Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                  TO                

Commission File Number: 001-35538

 

 

The Carlyle Group L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   45-2832612
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification No.)

1001 Pennsylvania Avenue, NW

Washington, D.C., 20004-2505

(Address of principal executive offices)(Zip Code)

(202) 729-5626

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of the Registrant’s common units representing limited partner interests outstanding as of November 8, 2013 was 49,286,225.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I – FINANCIAL INFORMATION

  

Item 1.

  Financial Statements      3   
  Unaudited Condensed Consolidated Financial Statements – September 30, 2013 and 2012:   
 

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

     3   
 

Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2013 and 2012

     4   
 

Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September  30, 2013 and 2012

     5   
 

Condensed Consolidated Statement of Changes in Partners’ Capital and Redeemable Non-controlling Interests in Consolidated Entities for the Nine Months Ended September 30, 2013

     6   
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

     7   
 

Notes to the Condensed Consolidated Financial Statements

     9   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      77   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      153   

Item 4.

  Controls and Procedures      154   

PART II – OTHER INFORMATION

  

Item 1.

  Legal Proceedings      155   

Item 1A.

  Risk Factors      155   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      155   

Item 3.

  Defaults Upon Senior Securities      155   

Item 4.

  Mine Safety Disclosures      155   

Item 5.

  Other Information      155   

Item 6.

  Exhibits      155   

SIGNATURE

     156   

INDEX TO EXHIBITS

     157   

 

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Table of Contents

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believe,” “expect,” “potential,” “continue,” “may,” “will,” “should,” “seek,” “approximately,” “predict,” “intend,” “plan,” “estimate,” “anticipate” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (the “SEC”), which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Website and Social Media Disclosure

We use our website (www.carlyle.com), our corporate Facebook page (http://www.facebook.com/pages/The-Carlyle-Group/103519702981?rf=110614118958798) and our corporate Twitter account (@OneCarlyle) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about Carlyle when you enroll your email address by visiting the “Email Alert Subscription” section at http://ir.carlyle.com/alerts.cfm?. The contents of our website and social media channels are not, however, a part of this report.

Prior to the reorganization in May 2012 in connection with our initial public offering, our business was owned by four holding entities: TC Group, L.L.C., TC Group Cayman, L.P., TC Group Investment Holdings, L.P. and TC Group Cayman Investment Holdings, L.P. We refer to these four holding entities collectively as the “Parent Entities.” The Parent Entities were under the common ownership and control of our senior Carlyle professionals and two strategic investors that owned minority interests in our business — entities affiliated with Mubadala Development Company, an Abu-Dhabi based strategic development and investment company (“Mubadala”), and California Public Employees’ Retirement System (“CalPERS”). Unless the context suggests otherwise, references in this report to “Carlyle,” the “Company,” “we,” “us” and “our” refer (1) prior to the consummation of our reorganization into a holding partnership structure to Carlyle Group, which was comprised of the Parent Entities and their consolidated subsidiaries and (2) after our reorganization into a holding partnership structure, to The Carlyle Group L.P. and its consolidated subsidiaries. In addition, certain individuals engaged in our businesses own interests in the general partners of our existing carry funds. Certain of these individuals contributed a portion of these interests to us as part of the reorganization. We refer to these individuals, together with the owners of the Parent Entities prior to the reorganization and our initial public offering, collectively as our “pre-IPO owners.”

When we refer to the “partners of The Carlyle Group L.P.,” we are referring specifically to the common unitholders and our general partner and any others who may from time to time be partners of that specific Delaware limited partnership. When we refer to our “senior Carlyle professionals,” we are referring to the partner-level personnel of our firm. Senior Carlyle professionals, together with CalPERS and Mubadala, were the owners of our Parent Entities prior to the reorganization. References in this report to the ownership of the senior Carlyle professionals include the ownership of personal planning vehicles of these individuals.

“Carlyle funds,” “our funds” and “our investment funds” refer to the investment funds and vehicles advised by Carlyle. Our “carry funds” refer to those investment funds that we advise, including the buyout funds, growth capital funds, real estate funds, infrastructure funds, certain energy funds and distressed debt and mezzanine funds (but excluding our structured credit funds, hedge funds, fund of funds vehicles and the NGP management fee funds), where we receive a special residual allocation of income, which we refer to as a carried interest, in the event that specified investment returns are achieved by the fund. The “NGP management fee funds” refer to those funds advised by NGP Energy Capital Management (together with its affiliates and subsidiaries, “NGP”). Our “fund of funds vehicles” refers to those funds, accounts and vehicles advised by AlpInvest Partners B.V., formerly known as AlpInvest Partners N.V. (“AlpInvest”).

 

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Table of Contents

“Fee-earning assets under management” or “Fee-earning AUM” refer to the assets we manage from which we derive recurring fund management fees. Our Fee-earning AUM generally equals the sum of:

(a) for carry funds and certain co-investment vehicles where the original investment period has not expired, the amount of limited partner capital commitments, for fund of funds vehicles, the amount of external investor capital commitments during the commitment fee period, and for the NGP management fee funds, the amount of investor capital commitments before the first investment realization;

(b) for substantially all carry funds and certain co-investment vehicles where the original investment period has expired, the remaining amount of limited partner invested capital, and for the NGP management fee funds where the first investment has been realized, the amount of partner commitments less realized and written-off investments;

(c) the amount of aggregate Fee-earning collateral balance at par of our collateralized loan obligations (“CLOs”), as defined in the fund indentures (typically exclusive of equities and defaulted positions) as of the quarterly cut-off date for each CLO, and the reference portfolio notional amount of our synthetic collateralized loan obligations (“synthetic CLOs”);

(d) the external investor portion of the net asset value (pre-redemptions and subscriptions) of our long/short credit, emerging markets, multi-product macroeconomic and other hedge funds;

(e) the gross assets (including assets acquired with leverage), excluding cash and cash equivalents of our business development companies; and

(f) for fund of funds vehicles where the commitment fee period has expired, and certain carry funds where the investment period has expired, the lower of cost or fair value of invested capital.

“Assets under management” or “AUM” refers to the assets we manage. Our AUM equals the sum of the following:

(a) the fair value of the capital invested in our carry funds, co-investment vehicles, fund of funds vehicles and the NGP management fee funds plus the capital that we are entitled to call from investors in those funds and vehicles (including our commitments to those funds and vehicles and those of senior Carlyle professionals and employees) pursuant to the terms of their capital commitments to those funds and vehicles;

(b) the amount of aggregate collateral balance and principal cash at par of our CLOs (inclusive of all positions) and the reference portfolio notional amount of our synthetic CLOs;

(c) the net asset value (pre-redemptions and subscriptions) of our long/short credit, emerging markets, multi-product macroeconomic and other hedge funds; and

(d) the gross assets (including assets acquired with leverage) of our business development companies.

We include in our calculation of AUM and Fee-earning AUM certain energy and renewable resources funds that we jointly advise with Riverstone Holdings LLC (“Riverstone”) and certain NGP management fee funds.

For our carry funds, co-investment vehicles, fund of funds vehicles and the NGP management fee funds, total AUM includes the fair value of the capital invested, whereas Fee-earning AUM includes the amount of capital commitments or the remaining amount of invested capital, depending on whether the investment period for the fund has expired. As such, Fee-earning AUM may be greater than total AUM when the aggregate fair value of the remaining investments is less than the cost of those investments.

Our calculations of AUM and Fee-earning AUM may differ from the calculations of other alternative asset managers. As a result, these measures may not be comparable to similar measures presented by other alternative asset managers. In addition, our calculation of AUM (but not Fee-earning AUM) includes uncalled commitments to, and the fair value of invested capital in, our investment funds from Carlyle and our personnel, regardless of whether such commitments or invested capital are subject to management or performance fees. Our calculations of AUM or Fee-earning AUM are not based on any definition of AUM or Fee-earning AUM that is set forth in the agreements governing the investment funds that we manage.

 

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Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

The Carlyle Group L.P.

Condensed Consolidated Balance Sheets

(Dollars in millions)

 

     September 30,
2013
    December 31,
2012
 
     (Unaudited)        

Assets

    

Cash and cash equivalents

   $ 855.7      $ 567.1   

Cash and cash equivalents held at Consolidated Funds

     1,494.9        1,646.6   

Restricted cash

     79.6        34.5   

Restricted cash and securities of Consolidated Funds

     25.7        36.3   

Accrued performance fees

     2,877.7        2,192.5   

Investments

     794.0        881.2   

Investments of Consolidated Funds

     26,118.0        24,815.7   

Due from affiliates and other receivables, net

     176.1        190.7   

Due from affiliates and other receivables of Consolidated Funds, net

     493.6        331.8   

Receivables and inventory of a consolidated real estate VIE

     191.4        —     

Fixed assets, net

     63.3        63.6   

Deposits and other

     43.3        48.4   

Other assets of a consolidated real estate VIE

     42.7        —     

Intangible assets, net

     580.3        691.1   

Deferred tax assets

     69.0        67.1   
  

 

 

   

 

 

 

Total assets

   $ 33,905.3      $ 31,566.6   
  

 

 

   

 

 

 

Liabilities and partners’ capital

    

Loans payable

   $ 25.0      $ 886.3   

3.875% senior notes due 2023

     499.8        —     

5.625% senior notes due 2043

     398.4        —     

Loans payable of Consolidated Funds

     15,070.6        13,656.7   

Loans payable of a consolidated real estate VIE at fair value (principal amount of $335.1)

     123.8        —     

Accounts payable, accrued expenses and other liabilities

     236.5        215.0   

Accrued compensation and benefits

     1,797.8        1,318.2   

Due to affiliates

     403.2        332.1   

Deferred revenue

     196.9        59.4   

Deferred tax liabilities

     92.6        61.1   

Other liabilities of Consolidated Funds

     1,144.6        1,385.8   

Other liabilities of a consolidated real estate VIE

     110.3        —     

Accrued giveback obligations

     48.7        69.2   
  

 

 

   

 

 

 

Total liabilities

     20,148.2        17,983.8   

Commitments and contingencies

    

Redeemable non-controlling interests in consolidated entities

     4,199.1        2,887.4   

Partners’ capital (common units, 49,209,545 and 43,244,180 issued and outstanding as of September 30, 2013 and December 31, 2012, respectively)

     278.3        235.1   

Accumulated other comprehensive loss

     (11.5     (4.8

Partners’ capital appropriated for Consolidated Funds

     451.4        838.6   

Non-controlling interests in consolidated entities

     7,380.1        8,264.8   

Non-controlling interests in Carlyle Holdings

     1,459.7        1,361.7   
  

 

 

   

 

 

 

Total partners’ capital

     9,558.0        10,695.4   
  

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 33,905.3      $ 31,566.6   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

The Carlyle Group L.P.

Condensed Consolidated Statements of Operations

(Unaudited)

(Dollars in millions, except unit and per unit data)

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2013     2012      2013      2012  

Revenues

          

Fund management fees

   $ 257.9      $ 239.8       $ 731.5       $ 714.1   

Performance fees

          

Realized

     108.6        291.4         564.6         688.7   

Unrealized

     211.9        64.9         657.4         88.0   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total performance fees

     320.5        356.3         1,222.0         776.7   

Investment income

          

Realized

     (3.1     9.8         5.4         11.4   

Unrealized

     8.1        0.4         11.0         27.3   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total investment income

     5.0        10.2         16.4         38.7   

Interest and other income

     2.7        4.5         9.2         9.9   

Interest and other income of Consolidated Funds

     302.0        247.7         823.3         678.4   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

     888.1        858.5         2,802.4         2,217.8   

Expenses

          

Compensation and benefits

          

Base compensation

     204.2        177.0         556.3         433.0   

Equity-based compensation

     78.7        53.2         257.0         147.4   

Performance fee related

          

Realized

     45.4        121.9         232.2         188.3   

Unrealized

     113.5        41.5         374.5         (1.4
  

 

 

   

 

 

    

 

 

    

 

 

 

Total compensation and benefits

     441.8        393.6         1,420.0         767.3   

General, administrative and other expenses

     136.4        92.9         368.1         268.1   

Interest

     11.7        4.0         33.8         20.6   

Interest and other expenses of Consolidated Funds

     217.2        204.1         669.0         568.1   

Other non-operating expense

     7.6        10.3         1.9         6.9   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses

     814.7        704.9         2,492.8         1,631.0   

Other income (losses)

          

Net investment gains (losses) of Consolidated Funds

     (82.0     448.9         420.1         1,707.6   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) before provision for income taxes

     (8.6     602.5         729.7         2,294.4   

Provision for income taxes

     17.9        5.5         59.4         27.8   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss)

     (26.5     597.0         670.3         2,266.6   

Net income (loss) attributable to non-controlling interests in consolidated entities

     (26.6     485.4         441.4         1,708.2   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income attributable to Carlyle Holdings

     0.1        111.6         228.9         558.4   

Net income (loss) attributable to non-controlling interests in Carlyle Holdings

     (2.2     93.0         196.1         550.1   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income attributable to The Carlyle Group L.P.

   $ 2.3      $ 18.6       $ 32.8       $ 8.3   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income attributable to The Carlyle Group L.P. per common unit (see Note 15)

          

Basic

   $ 0.04      $ 0.43       $ 0.72       $ 0.20   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.04      $ 0.40       $ 0.65       $ 0.15   
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted-average common units

          

Basic

     47,554,246        43,235,336         45,363,194         42,097,973   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted

     51,055,564        46,939,751         50,209,620         255,300,460   
  

 

 

   

 

 

    

 

 

    

 

 

 

Distributions declared per common unit

   $ 0.16      $ 0.11       $ 1.17       $ 0.11   
  

 

 

   

 

 

    

 

 

    

 

 

 

Substantially all revenue is earned from affiliates of the Partnership. See accompanying notes.

