sv1za
As filed with the Securities and Exchange
Commission on April 2, 2012.
Registration
No. 333-176685
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 5
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
The Carlyle Group
L.P.
(Exact name of Registrant as
specified in its charter)
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Delaware
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6282
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45-2832612
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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1001 Pennsylvania Avenue,
NW
Washington, D.C.
20004-2505
Telephone:
(202) 729-5626
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
Jeffrey W. Ferguson
General Counsel
The Carlyle Group L.P.
1001 Pennsylvania Avenue,
NW
Washington, D.C.
20004-2505
Telephone:
(202) 729-5626
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Joshua Ford Bonnie
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY
10017-3954
Telephone:
(212) 455-2000
Facsimile:
(212) 455-2502
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Phyllis G. Korff
David J. Goldschmidt
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036-6522
Telephone: (212) 735-3000
Facsimile: (212) 735-2000
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Approximate date of commencement of the proposed sale of the
securities to the public: As soon as practicable
after the Registration Statement is declared effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
of 1933, check the following box and list the Securities Act of
1933 registration statement number of the earlier effective
registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, check the
following box and list the Securities Act of 1933 registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act of 1933, check the
following box and list the Securities Act of 1933 registration
statement number of the earlier effective registration statement
for the same
offering. o
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. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
[Page Intentionally
Left Blank]
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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SUBJECT TO
COMPLETION, DATED April 2, 2012
PRELIMINARY
PROSPECTUS
Common
Units
Representing Limited Partner
Interests
This is the initial public offering of common units representing
limited partner interests in The Carlyle Group L.P. No public
market currently exists for our common units. We are offering
all of
the
common units representing limited partner interests in this
offering. We anticipate that the initial public offering price
will be between $ and
$ per common unit. We have applied
to list the common units on the NASDAQ Global Select Market
under the symbol CG.
Investing in our common units involves risks. See Risk
Factors beginning on page 27. These risks include the
following:
We are managed by our general partner, which is owned by our
senior Carlyle professionals. Our common unitholders will have
only limited voting rights and will have no right to remove our
general partner or, except in limited circumstances, elect the
directors of our general partner. Moreover, immediately
following this offering, our senior Carlyle professionals
generally will have sufficient voting power to determine the
outcome of those few matters that may be submitted for a vote of
our limited partners. In addition, our partnership agreement
limits the liability of, and reduces or eliminates the duties
(including fiduciary duties) owed by, our general partner to our
common unitholders and restricts the remedies available to our
common unitholders for actions that might otherwise constitute
breaches of our general partners duties. As a limited
partnership, we will qualify for and intend to rely on
exceptions from certain corporate governance and other
requirements under the rules of the NASDAQ Global Select Market.
For example, we will not be required to comply with the
requirements that a majority of the board of directors of our
general partner consist of independent directors and that we
have independent director oversight of executive officer
compensation and director nominations.
Our business is subject to many risks, including those
associated with:
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adverse economic and market conditions, which can affect our
business and liquidity position in many ways, including by
reducing the value or performance of the investments made by our
investment funds and reducing the ability of our investment
funds to raise or deploy capital;
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changes in the debt financing markets, which could negatively
impact the ability of our funds and their portfolio companies to
obtain attractive financing or refinancing for their investments
and operations, and could increase the cost of such financing if
it is obtained, leading to lower-yielding investments;
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the potential volatility of our revenue, income and cash flow;
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our dependence on our founders and other key personnel and our
ability to attract, retain and motivate high quality employees
who will bring value to our operations;
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business and regulatory impediments to our efforts to expand
into new investment strategies, markets and businesses;
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the fact that most of our investment funds invest in illiquid,
long-term investments that are not marketable securities, and
such investments may lose significant value during an economic
downturn;
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the potential for poor performance of our investment
funds; and
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the possibility that we will not be able to continue to raise
capital from third-party investors on advantageous terms.
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As discussed in Material U.S. Federal Tax
Considerations, The Carlyle Group L.P. will be treated as
a partnership for U.S. federal income tax purposes, and our
common unitholders therefore will be required to take into
account their allocable share of items of income, gain, loss and
deduction of The Carlyle Group L.P. in computing their
U.S. federal income tax liability. Although we currently
intend to make annual distributions in an amount sufficient to
cover the anticipated U.S. federal, state and local income
tax liabilities of holders of common units in respect of their
allocable share of our net taxable income, it is possible that
such tax liabilities will exceed the cash distributions that
holders of common units receive from us. Although not enacted,
the U.S. Congress has considered legislation that would
have precluded us from qualifying as a partnership for
U.S. federal income tax purposes or required us to hold
carried interest through taxable subsidiary corporations for
taxable years after a
ten-year
transition period and would have taxed individual holders of
common units with respect to certain income and gains at
increased rates. Similar legislation could be enacted in the
future.
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Proceeds, Before
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Expenses, to The
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Price to
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Underwriting
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Carlyle
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Public
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Discount
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Group L.P.
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Per Common Unit
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$
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$
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$
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Total
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$
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$
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$
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To the extent that the underwriters sell more
than
common units, the underwriters have the option to purchase up to
an
additional
common units from us at the initial public offering price less
the underwriting discount.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved these securities or
passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the common units to
purchasers on or
about ,
2012.
