley.

Hey good morning. Thanks for taking the question. Just curious if you could elaborate a little bit on the fee related earnings trajectory like there is a number of moving pieces say over the next year with some of the hedge fund business related aggregate come up then also the monetization pipeline which maybe could pressure fee related earning but then as your deploy similarly some pieces could be turning on in terms of fees. That’s more the near term. And then the longer term if you could just talk to you mentioned a $100 billion fund raising. How should we think about that benefitting fee related earnings to have some predecessor funds that stepped down. And then what sort of fee rates can we think about from different products that you're planning to raise?

Michael, thanks for your question. So, let me start with really a discussion of fee earning assets under management. So, think really that's the driver of the core fee related earning. So, if you think back first, I talked about a number of core items that put some pressure on fee earning assets on the management, although on many of these cases they don’t have as much of a direct impact on fee related earnings. So, three earnings in particular. Our legacy energy funds where we have a small economic participation has about $6 billion of remaining fee earning assets under management as of September 30. That will run off, won't have much of an impact on earnings but it will impact fee earning AUM. Second piece that well you have seen and will continue to see is the hedge funds. So, the hedge funds at their peak were about $15 billion of fee earning assets under management. They're now standing about five and as Bill said in his remarks, we expected it'll be about one by the end of the year. So, there is going to be some of your downward pressure in fourth quarter, a lower number there going forward. Finally AlpInvest. When we bought AlpInvest, we knew there is a large amount about $10 billion or so of fee earning assets under management that primarily came from its prior owners. That amount we knew was not going to be replaced at the same fee earning level or replacing that at a higher fee earning level. So, you will see a decrease in fee earning assets under management in solutions from that trend is it, wound its way through. Although that again is low yielding assets under management that is being replaced by higher yielding assets under management. That plus obviously we've been acting at a very good pace, $19 million over the last 12 months. And in the current period we've been in somewhat offsite for us, a bit of a low in fundraising. We're going to raise about $15 billion growth this year. That's why David then mentioned kind of, we're embarking on the $100 billion new raise. That it starts really, some funds will start hitting in 2000 in early '17, a lot of bigger funds won't be until the end of 2017, when they turn on fees, it will really start to really impact our fee earning AUM. So, that's when we turn the fees on. That will most likely be the end of '17, the beginning of '18 and that's what's going to then start to see a drive up in 2018. As when you're relative it coming through not only fee earning AUM but also in fee related earnings. So, hopefully that summarizes your question fairly well.

That's it, very helpful. And just any commentary around fee rates around different products that you're raising and just generally how you're thinking about overall the pressure in the industry or discounts or size chatter.

I want fee pressure so called. Let me clarify or put it into three categories. There is the management fee, there is the carried interest and there is the so called deal fees and related kinds of things like that. On the carried interest, there really hasn’t been pressure on traditional private equity funds of this, we haven’t seen it, are going below the 20%. A longer dated fund might be different in some respects. But a traditional carried interest of 20% in there, traditional private equity funds I think is pretty likely to be accepted. I don’t think that's going to be reduced. In terms of the management fee, the ongoing management fee on committed capital. It depends on the size of the fund. A smaller fund can have a 2% fee, a tiny fund might have been slightly higher. Then most of the funds that we're raising are probably in the 1.5% range, maybe slightly higher in some cases. The biggest funds might be between 1% and 1.5%. I don’t really see the fee pressure go on changing break neck much from where it is today. In other words, I think there was some fee pressure after the great recession. And fees, did come down somewhat but I think they stabilized at this point. And I would add that it's actually the reverse of where the situation was just a few years ago. It used to be that the limited partners were demanding more fee cuts and so forth than they are today. And part because the interest in getting into the best funds is so intense, these funds are typically oversubscribed. That's really what's happening now is sometimes there the general partners are able to get exactly what they set out the beginning to get and not…

Great, thank you. I appreciate all the color.

Our next question is a follow-up question from Chris Kotowski with Oppenheimer.

Yes. I'm the investment solutions business. I'd never reflected on it that much. But this quarter because it's relatively small and the financial in terms of the whole business. But this quarter you had 36 million of realized carry and 36 million of realized performance fees. Is that just the nature of that business that all the carry gets paid out?

So, Chris, this is Curt. On a net basis we had about $1 million of net realized performance fee on investment solutions. Just remember that when we bought and also the carry that’s coming off is from AlpInvest. We see this is a huge opportunity for us in the future. But what you have to remember is that most of the carry that's being realized today, we didn’t buy. And so, while we have to consolidate these numbers. In the GAAP numbers you will see a large amount of realizations and even in the non-GAAP you'll see large amounts but pretty much either going to taxes or to the deal teams because our share of what is being purchased is really not being of what's coming out. Now, in a few years, so 2020, 2021, you'll start to see our portion of that going up. And as a result you're going to see investment solution has become a bigger part of our business.

Okay, thank you.

And I'm not showing any further questions at this time. I'll like to turn the conference back over to our host.

Thank you very much for joining us this quarter on the call. We look forward to talking to you next quarter. If you have any further questions, feel free to follow-up with investor relations at any time.

Ladies and gentlemen, that concludes today's presentation. And you may now disconnect and have a wonderful day.