 

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The Carlyle Group L.P.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in millions)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Net income (loss)

   $ (26.5   $ 597.0      $ 670.3      $ 2,266.6   

Other comprehensive income (loss)

        

Foreign currency translation adjustments

     196.8        (291.0     114.9        (479.4

Cash flow hedges

        

Unrealized gains (loss) for the period

     —          (3.2     0.2        (10.1

Less: reclassification adjustment for loss included in interest expense

     0.8        1.7        3.2        5.4   

Defined benefit plans

        

Unrealized gains (loss) for the period

     (0.4     —          0.2        —     

Less: reclassification adjustment for unrecognized loss during the period, net, included in base compensation expense

     0.1        —          0.5        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     197.3        (292.5     119.0        (484.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     170.8        304.5        789.3        1,782.5   

Less: Comprehensive (income) loss attributable to partners’ capital appropriated for Consolidated Funds

     (13.2     138.9        387.2        240.1   

Less: Comprehensive (income) loss attributable to non-controlling interests in consolidated entities

     (168.8     (345.5     (757.5     (1,499.9

Less: Comprehensive (income) loss attributable to redeemable non-controlling interests in consolidated entities

     21.3        18.4        (187.8     27.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Carlyle Holdings

     10.1        116.3        231.2        550.3   

Less: Comprehensive income (loss) attributable to non-controlling interests in Carlyle Holdings

     (6.4     (97.0     (198.0     (543.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to The Carlyle Group L.P.

   $ 3.7      $ 19.3      $ 33.2      $ 7.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

The Carlyle Group L.P.

Condensed Consolidated Statements of Changes in Partners’ Capital and Redeemable Non-controlling

Interests in Consolidated Entities

(Unaudited)

(Dollars and units in millions)

 

    Common
Units
    Partners’
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Partners’
Capital
Appropriated
for
Consolidated
Funds
    Non-
controlling
Interests in

Consolidated
Entities
    Non-
controlling
Interests in
Carlyle
Holdings
    Total
Partners’
Capital
    Redeemable
Non-controlling
Interests in

Consolidated
Entities
 

Balance at December 31, 2012

    43.2      $ 235.1      $ (4.8   $ 838.6      $ 8,264.8      $ 1,361.7      $ 10,695.4      $ 2,887.4   

Reallocation of ownership interests in Caryle Holdings

    0.2        17.5        (6.8     —          —          (10.7     —          —     

Acquisition of non-controlling interests in consolidated entities

    2.9        4.2        (0.3     —          (33.1     22.1        (7.1     —     

Initial consolidation of a Consolidated Fund

    —          —          —          —          0.5        —          0.5        —     

Equity-based compensation

    —          40.4        —          —          —          218.1        258.5        —     

Net delivery of vested common units

    2.9        0.3        —          —          —          1.6        1.9        —     

Contributions

    —          —          —          —          358.9        —          358.9        1,556.0   

Distributions

    —          (52.0     —          —          (1,968.5     (331.1     (2,351.6     (432.1

Net income (loss)

    —          32.8        —          (389.5     643.1        196.1        482.5        187.8   

Currency translation adjustments

    —          —          (0.1     2.3        114.0        (1.3     114.9        —     

Defined benefit plans, net

    —          —          —          —          0.4        0.3        0.7        —     

Change in fair value of cash flow hedge instruments

    —          —          0.5        —          —          2.9        3.4        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

    49.2      $ 278.3      $ (11.5   $ 451.4      $ 7,380.1      $ 1,459.7      $ 9,558.0      $ 4,199.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

The Carlyle Group L.P.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in millions)

 

     Nine Months Ended September 30,  
     2013     2012  

Cash flows from operating activities

    

Net income

   $ 670.3      $ 2,266.6   

Adjustments to reconcile net income to net cash flows from operating activities:

    

Depreciation and amortization

     131.1        74.1   

Amortization of deferred financing fees

     1.1        1.1   

Equity-based compensation

     257.0        147.4   

Excess tax benefits related to equity-based compensation

     (1.9     —     

Non-cash performance fees

     (743.1     (124.6

Other non-cash amounts

     8.5        7.0   

Consolidated Funds related:

    

Realized/unrealized gain on investments of Consolidated Funds

     (956.4     (2,336.1

Realized/unrealized loss from loans payable of Consolidated Funds

     581.2        713.6   

Purchases of investments by Consolidated Funds

     (8,993.1     (5,212.5

Proceeds from sale and settlements of investments by Consolidated Funds

     8,916.5        6,409.4   

Non-cash interest income, net

     (65.8     (57.1

Change in cash and cash equivalents held at Consolidated Funds

     2,326.7        886.9   

Change in other receivables held at Consolidated Funds

     (31.8     104.4   

Change in other liabilities held at Consolidated Funds

     (347.8     (975.9

Investment income

     (6.3     (48.4

Purchases of investments

     (75.0     (41.1

Proceeds from the sale of investments

     211.7        162.6   

Purchases of trading securities

     (37.2     (15.1

Proceeds from sale of trading securities

     19.7        15.7   

Changes in deferred taxes

     28.3        (3.5

Change in due from affiliates and other receivables

     (30.0     (14.0

Change in deposits and other

     5.0        10.8   

Change in accounts payable, accrued expenses and other liabilities

     26.5        3.7   

Change in accrued compensation and benefits

     477.7        (6.3

Change in due to affiliates

     46.6        (13.1

Change in deferred revenue

     137.1        96.7   
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,556.6        2,052.3   

Cash flows from investing activities

    

Change in restricted cash

     (45.2     (3.6

Purchases of fixed assets, net

     (18.8     (26.0

Purchases of intangible assets

     —          (41.0
  

 

 

   

 

 

 

Net cash used in investing activities

     (64.0     (70.6

 

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Table of Contents

The Carlyle Group L.P.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in millions)

 

     Nine Months Ended September 30,  
     2013     2012  

Cash flows from financing activities

    

Borrowings under credit facility

   $ —        $ 433.7   

Repayments under credit facility

     (386.3     (744.6

Issuance of 3.875% senior notes due 2023, net of financing costs

     495.3        —     

Issuance of 5.625% senior notes due 2043, net of financing costs

     394.1        —     

Payments on loans payable

     (475.0     (310.0

Net payment on loans payable of Consolidated Funds

     (1,462.7     (1,071.8

Payments of contingent consideration

     (23.6     —     

Distributions to common unitholders

     (52.0     (4.8

Net proceeds from issuance of common units in initial public offering

     —          615.8   

Excess tax benefits related to equity-based compensation

     1.9        —     

Contributions from predecessor owners

     —          9.3   

Distributions to predecessor owners

     —          (452.3

Contributions from non-controlling interest holders

     1,909.5        1,579.4   

Distributions to non-controlling interest holders

     (2,728.5     (1,757.7

Acquisition of non-controlling interests in consolidated entities

     (7.1     —     

Change in due to/from affiliates financing activities

     43.0        0.3   

Change in due to/from affiliates and other receivables of Consolidated Funds

     65.9        (22.2
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,225.5     (1,724.9

Effect of foreign exchange rate changes

     21.5        2.8   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     288.6        259.6   

Cash and cash equivalents, beginning of period

     567.1        509.6   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 855.7      $ 769.2   
  

 

 

   

 

 

 

Supplemental non-cash disclosures

    

Increase in partners’ capital related to reallocation of ownership interest in Carylyle Holdings

   $ 10.7      $ —     
  

 

 

   

 

 

 

Increase to partners’ capital from acquisition of non-controlling interests in consolidated entities

   $ 3.9      $ —     
  

 

 

   

 

 

 

Net assets related to consolidation of the CLOs

   $ —        $ 357.3   
  

 

 

   

 

 

 

Non-cash distributions to predecessor owners

   $ —        $ 402.5   
  

 

 

   

 

 

 

Non-cash contributions from non-controlling interest holders

   $ 5.4      $ 126.1   
  

 

 

   

 

 

 

Non-cash distributions to non-controlling interest holders

   $ 3.2      $ 56.3   
  

 

 

   

 

 

 

Reorganization:

    

Transfer of partners’ capital to non-controlling interests in consolidated entities

   $ —        $ 120.3   
  

 

 

   

 

 

 

Deferred taxes from transfer of ownership interests

   $ —        $ 9.4   
  

 

 

   

 

 

 

Exchange of CalPERS equity interests:

    

Deferred tax asset

   $ —        $ 21.8   
  

 

 

   

 

 

 

Tax receivable agreement liability

   $ —        $ 18.3   
  

 

 

   

 

 

 

Total partners’ capital

   $ —        $ 3.5   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

The Carlyle Group L.P., together with its consolidated subsidiaries (the “Partnership” or “Carlyle”), is one of the world’s largest global alternative asset management firms that originates, structures and acts as lead equity investor in management-led buyouts, strategic minority equity investments, equity private placements, consolidations and buildups, growth capital financings, real estate opportunities, bank loans, high-yield debt, distressed assets, mezzanine debt and other investment opportunities. The Partnership is a Delaware limited partnership formed on July 18, 2011. The Partnership is managed and operated by its general partner, Carlyle Group Management L.L.C., which is in turn wholly-owned and controlled by Carlyle’s founders and other senior Carlyle professionals.

Carlyle provides investment management services to, and has transactions with, various private equity funds, real estate funds, collateralized loan obligations (“CLOs”), hedge funds and other investment products sponsored by the Partnership for the investment of client assets in the normal course of business. Carlyle typically serves as the general partner, investment manager or collateral manager, making day-to-day investment decisions concerning the assets of these products. Carlyle operates its business through four reportable segments: Corporate Private Equity, Global Market Strategies, Real Assets and Solutions (see Note 18).

Basis of Presentation

The accompanying financial statements include (1) subsequent to the reorganization as described below, the accounts of the Partnership and (2) prior to the reorganization, the combined accounts of TC Group, L.L.C., TC Group Cayman, L.P., TC Group Investment Holdings, L.P. and TC Group Cayman Investment Holdings, L.P., as well as their majority-owned subsidiaries (collectively, “Carlyle Group”), which were engaged in the above businesses under common ownership and control by Carlyle’s individual partners (“senior Carlyle professionals”), the California Employees Public Retirement System (“CalPERS”) and Mubadala Development Company (“Mubadala”). In addition, certain Carlyle-affiliated funds, related co-investment entities, certain CLOs managed by the Partnership (collectively the “Consolidated Funds”) and a real estate development company (see Note 17) have been consolidated in the accompanying financial statements pursuant to accounting principles generally accepted in the United States (“U.S. GAAP”), as described in Note 2. The consolidation of the Consolidated Funds generally has a gross-up effect on assets, liabilities and cash flows, and has no effect on the net income attributable to the Partnership. The majority economic ownership interests of the investors in the Consolidated Funds are reflected as non-controlling interests in consolidated entities, partners’ capital appropriated for Consolidated Funds and redeemable non-controlling interests in consolidated entities in the accompanying condensed consolidated financial statements.

Prior to the reorganization and initial public offering in May 2012, all compensation for services rendered by senior Carlyle professionals was reflected as distributions from partners’ capital rather than as compensation expense. Subsequent to the reorganization and initial public offering, all compensation attributable to senior Carlyle professionals is recognized as compensation expense, consistent with all other Carlyle employees.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. These statements, including the notes, have not been audited, exclude some of the disclosures required for annual financial statements and should be read in conjunction with the audited consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Reorganization and Initial Public Offering

In May 2012, a series of reorganization transactions were executed to facilitate the acquisition by the Partnership of an indirect equity interest in Carlyle Group. As part of these reorganization transactions, the senior Carlyle professionals (excluding retired senior Carlyle professionals), CalPERS and Mubadala contributed all of their interests in TC Group, L.L.C., TC Group Cayman, L.P., TC Group Investment Holdings, L.P. and TC Group Cayman Investment Holdings, L.P. (the “Former Parent Entities”) and senior Carlyle professionals and other individuals engaged in Carlyle’s business contributed a portion of the equity interests they owned in the general partners of Carlyle’s existing carry funds, to Carlyle Holdings I L.P., Carlyle Holdings II L.P. and Carlyle Holdings III L.P. (collectively, “Carlyle Holdings”) in exchange for Carlyle Holdings partnership units.

After the completion of the reorganization transactions, Carlyle Group is a consolidated subsidiary of Carlyle Holdings. Carlyle Group is considered the predecessor of the Partnership for accounting purposes, and accordingly, Carlyle Group’s combined and consolidated financial statements are the Partnership’s historical financial statements. The historical combined and consolidated financial statements of Carlyle Group are reflected herein based on the historical ownership interests of the senior Carlyle professionals, CalPERS and Mubadala in Carlyle Group.

In May 2012, the Partnership completed an initial public offering of 30,500,000 common units on the NASDAQ Global Select Market under the symbol “CG”. The net proceeds to the Partnership from the initial public offering were approximately $615.8 million, after deducting underwriting discounts and offering expenses. The Partnership used all of the proceeds to purchase an equivalent number of newly issued Carlyle Holdings partnership units from Carlyle Holdings. As the sole general partner of Carlyle Holdings, the Partnership consolidates the financial position and results of operations of Carlyle Holdings into its financial statements, and the other ownership interests in Carlyle Holdings are reflected as non-controlling interests in the Partnership’s financial statements.

For additional information on the reorganization and initial public offering, see Note 1 to the consolidated financial statements included in the Partnership’s 2012 Annual Report on Form 10-K.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The Partnership consolidates all entities that it controls through a majority voting interest or otherwise. In addition, the accompanying condensed consolidated financial statements consolidate: (1) Carlyle-affiliated funds and co-investment entities, for which the Partnership is the sole general partner and the presumption of control by the general partner has not been overcome and (2) variable interest entities (“VIE“s), including certain CLOs and a real estate development company, for which the Partnership is deemed to be the primary beneficiary; consolidation of these entities is a requirement under U.S. GAAP. All significant inter-entity transactions and balances have been eliminated.

For entities that are determined to be VIEs, the Partnership consolidates those entities where it is deemed to be the primary beneficiary. An entity is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The revised consolidation rules require an analysis to (x) determine whether an entity in which the Partnership holds a variable interest is a VIE and (y) whether the Partnership’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related fees), would give it a controlling financial interest. In evaluating whether the Partnership is the primary beneficiary, the Partnership evaluates its economic interests in the entity held either directly or indirectly by the Partnership. The consolidation analysis is generally performed qualitatively. This analysis, which requires judgment, is performed at each reporting date.

In February 2010, Accounting Standards Update (“ASU”) No. 2010-10, “Amendments for Certain Investment Funds,” was issued. This ASU defers the application of the revised consolidation rules for a reporting enterprise’s interest in an entity if certain conditions are met, including if the entity has the attributes of an investment company and is not a securitization or asset-backed financing entity. An entity that qualifies for the deferral will continue to be assessed for consolidation under the overall guidance on VIEs, before its amendment, and other applicable consolidation guidance.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

As of September 30, 2013, assets and liabilities of consolidated VIEs reflected in the condensed consolidated balance sheets were $24.1 billion and $16.4 billion, respectively. Except to the extent of the assets of the VIEs which are consolidated, the holders of the consolidated VIEs’ liabilities do not have recourse to the Partnership. The assets and liabilities of the consolidated VIEs that are Consolidated Funds are comprised primarily of investments and loans payable, respectively.

The loans payable issued by the CLOs are backed by diversified collateral asset portfolios consisting primarily of loans or structured debt. In exchange for managing the collateral for the CLOs, the Partnership earns investment management fees, including in some cases subordinated management fees and contingent incentive fees. In cases where the Partnership consolidates the CLOs, those management fees have been eliminated as intercompany transactions. As of September 30, 2013, the Partnership held $67.3 million of investments in these CLOs which represents its maximum risk of loss. The Partnership’s investments in these CLOs are generally subordinated to other interests in the entities and entitle the Partnership to receive a pro rata portion of the residual cash flows, if any, from the entities. Investors in the CLOs have no recourse against the Partnership for any losses sustained in the CLO structure.

For all Carlyle-affiliated funds and co-investment entities (collectively “the Funds”) that are not determined to be VIEs, the Partnership consolidates those funds where, as the sole general partner, it has not overcome the presumption of control pursuant to U.S. GAAP. Most Carlyle funds provide a dissolution right upon a simple majority vote of the non-Carlyle affiliated limited partners such that the presumption of control by Carlyle is overcome. Accordingly, these funds are not consolidated in the Partnership’s condensed consolidated financial statements.

Investments in Unconsolidated Variable Interest Entities

The Partnership holds variable interests in certain VIEs that are not consolidated because the Partnership is not the primary beneficiary. The Partnership’s involvement with such entities is in the form of direct equity interests and fee arrangements. The maximum exposure to loss represents the loss of assets recognized by the Partnership relating to these unconsolidated entities. The assets recognized in the Partnership’s condensed consolidated balance sheets related to the Partnership’s interests in these non-consolidated VIEs and the Partnership’s maximum exposure to loss relating to non-consolidated VIEs were as follows:

 

     As of  
     September 30,
2013
     December 31,
2012
 
     (Dollars in millions)  

Investments

   $ 375.3       $ 398.2   

Receivables

     95.9         43.5   
  

 

 

    

 

 

 

Maximum Exposure to Loss

   $ 471.2       $ 441.7   
  

 

 

    

 

 

 

Basis of Accounting

The accompanying financial statements are prepared in accordance with U.S. GAAP. Management has determined that the Partnership’s Funds are investment companies under U.S. GAAP for the purposes of financial reporting. U.S. GAAP for an investment company requires investments to be recorded at estimated fair value and the unrealized gains and/or losses in an investment’s fair value are recognized on a current basis in the statements of operations. Additionally, the Funds do not consolidate their majority-owned and controlled investments (the “Portfolio Companies”). In the preparation of these condensed consolidated financial statements, the Partnership has retained the specialized accounting for the Funds, pursuant to U.S. GAAP.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

All of the investments held and notes issued by the Consolidated Funds are presented at their estimated fair values in the Partnership’s condensed consolidated balance sheets. Interest income and other income of the Consolidated Funds is included in interest and other income of Consolidated Funds and interest expense and other expenses of the Consolidated Funds is included in interest and other expenses of Consolidated Funds in the Partnership’s condensed consolidated statements of operations. The excess of the CLO assets over the CLO liabilities upon consolidation is reflected in the Partnership’s condensed consolidated balance sheets as partners’ capital appropriated for Consolidated Funds. Net income attributable to the investors in the CLOs is included in net income (loss) attributable to non-controlling interests in consolidated entities in the condensed consolidated statements of operations and partners’ capital appropriated for Consolidated Funds in the condensed consolidated balance sheets.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates are based on historical experiences and other factors, including expectations of future events that management believes to be reasonable under the circumstances. It also requires management to exercise judgment in the process of applying the Partnership’s accounting policies. Assumptions and estimates regarding the valuation of investments and their resulting impact on performance fees involve a higher degree of judgment and complexity and these assumptions and estimates may be significant to the condensed consolidated financial statements and the resulting impact on performance fees. Actual results could differ from these estimates and such differences could be material.

Business Combinations

The Partnership accounts for business combinations using the acquisition method of accounting, under which the purchase price of the acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Contingent consideration obligations that are elements of consideration transferred are recognized as of the acquisition date as part of the fair value transferred in exchange for the acquired business. Acquisition-related costs incurred in connection with a business combination are expensed.

Revenue Recognition

Fund Management Fees

The Partnership provides management services to funds in which it holds a general partner interest or has a management agreement. For corporate private equity, certain global market strategies funds and real assets funds, management fees are calculated based on (a) limited partners’ capital commitments to the funds, (b) limited partners’ remaining capital invested in the funds at cost, (c) average daily gross assets, excluding cash and cash equivalents or (d) the net asset value (“NAV”) of certain of the funds, less offsets for the non-affiliated limited partners’ share of transaction advisory and portfolio fees earned, as defined in the respective partnership agreements.

Management fees for corporate private equity, closed-end carry funds in the global market strategies segment and real assets funds generally range from 1% to 2% of commitments during the investment period of the relevant fund. Following the expiration or termination of the investment period of such funds, the management fees generally step-down to between 0.6% and 2.0% of contributions for unrealized investments. The Partnership will receive management fees for corporate private equity and real assets funds during a specified period of time, which is generally ten years from the initial closing date, or in some instances, from the final closing date, but such termination date may be earlier in certain limited circumstances or later if extended for successive one-year periods, typically up to a maximum of two years. Depending upon the contracted terms of investment advisory or investment management and related agreements, these fees are generally called semi-annually in advance and are recognized as earned over the subsequent six month period.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

For certain global market strategies funds, management fees are calculated based on assets under management of the funds with generally lower fee rates. Hedge funds typically pay management fees quarterly that generally range from 1.5% to 3.0% of NAV per year. Management fees for our business development companies are due quarterly in arrears at annual rates that range from 0.25% to 1.0% of average daily gross assets, excluding cash and cash equivalents. Management fees for the CLOs typically range from 0.4% to 0.6% on the total par amount of assets in the fund and are due quarterly or semi-annually based on the terms and recognized over the respective period. Management fees for the CLOs and credit opportunities funds are governed by indentures and collateral management agreements. The Partnership will receive management fees for the CLOs until redemption of the securities issued by the CLOs, which is generally five to ten years after issuance. Open-ended funds typically do not have stated termination dates.

Management fees from fund of funds vehicles generally range from 0.3% to 1.0% on the vehicle’s capital commitments during the commitment fee period of the relevant fund. Following the expiration of the commitment fee period of such funds, the management fees generally range from 0.3% to 1.0% on the lower of cost or fair value of the capital invested. These fees are due quarterly and recognized over the related quarter.

The Partnership also provides transaction advisory and portfolio advisory services to the Portfolio Companies, and where covered by separate contractual agreements, recognizes fees for these services when the service has been provided and collection is reasonably assured. Fund management fees includes transaction and portfolio advisory fees of $10.9 million and $11.8 million for the three months ended September 30, 2013 and 2012, respectively, and $38.4 million and $33.2 million for the nine months ended September 30, 2013 and 2012, respectively, net of any offsets as defined in the respective partnership agreements.

Performance Fees

Performance fees consist principally of the allocation of profits from certain of the funds to which the Partnership is entitled (commonly known as carried interest). The Partnership is generally entitled to a 20% allocation (or approximately 2% to 10% in the case of most of the Partnership’s fund of funds vehicles) of the net realized income or gain as a carried interest after returning the invested capital, the allocation of preferred returns and return of certain fund costs (generally subject to catch-up provisions) from its corporate private equity and real assets funds. Carried interest is recognized upon appreciation of the funds’ investment values above certain return hurdles set forth in each respective partnership agreement. The Partnership recognizes revenues attributable to performance fees based upon the amount that would be due pursuant to the fund partnership agreement at each period end as if the funds were terminated at that date. Accordingly, the amount recognized as total performance fees reflects the Partnership’s share of the gains and losses of the associated funds’ underlying investments measured at their then-current fair values. Because of the inherent uncertainty, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is reasonably possible that the difference could be material.

Carried interest is ultimately realized when: (i) an underlying investment is profitably disposed of, (ii) certain costs borne by the limited partner investors have been reimbursed, (iii) the fund’s cumulative returns are in excess of the preferred return and (iv) the Partnership has decided to collect carry rather than return additional capital to limited partner investors. Realized carried interest may be required to be returned by the Partnership in future periods if the funds’ investment values decline below certain levels. When the fair value of a fund’s investments remains constant or falls below certain return hurdles, previously recognized performance fees are reversed. In all cases, each fund is considered separately in this regard, and for a given fund, performance fees can never be negative over the life of a fund. If upon a hypothetical liquidation of a fund’s investments at their then current fair values, previously recognized and distributed carried interest would be required to be returned, a liability is established for the potential giveback obligation. As of September 30, 2013 and December 31, 2012, the Partnership has recognized $48.7 million and $69.2 million, respectively, for giveback obligations.

In addition to its performance fees from its corporate private equity and real assets funds, the Partnership is also entitled to receive performance fees from certain of its global market strategies funds and fund of funds vehicles when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fees are recognized when the performance benchmark has been achieved, and are included in performance fees in the accompanying condensed consolidated statements of operations.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Investment Income (Loss)

Investment income (loss) represents the unrealized and realized gains and losses resulting from the Partnership’s equity method investments and other principal investments. Equity method investment income (loss) includes the related amortization of the basis difference between the Partnership’s carrying value of its investment and the Partnership’s share of underlying net assets of the investee, as well as the compensation expense associated with compensatory arrangements provided by the Partnership to employees of its equity method investee. Investment income (loss) is realized when the Partnership redeems all or a portion of its investment or when the Partnership receives or is due cash income, such as dividends or distributions. Unrealized investment income (loss) results from changes in the fair value of the underlying investment as well as the reversal of unrealized gain (loss) at the time an investment is realized.

Interest Income

Interest income is recognized when earned. Interest income earned by the Partnership was $0.4 million and $1.3 million for the three months ended September 30, 2013 and 2012, respectively, and $1.5 million and $4.0 million for the nine months ended September 30, 2013 and 2012, respectively, and is included in interest and other income in the accompanying condensed consolidated statements of operations. Interest income of the Consolidated Funds was $225.4 million and $208.4 million for the three months ended September 30, 2013 and 2012, respectively, and $677.7 million and $578.3 million for the nine months ended September 30, 2013 and 2012, respectively, and is included in interest and other income of Consolidated Funds in the accompanying condensed consolidated statements of operations.

Compensation and Benefits

Base Compensation – Base compensation includes salaries, bonuses (discretionary awards and guaranteed amounts), performance payment arrangements and benefits paid and payable to Carlyle employees. Bonuses are accrued over the service period to which they relate.

Equity-Based Compensation – Compensation expense relating to the issuance of equity-based awards to Carlyle employees is measured at fair value on the grant date. The compensation expense for awards that vest over a future service period is recognized over the relevant service period on a straight-line basis, adjusted for estimated forfeitures of awards not expected to vest. The compensation expense for awards that do not require future service is recognized immediately. Upon the end of the service period, compensation expense is adjusted to account for the actual forfeiture rate. Cash settled equity-based awards are classified as liabilities and are re-measured at the end of each reporting period.

Equity-based awards issued to non-employees are recognized as general, administrative and other expenses. The grant-date fair value of equity-based awards granted to Carlyle’s non-employee directors is expensed on a straight-line basis over the vesting period. The cost of services received in exchange for an equity-based award issued to consultants is measured at each vesting date, and is not measured based on the grant-date fair value of the award unless the award is vested at the grant date. Equity-based awards that require the satisfaction of future service criteria are recognized over the relevant service period, adjusted for estimated forfeitures of awards not expected to vest, based on the fair value of the award on each reporting date and adjusted for the actual fair value of the award at each vesting date. Accordingly, the measured value of the award will not be finalized until the vesting date.

Performance Fee Related Compensation – A portion of the performance fees earned is due to employees and advisors of the Partnership. These amounts are accounted for as compensation expense in conjunction with the recognition of the related performance fee revenue and, until paid, are recognized as a component of the accrued compensation and benefits liability. Accordingly, upon any reversal of performance fee revenue, the related compensation expense is also reversed. As of September 30, 2013 and December 31, 2012, the Partnership had recorded a liability of $1.3 billion and $0.9 billion, respectively, in accrued compensation related to the portion of accrued performance fees due to employees and advisors, which was included in accrued compensation and benefits in the accompanying condensed consolidated financial statements.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Income Taxes

For periods prior to the reorganization and initial public offering in May 2012, no provision was made for U.S. federal income taxes in the condensed consolidated financial statements since the profits and losses were allocated to the senior Carlyle professionals who were individually responsible for reporting such amounts. During those periods, based on applicable foreign, state and local tax laws, a provision for income taxes was recorded for certain entities.

For periods subsequent to the reorganization and initial public offering in May 2012, certain of the wholly-owned subsidiaries of the Partnership and the Carlyle Holdings partnerships are subject to federal, state and local corporate income taxes at the entity level and the related tax provision attributable to the Partnership’s share of this income is reflected in the condensed consolidated financial statements. Based on applicable foreign, state and local tax laws, the Partnership records a provision for income taxes for certain entities. AlpInvest Partners B.V. (“AlpInvest”), a subsidiary of the Partnership, is subject to entity level income taxes in the Netherlands. Tax positions taken by the Partnership are subject to periodic audit by U.S. federal, state, local and foreign taxing authorities.

The Partnership uses the liability method of accounting for deferred income taxes pursuant to U.S. GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the statutory tax rates expected to be applied in the periods in which those temporary differences are settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. A valuation allowance is recorded on the Partnership’s net deferred tax assets when it is more likely than not that such assets will not be realized. When evaluating the realizability of the Partnership’s deferred tax assets, all evidence, both positive and negative is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies, and expectations of future earnings.

Under U.S. GAAP for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is “more likely than not” to be sustained upon examination. The Partnership analyzes its tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Partnership determines that uncertainties in tax positions exist, a liability is established, which is included in accounts payable, accrued expenses and other liabilities in the condensed consolidated financial statements. The Partnership recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes. If recognized, the entire amount of unrecognized tax positions would be recorded as a reduction in the provision for income taxes.

Tax Receivable Agreement

Exchanges of Carlyle Holdings partnership units for the Partnership’s common units that are executed by the limited partners of the Carlyle Holdings partnerships result in transfers of and increases in the tax basis of the tangible and intangible assets of Carlyle Holdings, primarily attributable to a portion of the goodwill inherent in the business. These transfers and increases in tax basis will increase (for tax purposes) depreciation and amortization and therefore reduce the amount of tax that certain of the Partnership’s subsidiaries, including Carlyle Holdings I GP Inc., which are referred to as the “corporate taxpayers,” would otherwise be required to pay in the future. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. The Partnership has entered into a tax receivable agreement with the limited partners of the Carlyle Holdings partnerships whereby the corporate taxpayers have agreed to pay to the limited partners of the Carlyle Holdings partnerships involved in any exchange transaction 85% of the amount of cash tax savings, if any, in U.S. federal, state and local income tax or foreign or franchise tax that the corporate taxpayers realize as a result of these increases in tax basis and, in limited cases, transfers or prior increases in tax basis. The corporate taxpayers expect to benefit from the remaining 15% of cash tax savings, if any, in income tax they realize. Payments under the tax receivable agreement will be based on the tax reporting positions that the Partnership will determine. The corporate taxpayers will not be reimbursed for any payments previously made under the tax receivable agreement if a tax basis increase is successfully challenged by the Internal Revenue Service.

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The Partnership records an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the exchange. To the extent that the Partnership estimates that the corporate taxpayers will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, its expectation of future earnings, the Partnership will reduce the deferred tax asset with a valuation allowance. The Partnership records 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the tax receivable agreement, which is included in due to affiliates in the accompanying condensed consolidated financial statements. The remaining 15% of the estimated realizable tax benefit is initially recorded as an increase to the Partnership’s partners’ capital. All of the effects to the deferred tax asset of changes in any of the Partnership’s estimates after the tax year of the exchange will be reflected in the provision for income taxes. Similarly, the effect of subsequent changes in the enacted tax rates will be reflected in the provision for income taxes.

Non-controlling Interests

Non-controlling interests in consolidated entities represent the component of equity in consolidated entities held by third party investors. These interests are adjusted for general partner allocations and by subscriptions and redemptions in hedge funds which occur during the reporting period. Any change in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between the controlling and non-controlling interests. Transaction costs incurred in connection with such changes in ownership of a subsidiary are recorded as a direct charge to partners’ capital.

Non-controlling interests related to hedge funds are subject to quarterly or monthly redemption by investors in these funds following the expiration of a specified period of time (typically one year), or may be withdrawn subject to a redemption fee during the period when capital may not be withdrawn. As limited partners in these types of funds have been granted redemption rights, amounts relating to third-party interests in such consolidated funds are presented as redeemable non-controlling interests in consolidated entities within the condensed consolidated balance sheets. When redeemable amounts become contractually payable to investors, they are classified as a liability and included in other liabilities of Consolidated Funds in the condensed consolidated balance sheets.

Non-controlling interests in Carlyle Holdings relate to the ownership interests of the other limited partners of the Carlyle Holdings partnerships. The Partnership, through wholly-owned subsidiaries, is the sole general partner of Carlyle Holdings. Accordingly, the Partnership consolidates Carlyle Holdings into its consolidated financial statements, and the other ownership interests in Carlyle Holdings are reflected as non-controlling interests in the Partnership’s consolidated financial statements. Any change to the Partnership’s ownership interest in Carlyle Holdings while it retains the controlling financial interest in Carlyle Holdings is accounted for as a transaction within partners’ capital as a reallocation of ownership interests in Carlyle Holdings.

Earnings Per Common Unit

The Partnership computes earnings per common unit in accordance with Accounting Standards Codification (“ASC”) 260, Earnings Per Share. Basic earnings per common unit is calculated by dividing net income (loss) attributable to the common units of the Partnership by the weighted-average number of common units outstanding for the period. Diluted earnings per common unit reflects the assumed conversion of all dilutive securities. Net income (loss) attributable to the common units excludes net income (loss) and dividends attributable to any participating securities under the two-class method of ASC 260.

Investments

Investments include (i) the Partnership’s ownership interests (typically general partner interests) in the Funds, (ii) the investments held by the Consolidated Funds (all of which are presented at fair value in the Partnership’s condensed consolidated financial statements), (iii) strategic investments made by the Partnership and (iv) certain credit-oriented investments. The valuation procedures utilized for investments of the Funds vary depending on the nature of the investment. The fair value of investments in publicly-traded securities is based on the closing price of the security with adjustments to reflect appropriate discounts if the securities are subject to restrictions. Upon the sale of a security, the realized net gain or loss is computed on a weighted average cost basis, with the exception of the CLOs, which compute the realized net gain or loss on a first in, first out basis. Securities transactions are recorded on a trade date basis.

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The fair value of non-equity securities, which may include instruments that are not listed on an exchange, considers, among other factors, external pricing sources, such as dealer quotes or independent pricing services, recent trading activity or other information that, in the opinion of the Partnership, may not have been reflected in pricing obtained from external sources.

When valuing private securities or assets without readily determinable market prices, the Partnership gives consideration to operating results, financial condition, economic and/or market events, recent sales prices and other pertinent information. These valuation procedures may vary by investment but include such techniques as comparable public market valuation, comparable acquisition valuation and discounted cash flow analysis. Because of the inherent uncertainty, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is reasonably possible that the difference could be material. Furthermore, there is no assurance that, upon liquidation, the Partnership will realize the values presented herein.

Equity-Method Investments

The Partnership accounts for all investments in which it has significant influence, including investments in the unconsolidated Funds and strategic investments, using the equity method of accounting. The carrying value of equity-method investments is determined based on amounts invested by the Partnership, adjusted for the equity in earnings or losses of the investee allocated based on the respective partnership agreement, less distributions received. The Partnership evaluates its equity-method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.

Cash and Cash Equivalents

Cash and cash equivalents include cash held at banks and cash held for distributions, including temporary investments with original maturities of less than three months when purchased. Included in cash and cash equivalents is cash withheld from carried interest distributions for potential giveback obligations of $36.0 million and $59.2 million at September 30, 2013 and December 31, 2012, respectively.

Cash and Cash Equivalents Held at Consolidated Funds

Cash and cash equivalents held at Consolidated Funds consists of cash and cash equivalents held by the Consolidated Funds, which, although not legally restricted, is not available to fund the general liquidity needs of the Partnership.

Restricted Cash

In addition to the unrestricted cash held for potential giveback obligations discussed above, the Partnership is required to withhold a certain portion of the carried interest proceeds from one of its corporate private equity funds to provide a reserve for potential giveback obligations. In connection with this agreement, cash and cash equivalents of $13.2 million and $13.0 million is included in restricted cash at September 30, 2013 and December 31, 2012, respectively. Also included in restricted cash at September 30, 2013 and December 31, 2012 is €4.4 million ($6.0 million and $5.8 million as of September 30, 2013 and December 31, 2012, respectively) in escrow related to a tax contingency at one of the Partnership’s real estate funds (see Note 11). Restricted cash at September 30, 2013 also includes $40.5 million of cash received on behalf of a non-consolidated Carlyle fund that was remitted to the fund in October 2013. The remaining balance in restricted cash at September 30, 2013 and December 31, 2012 primarily represents cash held by the Partnership’s foreign subsidiaries due to certain government regulatory capital requirements.

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Restricted Cash and Securities of Consolidated Funds

Certain CLOs receive cash from various counterparties to satisfy collateral requirements on derivative transactions. Cash received to satisfy these collateral requirements of $13.4 million and $35.7 million is included in restricted cash and securities of Consolidated Funds at September 30, 2013 and December 31, 2012, respectively.

Certain CLOs hold U.S. Treasury notes, Obligation Assimilable du Tresor Securities (“OATS”) Strips and corporate bonds as collateral for specific classes of loans payable in the CLOs. As of September 30, 2013 and December 31, 2012, securities of $12.3 million and $0.6 million, respectively, are included in restricted cash and securities of Consolidated Funds.

Derivative Instruments

Derivative instruments are recognized at fair value in the condensed consolidated balance sheets with changes in fair value recognized in the condensed consolidated statements of operations for all derivatives not designated as hedging instruments. For all derivatives where hedge accounting is applied, effectiveness testing and other procedures to assess the ongoing validity of the hedges are performed at least quarterly. For instruments designated as cash flow hedges, the Partnership records changes in the estimated fair value of the derivative, to the extent that the hedging relationship is effective, in other comprehensive income (loss). If the hedging relationship for a derivative is determined to be ineffective, due to changes in the hedging instrument or the hedged items, the fair value of the portion of the hedging relationship determined to be ineffective will be recognized as a gain or loss in the condensed consolidated statements of operations.

Fixed Assets

Fixed assets consist of furniture, fixtures and equipment, leasehold improvements, and computer hardware and software and are stated at cost, less accumulated depreciation and amortization. Depreciation is recognized on a straight-line method over the assets’ estimated useful lives, which for leasehold improvements are the lesser of the lease terms or the life of the asset, and three to seven years for other fixed assets. Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Intangible Assets and Goodwill

The Partnership’s intangible assets consist of acquired contractual rights to earn future fee income, including management and advisory fees, customer relationships, and acquired trademarks. Finite-lived intangible assets are amortized over their estimated useful lives, which range from three to ten years, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Goodwill represents the excess of cost over the identifiable net assets of businesses acquired and is recorded in the functional currency of the acquired entity. Goodwill is recognized as an asset and is reviewed for impairment annually as of October 1st and between annual tests when events and circumstances indicate that impairment may have occurred.

Deferred Revenue

Deferred revenue represents management fees and other revenue received prior to the balance sheet date, which has not yet been earned.

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). The Partnership’s other comprehensive income is comprised of unrealized gains and losses on cash flow hedges, foreign currency translation adjustments and gains / losses on defined benefit plans sponsored by AlpInvest. The components of accumulated other comprehensive income (loss) as of September 30, 2013 and December 31, 2012 were as follows:

 

     As of  
     September 30,
2013
    December 31,
2012
 
     (Dollars in millions)  

Unrealized losses on cash flow hedge instruments

   $ (1.1   $ (0.1

Currency translation adjustments

     (8.6     (3.3

Unrecognized losses on defined benefit plans

     (1.8     (1.4
  

 

 

   

 

 

 

Total

   $ (11.5   $ (4.8
  

 

 

   

 

 

 

Foreign Currency Translation

Non-U.S. dollar denominated assets and liabilities are translated at period-end rates of exchange, and the condensed consolidated statements of operations are translated at rates of exchange in effect throughout the period. Foreign currency losses resulting from transactions outside of the functional currency of an entity of $2.1 million and $3.2 million for the three months ended September 30, 2013 and 2012, respectively, and $3.2 million and $6.7 million for the nine months ended September 30, 2013 and 2012, respectively, are included in general, administrative and other expenses in the condensed consolidated statements of operations.

Recent Accounting Pronouncement

In December 2011, the FASB amended its guidance for offsetting financial instruments. The amended guidance, included in ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” is effective for the Partnership for its interim reporting periods beginning on or after January 1, 2013. The amended guidance requires additional disclosure about netting arrangements to enable financial statement users to evaluate the effect or potential effect of such arrangements on an entity’s financial position. The Partnership adopted this guidance as of January 1, 2013 and the adoption did not have a material impact on the Partnership’s financial statements.

In June 2013, the FASB issued ASU 2013-08, “Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements.” ASU 2013-08 provides additional guidance on the characteristics necessary to qualify as an investment company. The Partnership currently consolidates entities that are investment companies and the Partnership retains the specialized accounting for those investment companies in its consolidated financial statements. The guidance in ASU 2013-08 is effective for the Partnership beginning on January 1, 2014. The Partnership does not expect the adoption of this guidance to change the status of the Partnership’s investment companies or have a material impact on the Partnership’s consolidated financial statements.

3. Acquisitions

Acquisition of Remaining 40% Equity Interest in AlpInvest

On August 1, 2013, Carlyle Holdings, a controlled subsidiary of the Partnership, acquired the remaining 40% equity interest in AlpInvest for an aggregate of 2,887,970 newly issued common units of the Partnership and approximately €4.5 million in cash (approximately $6.0 million). Of the 2,887,970 common units issued in this transaction, 914,087 common units were issued to AlpInvest sellers who are employees of the Partnership and are subject to vesting over a period up to five years (see Note 16). The remaining 1,973,883 common units issued in the transaction are not subject to any vesting conditions.

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The Partnership accounted for this transaction as an acquisition of ownership interests in a subsidiary while retaining a controlling interest in the subsidiary. Accordingly, the carrying value of the non-controlling interest was adjusted to reflect the change in the ownership interests in AlpInvest. The excess of the fair value of the consideration paid by the Partnership (excluding any elements of the transaction deemed to be compensatory) over the carrying amount of the non-controlling interest acquired was recognized directly as a reduction to partners’ capital. In connection with this transaction, the Partnership incurred approximately $1.1 million of acquisition costs, which has been included as components of the adjustment to partners’ capital. The adjustment to partners’ capital was derived as follows (Dollars in millions):

 

Acquisition-date fair value of consideration transferred:

  

The Carlyle Group L.P. common units not subject to vesting

   $ 55.3   

Cash

     6.0   
  

 

 

 
     61.3   

Carrying value of non-controlling interest acquired

     (33.1
  

 

 

 

Excess of fair value of consideration transferred over carrying value of non-controlling interests acquired

     28.2   

Acquisition costs

     1.1   
  

 

 

 

Net decrease to partners’ capital

   $ 29.3   
  

 

 

 

Historically, the carrying value of the non-controlling interests in AlpInvest was included in non-controlling interests in consolidated entities in the Partnership’s consolidated financial statements. Additionally, the Partnership recognized a dilution in partners’ capital associated with the portion of this transaction allocable to the non-controlling interests in Carlyle Holdings. The following summarizes the adjustments within partners’ capital related to the transaction (Dollars in millions):

 

     Partners’ capital     Non-controlling
interests in Carlyle
Holdings
     Non-controlling
interests in
consolidated entities
 

The Carlyle Group L.P. vested common units issued not subject to vesting

   $ 55.3      $ —         $ —     

Acquisition of non-controlling interests in AlpInvest

     (29.3     —           (33.1

Dilution associated with non-controlling interests in Carlyle Holdings

     (22.1     22.1         —     
  

 

 

   

 

 

    

 

 

 

Total increase (decrease)

   $ 3.9      $ 22.1       $ (33.1
  

 

 

   

 

 

    

 

 

 

The fair value of the common units issued as part of this acquisition was based on the closing price of the Partnership’s common units on the closing date. This fair value measurement represents a Level I measurement as defined in the accounting guidance for fair value measurement.

As a result of the Partnership’s issuance of 2,887,970 newly issued common units, the Partnership concurrently acquired 2,140,434 additional Carlyle Holdings partnership units. The Partnership will acquire the remaining 747,536 Carlyle Holdings partnership units (corresponding to certain of the 914,087 unvested common units) at such time as the underlying common units vest.

Acquisition of Vermillion

On October 1, 2012, the Partnership acquired 55% of Vermillion Asset Management, LLC and its consolidated subsidiaries, Viridian Partners, LLC, Crimson Physical Commodities Partners, LLC, Celadon Partners, LLC, and Indigo Partners, LLC, (collectively, “Vermillion”), a New York-based commodities investment manager. The purchase price consisted of $50.0 million in cash, 1,440,276 contingently issuable Carlyle Holdings partnership units, which are issuable

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

over a period of 4.25 years based on the achievement of performance-based conditions, and performance-based contingent cash payments of up to $131.3 million, which is the maximum amount of additional cash consideration that would be paid within 5.25 years of closing. The Partnership consolidated the financial position and results of operations of Vermillion effective October 1, 2012 and accounted for this transaction as a business combination. Vermillion is included in the Partnership’s Global Market Strategies business segment.

See Note 3 to the consolidated financial statements included in the Partnership’s 2012 Annual Report on Form 10-K for additional information on the Vermillion acquisition.

4. Fair Value Measurement

The fair value measurement accounting guidance establishes a hierarchal disclosure framework which ranks the observability of market price inputs used in measuring financial instruments at fair value. The observability of inputs is impacted by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices, or for which fair value can be measured from quoted prices in active markets, will generally have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value.

Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:

Level I – inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date. The type of financial instruments included in Level I include unrestricted securities, including equities and derivatives, listed in active markets. The Partnership does not adjust the quoted price for these instruments, even in situations where the Partnership holds a large position and a sale could reasonably impact the quoted price.

Level II – inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. The type of financial instruments in this category includes less liquid and restricted securities listed in active markets, securities traded in other than active markets, government and agency securities, and certain over-the-counter derivatives where the fair value is based on observable inputs. Investments in hedge funds are classified in this category when their net asset value is redeemable without significant restriction.

Level III – inputs to the valuation methodology are unobservable and significant to overall fair value measurement. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category include investments in privately-held entities, non-investment grade residual interests in securitizations, collateralized loan obligations, and certain over-the-counter derivatives where the fair value is based on unobservable inputs. Investments in fund of funds are generally included in this category.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Partnership’s assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of September 30, 2013:

 

                                                                                                       

(Dollars in millions)

   Level I      Level II      Level III      Total  

Assets

           

Investments of Consolidated Funds:

           

Equity securities

   $  602.1       $ 17.3       $ 2,576.9       $ 3,196.3   

Bonds

     —           —           1,199.5         1,199.5   

Loans

     —           —           13,775.8         13,775.8   

Partnership and LLC interests(1)

     —           —           3,710.0         3,710.0   

Hedge funds

     —           4,233.1         —           4,233.1   

Other

     —           —           3.3         3.3   
  

 

 

    

 

 

    

 

 

    

 

 

 
     602.1         4,250.4         21,265.5         26,118.0   

Trading securities

     —           —           7.1         7.1   

Restricted securities of Consolidated Funds

     3.7         —           8.6         12.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 605.8       $ 4,250.4       $ 21,281.2       $ 26,137.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Loans payable of Consolidated Funds

   $ —         $ —         $ 15,070.6       $ 15,070.6   

Loans payable of a consolidated real estate VIE

     —           —           123.8         123.8   

Interest rate swaps

     —           7.1         —           7.1   

Derivative instruments of the CLOs

     —           —           10.7         10.7   

Contingent consideration(2)

     —           56.1         171.5         227.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 63.2       $ 15,376.6       $ 15,439.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Balance represents Fund Investments that the Partnership consolidates one fiscal quarter in arrears.
(2) Related to contingent cash and equity consideration associated with the acquisitions of Claren Road, AlpInvest, ESG and Vermillion, excluding employment-based contingent consideration (see Note 9).

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Partnership’s assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of December 31, 2012:

 

(Dollars in millions)

   Level I      Level II      Level III      Total  

Assets

           

Investments of Consolidated Funds:

           

Equity securities

   $ 872.8       $ 32.0       $ 2,475.1       $ 3,379.9   

Bonds

     —           —           934.2         934.2   

Loans

     —           —           13,290.1         13,290.1   

Partnership and LLC interests(1)

     —           —           4,315.5         4,315.5   

Hedge funds

     —           2,888.7         —           2,888.7   

Other

     —           —           7.3         7.3   
  

 

 

    

 

 

    

 

 

    

 

 

 
     872.8         2,920.7         21,022.2         24,815.7   

Trading securities

     —           —           20.0         20.0   

Restricted securities of Consolidated Funds

     0.6         —           —           0.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 873.4       $ 2,920.7       $ 21,042.2       $ 24,836.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Loans payable of Consolidated Funds

   $ —         $ —         $ 13,656.7       $ 13,656.7   

Interest rate swaps

     —           10.5         —           10.5   

Derivative instruments of the CLOs

     —           —           15.8         15.8   

Contingent consideration(2)

     —           57.6         186.7         244.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 68.1       $ 13,859.2       $ 13,927.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Balance represents Fund Investments that the Partnership consolidates one fiscal quarter in arrears.
(2) Related to contingent cash and equity consideration associated with the acquisitions of Claren Road, AlpInvest, ESG and Vermillion, excluding employment-based contingent consideration (see Note 9).

Transfers from Level II to Level I during the nine months ended September 30, 2013 were due to the expiration of transferability restrictions on certain securities that were classified as Level II at December 31, 2012.

In certain cases, debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments and various relationships between investments.

In the absence of observable market prices, the Partnership values its investments using valuation methodologies applied on a consistent basis. For some investments little market activity may exist. Management’s determination of fair value is then based on the best information available in the circumstances and may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks. Investments for which market prices are not observable include private investments in the equity of operating companies, real estate properties, and certain debt positions. The valuation technique for each of these investments is described below:

Corporate Private Equity Investments – The fair values of corporate private equity investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), the discounted cash flow method, public market or private transactions, valuations for comparable companies and other measures which, in many cases, are unaudited at the time received. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (e.g., multiplying a key performance metric of the investee company such as EBITDA by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar models. Certain fund investments in the Partnership’s Global Market Strategies, Real Assets and Solutions segments are comparable to corporate private equity investments and are valued in accordance with these policies.

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Real Estate Investments – The fair values of real estate investments are determined by considering projected operating cash flows, sales of comparable assets, if any, and replacement costs, among other measures. The methods used to estimate the fair value of real estate investments include the discounted cash flow method and/or capitalization rates (“cap rates”) analysis. Valuations may be derived by reference to observable valuation measures for comparable assets (e.g., multiplying a key performance metric of the investee asset, such as net operating income, by a relevant cap rate observed in the range of comparable transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to pricing models or other similar methods.

Credit-Oriented Investments – The fair values of credit-oriented investments are generally determined on the basis of prices between market participants provided by reputable dealers or pricing services. Specifically, for investments in distressed debt and corporate loans and bonds, the fair values are generally determined by valuations of comparable investments. In some instances, the Partnership may utilize other valuation techniques, including the discounted cash flow method.

CLO Investments and CLO Loans Payable – The Partnership has elected the fair value option to measure the loans payable of the CLOs at fair value, as the Partnership has determined that measurement of the loans payable and preferred shares issued by the CLOs at fair value better correlates with the value of the assets held by the CLOs, which are held to provide the cash flows for the note obligations. The investments of the CLOs are also carried at fair value.

The fair values of the CLO loan and bond assets are primarily based on quotations from reputable dealers or relevant pricing services. In situations where valuation quotations are unavailable, the assets are valued based on similar securities, market index changes, and other factors. The Partnership corroborates quotations from pricing services either with other available pricing data or with its own models. Generally, the bonds and loans in the CLOs are not actively traded and are classified as Level III.

The fair values of the CLO loans payable and the CLO structured asset positions are determined based on both discounted cash flow analyses and third-party quotes. Those analyses consider the position size, liquidity, current financial condition of the CLOs, the third-party financing environment, reinvestment rates, recovery lags, discount rates and default forecasts and are compared to broker quotations from market makers and third party dealers.

Fund Investments – The Partnership’s investments in funds are valued based on its proportionate share of the net assets provided by the third party general partners of the underlying fund partnerships based on the most recent available information which is typically a lag of up to 90 days. The terms of the investments generally preclude the ability to redeem the investment. Distributions from these investments will be received as the underlying assets in the funds are liquidated, the timing of which cannot be readily determined.

 

24


Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The changes in financial instruments measured at fair value for which the Partnership has used Level III inputs to determine fair value are as follows (Dollars in millions):

 

     Financial Assets
Three Months Ended September 30, 2013
 
     Investments of Consolidated Funds           Restricted         
     Equity
securities
    Bonds     Loans     Partnership and
LLC interests
    Other     Trading
securities  and
other
    securities of
Consolidated
Funds
     Total  

Balance, beginning of period

   $ 2,617.6      $ 1,058.9      $ 13,771.2      $ 3,840.6      $ 11.5      $ 10.0      $ —         $ 21,309.8   

Transfers in (1)

     2.9        —          —          —          —          —          8.5         11.4   

Transfers out (1)

     (7.7     —          —          —          —          —          —           (7.7

Purchases

     37.0        262.7        1,779.4        31.6        21.6        —          —           2,132.3   

Sales

     (98.7     (145.2     (549.2     (304.5     (0.6     (0.8     —           (1,099.0

Settlements

     —          —          (1,338.0     —          —          —          —           (1,338.0

Realized and unrealized gains (losses), net

     25.8        23.1        112.4        142.3        (29.2     (2.1     0.1         272.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 2,576.9      $ 1,199.5      $ 13,775.8      $ 3,710.0      $ 3.3      $ 7.1      $ 8.6       $ 21,281.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date

   $ 48.4      $ (12.5   $ (69.0   $ (79.8   $ (29.8   $ (2.0   $ 0.1       $ (144.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Financial Assets
Nine Months Ended September 30, 2013
 
     Investments of Consolidated Funds           Restricted         
     Equity
securities
    Bonds     Loans     Partnership and
LLC interests
    Other     Trading
securities  and
other
    securities of
Consolidated
Funds
     Total  

Balance, beginning of period

   $ 2,475.1      $ 934.2      $ 13,290.1      $ 4,315.5      $ 7.3      $ 20.0      $ —         $ 21,042.2   

Initial consolidation of funds

     —          —          —          —          10.4        —          —           10.4   

Transfers in (1)

     2.9        —          —          —          —          —          8.5         11.4   

Transfers out (1)

     (12.0     —          —          —          —          —          —           (12.0

Purchases

     144.3        677.8        6,449.5        164.7        21.6        —          —           7,457.9   

Sales

     (227.4     (471.7     (1,909.8     (1,143.1     (9.6     (14.4     —           (3,776.0

Settlements

     —          —          (4,315.8     —          —          —          —           (4,315.8

Realized and unrealized gains (losses), net

     194.0        59.2        261.8        372.9        (26.4     1.5        0.1         863.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 2,576.9      $ 1,199.5      $ 13,775.8      $ 3,710.0      $ 3.3      $ 7.1      $ 8.6       $ 21,281.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date

   $ 214.1      $ 23.6      $ 82.6      $ (305.3   $ (34.7   $ (0.9   $ 0.1       $ (20.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Financial Assets
Three Months Ended September 30, 2012
 
     Investments of Consolidated Funds              
     Equity
securities
    Bonds     Loans     Partnership and
LLC interests
    Other     Trading
securities and
other
    Total  

Balance, beginning of period

   $ 2,140.0      $ 891.0      $ 12,643.1      $ 4,467.1      $ 11.4      $ 35.5      $ 20,188.1   

Initial consolidation of funds

     51.7        —          —          —          —          —          51.7   

Purchases

     7.5        49.4        1,393.8        43.1        —          —          1,493.8   

Sales

     (1.7     (170.3     (689.7     (282.8     (0.1     (15.7     (1,160.3

Settlements

     —          —          (721.5     —          —          —          (721.5

Realized and unrealized gains (losses), net

     375.1        40.1        210.3        (23.5     (0.9     1.3        602.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 2,572.6      $ 810.2      $ 12,836.0      $ 4,203.9      $ 10.4      $ 21.1      $ 20,454.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains (losses) included in earnings related to financial assets still held at the reporting date

   $ 432.4      $ 26.4      $ 140.4      $ 45.5      $ (1.2   $ (1.5   $ 642.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

     Financial Assets
Nine Months Ended September 30, 2012
 
     Investments of Consolidated Funds              
     Equity
securities
    Bonds     Loans     Partnership and
LLC interests
    Other     Trading
securities and
other
    Total  

Balance, beginning of period

   $ 1,868.9      $ 557.0      $ 10,152.6      $ 4,198.6      $ 20.8      $ 30.6      $ 16,828.5   

Initial consolidation of funds

     76.9        262.6        2,256.4        —          —          —          2,595.9   

Transfers out (1)

     (145.6     —          —          —          —          —          (145.6

Purchases

     48.5        248.9        4,704.6        352.9        —          —          5,354.9   

Sales

     (317.7     (311.0     (1,974.0     (700.9     (2.1     (15.7     (3,321.4

Settlements

     —          —          (2,584.3     —          —          —          (2,584.3

Realized and unrealized gains (losses), net

     1,041.6        52.7        280.7        353.3        (8.3     6.2        1,726.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 2,572.6      $ 810.2      $ 12,836.0      $ 4,203.9      $ 10.4      $ 21.1      $ 20,454.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains included in earnings related to financial assets still held at the reporting date

   $ 955.7      $ 22.7      $ 175.4      $ 252.8      $ 0.4      $ 3.4      $ 1,410.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Transfers into and out of Level III financial assets were due to changes in the observability of market inputs used in the valuation of such assets. Transfers are measured as of the beginning of the quarter in which the transfer occurs.

 

     Financial Liabilities
Three Months Ended September 30, 2013
 
     Loans Payable
of Consolidated
Funds
    Derivative
Instruments of
Consolidated
Funds
    Contingent
Consideration
    Loans Payable of
a consolidated
real estate VIE
     Total  

Balance, beginning of period

   $ 15,019.8      $ 8.9      $ 172.2      $ —         $ 15,200.9   

Initial consolidation of a real estate VIE

     —          —          —          123.8         123.8   

Borrowings

     514.2        —          —          —           514.2   

Paydowns

     (634.2     —          (10.4     —           (644.6

Sales

     —          (5.0     —          —           (5.0

Realized and unrealized losses, net

     170.8        6.8        9.7        —           187.3   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 15,070.6      $ 10.7      $ 171.5      $ 123.8       $ 15,376.6   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date

   $ (61.8   $ 1.9      $ 9.7      $ —         $ (50.2
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Financial Liabilities
Nine Months Ended September 30, 2013
 
     Loans Payable
of Consolidated
Funds
    Derivative
Instruments of
Consolidated
Funds
    Contingent
Consideration
    Loans Payable of
a consolidated
real estate VIE
     Total  

Balance, beginning of period

   $ 13,656.7      $ 15.8      $ 186.7      $ —         $ 13,859.2   

Initial consolidation of a real estate VIE

     —          —          —          123.8         123.8   

Borrowings

     2,716.7        —          —          —           2,716.7   

Paydowns

     (2,042.9     —          (21.3     —           (2,064.2

Sales

     —          (5.8     —          —           (5.8

Realized and unrealized losses, net

     740.1        0.7        6.1        —           746.9   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 15,070.6      $ 10.7      $ 171.5      $ 123.8       $ 15,376.6   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in unrealized losses included in earnings related to financial liabilities still held at the reporting date

   $ 556.4      $ 1.7      $ 6.1      $ —         $ 564.2   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

26


Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

     Financial Liabilities
Three Months Ended September 30, 2012
 
     Loans Payable
of Consolidated
Funds
    Derivative
Instruments of
Consolidated
Funds
    Contingent
Consideration
    Total  

Balance, beginning of period

   $ 12,565.0      $ 16.7      $ 170.6      $ 12,752.3   

Borrowings

     603.8        —          —          603.8   

Paydowns

     (565.0     —          (10.2     (575.2

Sales

     —          (0.7     —          (0.7

Realized and unrealized losses, net

     440.5        2.1        10.5        453.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 13,044.3      $ 18.1      $ 170.9      $ 13,233.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized losses included in earnings related to financial liabilities still held at the reporting date

   $ 323.1      $ 0.1      $ 10.5      $ 333.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Financial Liabilities
Nine Months Ended September 30, 2012
 
     Loans Payable
of Consolidated
Funds
    Derivative
Instruments of
Consolidated
Funds
    Subordinated
Loan
Payable to
Affiliate
    Contingent
Consideration
    Total  

Balance, beginning of period

   $ 9,689.9      $ —        $ 262.5      $ 169.2      $ 10,121.6   

Initial consolidation of funds

     2,819.1        4.6        —          —          2,823.7   

Borrowings

     989.5        —          —          —          989.5   

Paydowns

     (1,072.3     —          (260.0     (11.4     (1,343.7

Sales

     —          (1.0     —          —          (1.0

Realized and unrealized (gains) losses, net

     618.1        14.5        (2.5     13.1        643.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 13,044.3      $ 18.1      $ —        $ 170.9      $ 13,233.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized (gains) losses included in earnings related to financial liabilities still held at the reporting date

   $ 630.4      $ (24.8   $ —        $ 10.3      $ 615.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total realized and unrealized gains and losses included in earnings for Level III investments for trading securities are included in investment income (loss), and such gains and losses for investments of Consolidated Funds and loans payable and derivative instruments of the CLOs are included in net investment gains (losses) of Consolidated Funds in the condensed consolidated statements of operations.

 

27


Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The following table summarizes quantitative information about the Partnership’s Level III inputs as of September 30, 2013:

 

(Dollars in millions)

   Fair Value at
September 30,
2013
    

Valuation Technique(s)

  

Unobservable Input(s)

   Range
(Weighted Average)

Assets

           

Investments of Consolidated Funds:

           

Equity securities

   $ 2,415.4      

Comparable Multiple

  

LTM EBITDA Multiple

   5.6x - 14.6x (10.7x)
     92.8      

Comparable Multiple

  

Price Earnings Multiple

   (16.0x)
     12.3      

Comparable Multiple

  

Book Value Multiple

   (1.0x)
     23.2      

Consensus Pricing

  

Indicative Quotes (% of Par)

   (1)
     33.2      

Discounted Cash Flow

  

Discount Rate

   5% - 11% (10%)
        

Exit Cap Rate

   (9%)

Bonds

     1,199.5      

Consensus Pricing

  

Indicative Quotes (% of Par)

   (98)

Loans

     13,563.3      

Consensus Pricing

  

Indicative Quotes (% of Par)

   (96)
     212.5      

Market Yield Analysis

  

Market Yield

   5% - 17% (9%)

Partnership and LLC interests

     3,710.0      

NAV of Underlying Fund(1)

  

N/A

   N/A

Other

     3.3      

Various

  

N/A

   N/A
  

 

 

          
     21,265.5            

Trading securities and other

     5.1      

Comparable Multiple

  

LTM EBITDA Multiple

   (5.8x)
     2.0      

Discounted Cash Flow

  

Discount Rate

   (7%)

Restricted securities of Consolidated Funds

     8.6      

Consensus Pricing

  

Indicative Quotes (% of Par)

   (86)
  

 

 

          

Total

   $ 21,281.2            
  

 

 

          

Liabilities

           

Loans payable of Consolidated Funds:

           

Senior secured notes

   $ 13,800.0      

Discounted Cash Flow with Consensus Pricing

  

Discount Rates

   (3%)
        

Default Rates

   (3%)
        

Recovery Rates

   (62%)
        

Indicative Quotes (% of Par)

   (96)

Subordinated notes and preferred shares

     1,254.4      

Discounted Cash Flow with Consensus Pricing

  

Discount Rates

   (16%)
        

Default Rates

   (3%)
        

Recovery Rates

   (62%)
        

Indicative Quotes (% of Par)

   (65)

Combination notes

     16.2      

Consensus Pricing

  

Indicative Quotes (% of Par)

   (97)

Loans payable of a consolidated real estate VIE

     123.8      

Discounted Cash Flow

  

Discount to Expected Payment

   41%
        

Discount Rate

   20% - 30% (23%)

Derivative instruments of Consolidated Funds

     10.7      

Counterparty Pricing

  

Indicative Quotes (% of Notional Amount)

   (5)

Contingent cash consideration(2)

     171.5      

Discounted Cash Flow

  

Assumed % of Total Potential Contingent Payments

   0% - 100% (84%)
        

Discount Rate

   2% - 32% (15%)
  

 

 

          

Total

   $ 15,376.6            
  

 

 

          

 

(1) Represents the Partnership’s investments in funds that are valued using the NAV of the underlying fund.
(2) Related to contingent cash consideration associated with the acquisitions of Claren Road, AlpInvest, ESG and Vermillion (see Note 9).

 

28


Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The following table summarizes quantitative information about the Partnership’s Level III inputs as of December 31, 2012:

 

(Dollars in millions)

   Fair Value at
December 31,
2012
    

Valuation Technique(s)

  

Unobservable Input(s)

   Range
(Weighted Average)

Assets

           

Investments of Consolidated Funds:

           

Equity securities

   $ 2,311.5      

Comparable Multiple

  

LTM EBITDA Multiple

   5.6x - 13.5x (9.7x)
     69.4      

Comparable Multiple

  

Price Earnings Multiple

   (13.5x)
     15.4      

Comparable Multiple

  

Book Value Multiple

   (1.0x)
     33.8      

Consensus Pricing

  

Indicative Quotes (% of Par)

   (10)
     45.0      

Discounted Cash Flow

  

Discount Rate

   9% - 15% (11%)
        

Exit Cap Rate

   6% - 8% (7%)

Bonds

     934.2      

Consensus Pricing

  

Indicative Quotes (% of Par)

   (94)

Loans

     12,952.9      

Consensus Pricing

  

Indicative Quotes (% of Par)

   (94)
     337.2      

Market Yield Analysis

  

Market Yield

   7% - 18% (10%)

Partnership and LLC interests

     4,315.5      

NAV of Underlying Fund(1)

  

N/A

   N/A

Other

     7.3      

Counterparty Pricing

  

Indicative Quotes (% of Notional Amount)

   (3)
  

 

 

          
     21,022.2            

Trading securities and other

     11.2      

Dealer Pricing

  

Indicative Quotes (% of Par)

   (83)
     6.2      

Comparable Multiple

  

LTM EBITDA Multiple

   (5.6x)
     2.6      

Discounted Cash Flow

  

Discount Rate

   (7%)
  

 

 

          

Total

   $ 21,042.2            
  

 

 

          

Liabilities

           

Loans payable of Consolidated Funds:

           

Senior secured notes

   $ 12,658.4      

Discounted Cash Flow with Consensus Pricing

  

Discount Rates

   (4%)
        

Default Rates

   (3%)
        

Recovery Rates

   (58%)
        

Indicative Quotes (% of Par)

   (93)

Subordinated notes and preferred shares

     996.9      

Discounted Cash Flow with Consensus Pricing

  

Discount Rates

   (29%)
        

Default Rates

   (3%)
        

Recovery Rates

   (53%)
        

Indicative Quotes (% of Par)

   (42)

Combination notes

     1.4      

Consensus Pricing

  

Indicative Quotes (% of Par)

   (96)

Derivative instruments of Consolidated Funds

     15.8      

Counterparty Pricing

  

Indicative Quotes (% of Notional Amount)

   (6)

Contingent cash consideration(2)

     186.7      

Discounted Cash Flow

  

Assumed % of Total Potential Contingent Payments

   32% - 100% (79%)
        

Discount Rate

   2% - 35% (17%)
  

 

 

          

Total

   $ 13,859.2            
  

 

 

          

 

(1) Represents the Partnership’s investments in funds that are valued using the NAV of the underlying fund.
(2) Related to contingent cash consideration associated with the acquisitions of Claren Road, AlpInvest, ESG and Vermillion (see Note 9).

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The significant unobservable inputs used in the fair value measurement of the Partnership’s investments in equity securities include EBITDA, price-earnings and book value multiples, indicative quotes, discount rates and exit cap rates. Significant decreases in EBITDA multiples, price-earnings multiples, book value multiples or indicative quotes in isolation would result in a significantly lower fair value measurement. Significant increases in discount rates or exit cap rates in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s investments in bonds and loans are market yields and indicative quotes. Significant increases in market yields would result in a significantly lower fair value measurement. Significant decreases in indicative quotes in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s other investments of Consolidated Funds and derivative instruments of Consolidated Funds include indicative quotes and discount rate. Significant decreases in indicative quotes in isolation would result in a significantly lower fair value measurement, while a significant increase in discount rate in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s trading securities and other investments include EBITDA multiples and discount rates. Significant decreases in EBITDA multiples or indicative quotes in isolation would result in a significantly lower fair value measurement. Significant increases in discount rates in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s loans payable of Consolidated Funds are discount rates, default rates and recovery rates. Significant increases in discount rates or default rates in isolation would result in a significantly lower fair value measurement, while a significant increase in recovery rates in isolation would result in a significantly higher fair value.

The significant unobservable inputs used in the fair value measurement of the Partnership’s loans payable of a consolidated real estate VIE are discount to expected payment and discount rate. A significant increase in either of these inputs in isolation would result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Partnership’s contingent consideration are assumed percentage of total potential contingent payments and discount rates. A significant decrease in the assumed percentage of total potential contingent payments or increase in discount rates in isolation would result in a significantly lower fair value measurement.

5. Accrued Performance Fees

The components of accrued performance fees are as follows:

 

     As of  
     September 30,
2013
     December 31,
2012
 
     (Dollars in millions)  

Corporate Private Equity

   $ 2,172.5       $ 1,667.3   

Global Market Strategies

     113.7         69.5   

Real Assets

     271.9         250.1   

Solutions

     319.6         205.6   
  

 

 

    

 

 

 

Total

   $ 2,877.7       $ 2,192.5   
  

 

 

    

 

 

 

Approximately 63% and 61% of accrued performance fees at September 30, 2013 and December 31, 2012, respectively, are related to Carlyle Partners IV, L.P. and Carlyle Partners V, L.P., two of the Partnership’s Corporate Private Equity funds.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Accrued performance fees are shown gross of the Partnership’s accrued giveback obligations, which are separately presented in the condensed consolidated balance sheets. The components of the accrued giveback obligations are as follows:

 

     As of  
     September 30,
2013
    December 31,
2012
 
     (Dollars in millions)  

Corporate Private Equity

   $ (11.7   $ (18.9

Global Market Strategies

     (1.4     (2.1

Real Assets

     (35.6     (48.2
  

 

 

   

 

 

 

Total

   $ (48.7   $ (69.2
  

 

 

   

 

 

 

Performance Fees

The performance fees included in revenues are derived from the following segments:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013      2012  
     (Dollars in millions)  

Corporate Private Equity

   $ 265.6      $ 350.8      $ 886.5       $ 597.7   

Global Market Strategies

     (14.8     3.9        142.4         56.3   

Real Assets

     24.6        3.2        73.7         78.3   

Solutions

     45.1        (1.6     119.4         44.4   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 320.5      $ 356.3      $ 1,222.0       $ 776.7   
  

 

 

   

 

 

   

 

 

    

 

 

 

Approximately 79% and 67% ($252.3 million and $814.3 million, respectively) of performance fees for the three and nine months ended September 30, 2013, respectively, were related to Carlyle Partners IV, L.P., Carlyle Partners V, L.P., and Carlyle Global Financial Services Partners, L.P., three of the Partnership’s Corporate Private Equity funds. Total revenues recognized from Carlyle Partners IV, L.P., Carlyle Partners V, L.P. and Carlyle Global Financial Services Partners, L.P., were $104.4 million, $143.1 million and $37.0 million, respectively, for the three months ended September 30, 2013, and were $327.4 million, $578.5 million and $55.9 million, respectively, for the nine months ended September 30, 2013.

Approximately 87% and 64% ($311.5 million and $500.5 million, respectively) of performance fees for the three and nine months ended September 30, 2012, respectively, were related to Carlyle Asia Partners II, L.P., Carlyle Partners IV, L.P. and Carlyle Partners V, L.P., three of the Partnership’s Corporate Private Equity funds. Total revenues recognized from Carlyle Asia Partners II, L.P., Carlyle Partners IV, L.P. and Carlyle Partners V, L.P. were $119.5 million, $92.5 million and $161.8 million, respectively, for the three months ended September 30, 2012, and were $131.4 million, $230.1 million and $321.2 million, respectively, for the nine months ended September 30, 2012.

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

6. Investments

Investments consist of the following:

 

     As of  
     September 30,
2013
     December 31,
2012
 
     (Dollars in millions)  

Equity method investments, excluding accrued performance fees

   $ 778.8       $ 855.1   

Trading securities and other investments

     15.2         26.1   
  

 

 

    

 

 

 

Total investments

   $ 794.0       $ 881.2   
  

 

 

    

 

 

 

Strategic Investment in NGP

On December 20, 2012, the Partnership entered into separate purchase agreements with ECM Capital, L.P. and Barclays Natural Resource Investments, a division of Barclays Bank PLC (“BNRI”), pursuant to which the Partnership agreed to invest in NGP Management Company, L.L.C. (“NGP Management” and, together with its affiliates, “NGP”). NGP is an Irving, Texas-based energy investor.

The Partnership’s equity interests in NGP Management entitle the Partnership to an allocation of income equal to 47.5% of the management fee-related revenues of the NGP entities that serve as the advisors to certain private equity funds, and future interests in the general partners of certain future carry funds advised by NGP that entitle the Partnership to an allocation of income equal to 7.5% of the carried interest received by such fund general partners. In addition, following the termination of the investment period of the NGP Natural Resources X, L.P. fund (“NGP X”), the Partnership will pay $7.5 million to acquire an additional 7.5% equity interest in NGP Management that, together with the initial interests described above, will entitle the Partnership to an allocation of income equal to 55% of the management fee-related revenues of the NGP entities that serve as the advisors to certain private equity funds.

The sellers also granted the Partnership options to purchase additional interests in NGP. Specifically, the Partnership acquired (1) an option, exercisable by the Partnership between July 1, 2014 and July 1, 2015, to purchase from BNRI, for a purchase price in cash that is estimated to be between $65.0 million to $74.0 million plus the net capital amount that has been contributed by BNRI, interests in the general partner of NGP X entitling the Partnership to an allocation of income equal to 40% of the carried interest received by such fund general partner; (2) an option, exercisable by the Partnership from December 20, 2012 until January 1, 2015, to purchase from BNRI, for a purchase price in cash that is estimated to be between $34.0 million to $38.0 million, additional interests in the general partners of all future carry funds advised by NGP entitling the Partnership to an additional equity allocation equal to 40% of the carried interest received by such fund general partners; and (3) an option, exercisable by the Partnership in approximately 13 years, to purchase from ECM Capital, L.P. and its affiliates, for a formulaic purchase price in cash based upon a measure of the earnings of NGP, the remaining equity interests in NGP Management.

In consideration for these interests and options, the Partnership paid an aggregate of $384.0 million in cash to ECM Capital, L.P. and BNRI, and issued 996,572 Carlyle Holdings partnership units to ECM Capital, L.P. that vest ratably over a period of five years. The Partnership will also pay consideration of $7.5 million upon the termination of the investment period of the NGP X fund. The transaction also includes contingent consideration payable to ECM Capital, L.P. of up to $45.0 million in cash, 597,944 Carlyle Holdings partnership units that were issued at closing but vest upon the achievement of performance conditions, and contingently issuable Carlyle Holdings partnership units up to $15.0 million that will be issued if the performance conditions are met. Additionally, the transaction includes contingent consideration payable to BNRI of up to $183.0 million, which will be payable partly in cash and partly by a promissory note issued by the Partnership, if the performance conditions are met. The contingent consideration is payable from 2015 through 2018, depending on NGP’s achievement of certain business performance goals.

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The Partnership also entered into a senior advisor consulting agreement with the chief executive officer of NGP and granted deferred restricted common units to a group of NGP personnel who are providing the Partnership with consulting services.

The Partnership accounts for its investment in NGP Management under the equity method of accounting. The Partnership recorded its investment in NGP Management initially at cost, excluding any elements in the transaction that were deemed to be compensatory arrangements to NGP personnel. The Carlyle Holdings partnership units issued in the transaction, the contingently issuable Carlyle Holdings partnership units, and the deferred restricted common units were deemed to be compensatory arrangements; these elements are recognized as an expense under applicable U.S. GAAP.

The Partnership records realized investment income for its equity income allocation from NGP, and also records, as a reduction of realized investment income, its share of any allocated expenses from NGP Management, expenses associated with the compensatory elements of the transaction, and the amortization of the basis differences related to the definitive-lived identifiable intangible assets of NGP Management. For the three months ended September 30, 2013, the Partnership recognized $3.8 million of realized net investment loss from the investment in NGP Management, comprised of investment earnings of $15.8 million less $19.6 million of expenses associated with the compensatory elements of the transaction and amortization of basis differences. For the nine months ended September 30, 2013, the Partnership recognized $8.5 million of realized net investment loss from the investment in NGP Management, comprised of investment earnings of $47.6 million less $56.1 million of expenses associated with the compensatory elements of the transaction and amortization of basis differences.

The Partnership’s basis differences based on the underlying net assets of the entity were $214.4 million and $259.8 million as of September 30, 2013 and December 31, 2012, respectively; these differences are amortized over a period of ten years.

Equity-Method Investments

The Partnership’s equity method investments include its fund investments in Corporate Private Equity, Global Market Strategies and Real Assets, typically as general partner interests, and its investment in NGP Management (included within Real Assets), which are not consolidated but in which the Partnership exerts significant influence. Investments are related to the following segments:

 

     As of  
     September 30,
2013
     December 31,
2012
 
     (Dollars in millions)  

Corporate Private Equity

   $ 209.0       $ 251.6   

Global Market Strategies

     23.8         18.0   

Real Assets

     546.0         585.5   
  

 

 

    

 

 

 

Total

   $ 778.8       $ 855.1   
  

 

 

    

 

 

 

The Partnership evaluates each of its equity method investments to determine if disclosure of summarized income statement information is required under Article 10 of Regulation S-X. As of September 30, 2013 and for the nine months then ended, no individual equity method investment held by the Partnership was significant based on the disclosure criteria.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Investment Income (Loss)

The components of investment income (loss) are as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013     2012      2013      2012  
     (Dollars in millions)  

Income from equity investments

   $ 6.7      $ 9.6       $ 11.6       $ 35.6   

Income (loss) from trading securities

     (1.7     0.5         4.8         5.1   

Other investment income (loss)

     —          0.1         —           (2.0
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 5.0      $ 10.2       $ 16.4       $ 38.7   
  

 

 

   

 

 

    

 

 

    

 

 

 

Carlyle’s income (loss) from its equity-method investments is included in investment income (loss) in the condensed consolidated statements of operations and consists of:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2013     2012      2013     2012  
     (Dollars in millions)  

Corporate Private Equity

   $ 12.9      $ 5.7       $ 36.1      $ 27.8   

Global Market Strategies

     0.9        —           2.7        1.0   

Real Assets

     (7.1     3.9         (27.2     6.8   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 6.7      $ 9.6       $ 11.6      $ 35.6   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities and Other Investments

Trading securities and other investments as of September 30, 2013 and December 31, 2012 primarily consisted of $15.2 million and $26.1 million, respectively, of investments in corporate mezzanine securities and bonds, as well as other cost method investments.

Investments of Consolidated Funds

During the nine months ended September 30, 2013, the Partnership formed five new CLOs. The Partnership has concluded that these CLOs are VIEs and the Partnership is the primary beneficiary. As a result, the Partnership consolidated the financial positions and results of operations of the CLOs into its condensed consolidated financial statements beginning on their respective closing dates. As of September 30, 2013, the total assets of these CLOs included in the Partnership’s condensed consolidated financial statements were approximately $3.1 billion.

There were no individual investments with a fair value greater than five percent of the Partnership’s total assets for any period presented.

 

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The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Interest and Other Income of Consolidated Funds

The components of interest and other income of Consolidated Funds are as follows:

 

                                                                       
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  
     (Dollars in millions)  

Interest income from investments

   $ 225.4       $ 208.4       $ 677.7       $ 578.3   

Other income

     76.6         39.3         145.6         100.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 302.0       $ 247.7       $ 823.3       $ 678.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Investment Gains (Losses) of Consolidated Funds

Net investment gains (losses) of Consolidated Funds include net realized gains (losses) from sales of investments and unrealized gains (losses) resulting from changes in fair value of the Consolidated Funds’ investments. The components of net investment gains (losses) of Consolidated Funds are as follows:

 

                                                                       
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (Dollars in millions)  

Gains (losses) from investments of Consolidated Funds

   $ (142.7   $ 802.2      $ 1,000.0      $ 2,410.9   

Gains (losses) from liabilities of CLOs

     60.8        (354.0     (579.6     (706.5

Gains (losses) on other assets of CLOs

     (0.1     0.7        (0.3     3.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (82.0   $ 448.9      $ 420.1      $ 1,707.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents realized and unrealized gains (losses) earned from investments of the Consolidated Funds:

 

                                                                       
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013     2012      2013      2012  
     (Dollars in millions)  

Realized gains (losses)

   $ (138.2   $ 96.4       $ 556.3       $ 557.7   

Net change in unrealized gains (losses)

     (4.5     705.8         443.7         1,853.2   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ (142.7   $ 802.2       $ 1,000.0       $ 2,410.9   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

35


Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

7. Intangible Assets and Goodwill

The following table summarizes the carrying amount of intangible assets as of September 30, 2013 and December 31, 2012:

 

     As of  
     September 30,
2013
    December 31,
2012
 
     (Dollars in millions)  

Acquired contractual rights

   $ 799.2      $ 797.7   

Acquired trademarks

     6.9        6.8   

Accumulated amortization

     (263.0     (150.4
  

 

 

   

 

 

 

Finite-lived intangible assets, net

     543.1        654.1   

Goodwill

     37.2        37.0   
  

 

 

   

 

 

 

Intangible assets, net

   $ 580.3      $ 691.1   
  

 

 

   

 

 

 

The following table summarizes the changes in the carrying amount of goodwill by segment as of September 30, 2013. There was no goodwill associated with the Partnership’s Corporate Private Equity and Real Assets segments.

 

                                         
     Global
Market
Strategies
     Solutions      Total  
     (Dollars in millions)  

Balance as of December 31, 2012

   $ 28.0       $ 9.0       $ 37.0   

Foreign currency translation

     —           0.2         0.2   
  

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2013

   $ 28.0       $ 9.2       $ 37.2   
  

 

 

    

 

 

    

 

 

 

During the three months ended September 30, 2013, the Partnership evaluated for impairment certain intangible assets associated with acquired contractual rights for fee income based on revisions to the related expected future cash flow. The intangible assets are included in the Global Market Strategies segment. The Partnership recorded an impairment loss of $20.8 million to reduce the carrying value of the intangible assets to their estimated fair value. Fair value was based on a probability-weighted discounted cash flow model. This fair value measurement was based on significant inputs not observable in the market and thus represented a Level III measurement as defined in the accounting guidance for fair value measurements. The impairment loss was included in general, administrative and other expenses in the accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2013.

Intangible asset amortization expense, excluding impairment losses, was $27.7 million and $19.9 million for the three months ended September 30, 2013 and 2012, respectively, and $91.1 million and $58.3 million for the nine months ended September 30, 2013 and 2012, respectively, and is included in general, administrative, and other expenses in the condensed consolidated statements of operations.

 

36


Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the estimated amortization expense, excluding impairment losses, for 2013 through 2017 and thereafter (Dollars in millions):

 

                 

2013

   $ 115.0   

2014

     90.7   

2015

     87.3   

2016

     83.8   

2017

     79.4   

Thereafter

     177.1   
  

 

 

 
   $ 633.3   
  

 

 

 

8. Borrowings

The Partnership borrows and enters into credit agreements for its general operating and investment purposes. The Partnership’s borrowings consist of the following:

 

     As of September 30, 2013      As of December 31, 2012  
     Borrowing
Outstanding
     Carrying
Value
     Borrowing
Outstanding
     Carrying
Value
 

Revolving Credit Facility

   $ —         $ —         $ 386.3       $ 386.3   

Term Loan Due 8/09/2018

     25.0         25.0         500.0         500.0   

3.875% Senior Notes Due 2/01/2023

     500.0         499.8         —           —     

5.625% Senior Notes Due 3/30/2043

     400.0         398.4         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 925.0       $ 923.2       $ 886.3       $ 886.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Senior Credit Facility

The senior credit facility includes $500.0 million in a term loan and $750.0 million in a revolving credit facility. The term loan and revolving credit facility mature on August 9, 2018. Principal amounts outstanding under the term loan and revolving credit facility accrue interest, at the option of the borrowers, either (a) at an alternate base rate plus an applicable margin not to exceed 0.75%, or (b) at LIBOR plus an applicable margin not to exceed 1.75% (1.25% at September 30, 2013). During the first quarter of 2013, the Partnership prepaid $475.0 million of term loan principal that would have been due beginning in September 2014 and expensed $1.9 million of deferred financing costs in interest expense. The remaining outstanding principal amount under the term loan is payable on August 9, 2018. Total interest expense under the senior credit facility was $1.1 million and $4.0 million for the three months ended September 30, 2013 and 2012, respectively, and $6.3 million and $16.4 million for the nine months ended September 30, 2013 and 2012, respectively. The fair value of the outstanding balances of the term loan and revolving credit facility at September 30, 2013 and December 31, 2012 approximated par value based on current market rates for similar debt instruments and are classified as Level III within the fair value hierarchy.

3.875% Senior Notes

In January 2013, an indirect finance subsidiary of the Partnership issued $500.0 million in aggregate principal amount of 3.875% senior notes due February 1, 2023 at 99.966% of par. Interest is payable semi-annually on February 1 and August 1, beginning August 1, 2013. This subsidiary may redeem the senior notes in whole at any time or in part from time to time at a price equal to the greater of 100% of the principal amount of the notes being redeemed and the sum of the present values of the remaining scheduled payments of principal and interest on any notes being redeemed discounted to the redemption date on a semi-annual basis at the Treasury rate plus 30 basis points plus accrued and unpaid interest on the principal amounts being redeemed to the redemption date. Interest expense on the notes was $4.9 million and $13.9 million for the three and nine months ended September 30, 2013, respectively. At September 30, 2013, the fair value of the notes was approximately $490.3 million based on indicative quotes and is classified as Level II within the fair value hierarchy.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

5.625% Senior Notes

In March 2013, an indirect finance subsidiary of the Partnership issued $400.0 million in aggregate principal amount of 5.625% senior notes due March 30, 2043 at 99.583% of par. Interest is payable semi-annually on March 30 and September 30, beginning September 30, 2013. This subsidiary may redeem the senior notes in whole at any time or in part from time to time at a price equal to the greater of 100% of the principal amount of the notes being redeemed and the sum of the present values of the remaining scheduled payments of principal and interest on any notes being redeemed discounted to the redemption date on a semi-annual basis at the Treasury rate plus 40 basis points plus accrued and unpaid interest on the principal amounts being redeemed to the redemption date. Interest expense on the notes was $5.6 million and $11.5 million for the three and nine months ended September 30, 2013. At September 30, 2013, the fair value of the notes was approximately $373.3 million based on indicative quotes and is classified as Level II within the fair value hierarchy.

The Partnership is subject to interest rate risk associated with its variable rate debt financing. To manage this risk, the Partnership has an outstanding interest rate swap to fix the base LIBOR interest rate on its term loan borrowings with a notional amount of $500.0 million at September 30, 2013 that amortizes through September 30, 2016.

In the first quarter of 2013, $475.0 million of term loan principal was prepaid. As a result of these term loan prepayments, the two interest rate swaps are no longer accounted for as cash flow hedges due to ineffectiveness; the interest rate swaps are accounted for as freestanding derivative instruments recorded at fair value each period with changes in fair value recorded through earnings. The pre-existing hedge losses included in accumulated other comprehensive loss for these interest rate swaps of $8.8 million is being reclassified into earnings as the original forecasted transactions affect earnings.

In March 2013, the Partnership entered into a third interest rate swap with an initial notional amount of $427.2 million that amortizes through September 30, 2016. This interest rate swap is accounted for as a freestanding derivative instrument recorded at fair value each period with changes in fair value recorded through earnings.

Debt Covenants

The Partnership is subject to various financial covenants under its loan agreements including, among other items, maintenance of a minimum amount of management fee-earning assets. The Partnership is also subject to various non-financial covenants under its loan agreements. The Partnership was in compliance with all financial and non-financial covenants under its various loan agreements as of September 30, 2013. The consolidated real estate VIE was not in compliance with the debt covenants related to substantially all of its loans payable as of September 30, 2013 (see Note 17); such violations do not cause a default or event of default under the Partnership’s senior credit facility or senior notes.

Loans Payable of Consolidated Funds

Loans payable of Consolidated Funds represent amounts due to holders of debt securities issued by the CLOs. Several of the CLOs issued preferred shares representing the most subordinated interest, however these tranches are mandatorily redeemable upon the maturity dates of the senior secured loans payable, and as a result have been classified as liabilities and are included in loans payable of Consolidated Funds in the condensed consolidated balance sheets.

 

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Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

As of September 30, 2013 and December 31, 2012, the following borrowings were outstanding, which includes preferred shares classified as liabilities (Dollars in millions):

 

     As of September 30, 2013
     Borrowing
Outstanding
     Fair Value      Weighted
Average
Interest Rate
    Weighted
Average
Remaining
Maturity in
Years

Senior secured notes

   $ 14,290.8       $ 13,800.0         1.39   8.98

Subordinated notes, Income notes and Preferred shares

     1,277.0         1,254.4         N/A (a)   8.11

Combination notes

     15.2         16.2         N/A (b)   8.38
  

 

 

    

 

 

      

Total

   $ 15,583.0       $ 15,070.6        
  

 

 

    

 

 

      

 

     As of December 31, 2012
     Borrowing
Outstanding
     Fair Value      Weighted
Average
Interest Rate
    Weighted
Average
Remaining
Maturity in
Years

Senior secured notes

   $ 13,662.3       $ 12,658.4         1.30   8.80

Subordinated notes, Income notes and Preferred shares

     914.8         996.9         N/A (a)    8.22

Combination notes

     0.7         1.4         N/A (b)    8.81
  

 

 

    

 

 

      

Total

   $ 14,577.8       $ 13,656.7        
  

 

 

    

 

 

      

 

(a) The subordinated notes, income notes and preferred shares do not have contractual interest rates, but instead receive distributions from the excess cash flows of the CLOs.
(b) The combination notes do not have contractual interest rates and have recourse only to the securities specifically held to collateralize such combination notes.

Loans payable of the CLOs are collateralized by the assets held by the CLOs and the assets of one CLO may not be used to satisfy the liabilities of another. This collateral consisted of cash and cash equivalents, corporate loans, corporate bonds and other securities. As of September 30, 2013 and December 31, 2012, the fair value of the CLO assets was $16.5 billion and $15.7 billion, respectively.

Certain CLOs entered into liquidity facility agreements with various liquidity facility providers on or about the various closing dates of the applicable CLO in order to fund payments of interest when there are insufficient funds available. The proceeds from such draw-downs are used for payments of interest at each interest payment date and the acquisition or exercise of an option or warrant as part of any collateral enhancement obligation. These liquidity facility agreements in the aggregate allow for a maximum borrowing of $13.5 million and bear weighted average interest at EURIBOR plus 0.25% per annum. Amounts borrowed under the liquidity facilities are repaid based on cash flows available subject to priority of payments under each CLO’s governing documents. There were no borrowings outstanding under the liquidity facility agreements as of September 30, 2013 and December 31, 2012.

 

39


Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

9. Contingent Consideration

The Partnership has contingent consideration obligations related to its business acquisitions and strategic investments. The changes in the contingent consideration liabilities are as follows:

 

     Rollforward For The Three Months Ended September 30, 2013  
     Amounts payable to the sellers who are senior Carlyle  professionals      Contingent
cash  and other
consideration
payable to non-
Carlyle personnel
       
     Performance-based
contingent cash
consideration
    Performance-based
contingent equity
consideration
    Employment-based
contingent cash
consideration
       Total  
     (Dollars in millions)  

Balance, beginning of period

   $ 141.8      $ 56.9      $ 118.0       $ 30.4      $ 347.1   

Change in carrying value

     8.6        1.5        25.5         1.1        36.7   

Payments

     (9.6     (2.3     —           (0.8     (12.7
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 140.8      $ 56.1      $ 143.5       $ 30.7      $ 371.1   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     Rollforward For The Nine Months Ended September 30, 2013  
     Amounts payable to the sellers who are senior Carlyle  professionals      Contingent
cash  and other
consideration
payable to non-
Carlyle personnel
       
     Performance-based
contingent cash
consideration
    Performance-based
contingent equity
consideration
    Employment-based
contingent cash
consideration
       Total  
     (Dollars in millions)  

Balance, beginning of period

   $ 158.6      $ 57.6      $ 96.2       $ 28.1      $ 340.5   

Change in carrying value

     1.1        0.8        47.3         5.0        54.2   

Payments

     (18.9     (2.3     —           (2.4     (23.6
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 140.8      $ 56.1      $ 143.5       $ 30.7      $ 371.1   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The fair value of the performance-based contingent cash and equity consideration payable to the sellers who are senior Carlyle professionals has been recorded in due to affiliates in the accompanying condensed consolidated balance sheets. These payments are not contingent upon the senior Carlyle professional being employed by Carlyle at the time that the performance conditions are met. For periods prior to the reorganization and initial public offering in May 2012, the change in the fair value of this contingent consideration was recorded directly in partners’ capital in the condensed consolidated balance sheets. For periods subsequent to the reorganization and initial public offering, changes in the fair value of these amounts are recorded in other non-operating (income) expenses in the condensed consolidated statements of operations.

The amount of employment-based contingent cash consideration payable to the sellers who are senior Carlyle professionals has been recorded as accrued compensation and benefits in the accompanying condensed consolidated balance sheets. For periods prior to the reorganization and initial public offering in May 2012, the change in the value of this contingent consideration was recorded in partners’ capital in the condensed consolidated balance sheets. For periods subsequent to the reorganization and initial public offering, changes in the value of these amounts are recorded as compensation expense in the condensed consolidated statements of operations.

The fair value of contingent consideration payable to non-Carlyle personnel is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. Changes in the fair value of this contingent consideration are recorded in other non-operating (income) expenses in the condensed consolidated statements of operations.

The fair values of the performance-based contingent cash consideration were based on probability-weighted discounted cash flow models. These fair value measurements are based on significant inputs not observable in the market and thus represent Level III measurements as defined in the accounting guidance for fair value measurement. As of September 30, 2013 and December 31, 2012, the fair value of the contingently issuable Carlyle Holdings partnership units was based principally by reference to the quoted price of the Partnership’s common units. This fair value measurement was based on inputs that are not directly observable but are corroborated by observable market data and thus represents a Level II measurement as defined in the accounting guidance for fair value measurement. Refer to Note 4 for additional disclosures related to the fair value of these instruments as of September 30, 2013 and December 31, 2012.

 

40


Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The following table represents the maximum amounts that could be paid from contingent cash obligations associated with the business acquisitions and the strategic investment in NGP Management and the amount payable if the Partnership elects to exercise its options related to NGP:

 

     As of September 30, 2013  
     Hedge Fund
Acquisitions
     NGP
Investment
     Total      Liability
Recognized on
Financial
Statements(1)
 
     (Dollars in millions)  

Performance-based contingent cash consideration

   $ 354.2       $ 183.0       $ 537.2       $ 171.5   

Employment-based contingent cash consideration

     389.3         45.0         434.3         143.5   

Options to acquire additional investments in NGP(2)

     —           97.2         97.2         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total maximum cash obligations

   $ 743.5       $ 325.2       $ 1,068.7       $ 315.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) – On the condensed consolidated balance sheet, the liability for performance-based contingent cash consideration is included in due to affiliates (for amounts owed to senior Carlyle professionals) and accounts payable, accrued expenses, and other liabilities (for amounts owed to other sellers), and the liability for employment-based contingent cash consideration is included in accrued compensation and benefits. Also, the amounts shown here exclude the $56.1 million liability that has been recognized on the condensed consolidated financial statements for performance-based contingent equity consideration.
(2) – Refer to Note 6 for more information.

Some of the employment-based contingent cash consideration agreements do not contain provisions limiting the amount that could be paid by the Partnership. For purposes of the table above, the Partnership has used its current estimate of the amount to be paid upon the determination dates for such payments. In the condensed consolidated financial statements, the Partnership records the performance-based contingent cash consideration from business acquisitions at fair value at each reporting period. For the employment-based contingent cash consideration, the Partnership accrues the compensation liability over the implied service period. If the Partnership exercises the options to acquire additional investments in NGP, the amount paid will be included in the carrying value of its equity-method investment in NGP at such time.

In October 2013, the Partnership and the sellers of Claren Road agreed to modifications to the terms of the performance-based contingent cash consideration associated with the 2010 acquisition of Claren Road as well as adjustments to separation payments made upon the sellers’ departure from Claren Road. The modifications resulted in changes to the performance conditions and measurement date to earn the performance-based contingent cash consideration and changes to the basis of calculation and length of time for the separation payments. The modifications also include a new performance-based compensatory cash payment of $25.0 million, which is payable in 2018 based on the achievement of certain performance conditions.

 

41


Table of Contents

The Carlyle Group L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

10. Accrued Compensation and Benefits

Accrued compensation and benefits consist of the following:

 

     As of  
     September 30,
2013
     December 31,
2012
 
     (Dollars in millions)  

Accrued performance fee-related compensation