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J.P.
Morgan |
Citigroup |
Credit Suisse |
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BofA Merrill Lynch
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Barclays
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Deutsche Bank
Securities
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Goldman, Sachs &
Co.
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Morgan Stanley
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UBS Investment
Bank
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ICBC International |
Sandler ONeill + Partners, L.P.
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Keefe Bruyette & Woods
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CIBC
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Itaú BBA
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Nomura
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Ramirez & Co., Inc.
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Scotiabank
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Societe
Generale |
The
Williams Capital Group, L.P.
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Mizuho Securities |
SMBC Nikko
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, 2012
Global
Presence
As of December 31, 2011.
Assets
Under Management (dollars in billions, 2003
2011)
Table of
Contents
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Page
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1
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1
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2
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6
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13
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19
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24
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27
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27
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43
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63
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72
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74
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81
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81
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82
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82
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82
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86
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87
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87
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88
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90
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91
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94
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95
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97
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100
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100
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101
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103
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104
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105
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105
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113
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115
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123
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127
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159
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166
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167
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172
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178
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178
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181
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203
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203
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204
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208
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214
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219
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222
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226
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245
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248
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248
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(i)
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Page
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249
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249
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249
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256
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260
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267
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268
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268
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268
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268
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268
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268
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269
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270
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270
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270
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272
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273
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273
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273
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274
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275
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275
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275
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277
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278
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278
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278
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279
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280
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281
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287
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305
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307
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313
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313
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313
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F-1
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A-1
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Exhibit 10.27 |
Exhibit 23.1 |
You should rely only on the information contained in this
prospectus or in any free writing prospectus we may authorize to
be delivered to you. Neither we nor the underwriters have
authorized anyone to provide you with additional or different
information. We and the underwriters are offering to sell, and
seeking offers to buy, our common units only in jurisdictions
where offers and sales are permitted. The information in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or any
sale of our common units.
Through and
including ,
2012 (25 days after the date of this prospectus), all
dealers that effect transactions in our common units, whether or
not participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the
obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
(ii)
Our business is currently 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 are under the
common ownership and control of our senior Carlyle professionals
and two strategic investors that own 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
prospectus to Carlyle, the Company,
we, us and our refer
(1) prior to the consummation of our reorganization into a
holding partnership structure as described under
Organizational Structure, to Carlyle Group,
which is 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 will contribute 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 this
offering, collectively as our existing owners.
Completion of our reorganization will occur prior to this
offering. See Organizational Structure.
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 partners of our
firm who are, together with CalPERS and Mubadala, the owners of
our Parent Entities prior to the reorganization. References in
this prospectus 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 refers
to those investment funds that we advise, including the buyout
funds, growth capital funds, real asset funds and distressed
debt and mezzanine funds (but excluding our structured credit
funds, hedge funds and fund of funds vehicles), 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. Our fund of funds vehicles
refer to those funds, accounts and vehicles advised by AlpInvest
Partners B.V., formerly known as AlpInvest Partners N.V.
(AlpInvest).
Fee-earning assets under management or
Fee-earning AUM refers 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 investment period has not expired, the amount of
limited partner capital commitments and for fund of funds
vehicles, the amount of external investor capital commitments
during the commitment period;
(b) for substantially all carry funds and certain
co-investment vehicles where the investment period has expired,
the remaining amount of limited partner invested capital;
(c) the gross amount of aggregate collateral balance at
par, adjusted for defaulted or discounted collateral, of our
collateralized loan obligations (CLOs) 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 and certain structured credit funds; and
(e) for fund of funds vehicles and certain carry funds
where the investment period has expired, the lower of cost or
fair value of invested capital.
(iii)
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 and fund of funds vehicles 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 at par of
our CLOs and the reference portfolio notional amount of our
synthetic CLOs; and
(c) the net asset value (pre-redemptions and subscriptions)
of our long/short credit, emerging markets, multi-product
macroeconomic and other hedge funds and certain structured
credit funds.
We include in our calculation of AUM and fee-earning AUM certain
energy and renewable resources funds that we jointly advise with
Riverstone Investment Group L.L.C. (Riverstone).
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
fees. Our definitions 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 advise. See Business Structure
and Operation of Our Investment Funds Incentive
Arrangements/Fee Structure.
For our carry funds, co-investment vehicles and fund of funds
vehicles, 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 at cost,
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.
Unless indicated otherwise, non-financial operational and
statistical data in this prospectus is as of December 31,
2011. Compound annual growth in AUM is presented since
December 31, 2003, the first period for which comparable
information is available. The data presented herein that
provides inception to date performance results of
our segments relates to the period following the formation of
the first fund within each segment. For our Corporate Private
Equity segment, our first fund was formed in 1990. For our Real
Assets segment, our first fund was formed in 1997.
Until an investment fund (i) has distributed substantially
all expected investment proceeds to its fund investors,
(ii) is not expected to generate further investment
proceeds (e.g., earn-outs), (iii) is no longer paying
management fees or accruing performance fees, and (iv) in
the case of our structured credit funds, has made a final
redemption distribution, we consider such investment fund to be
active. The fund performance data presented herein
includes the performance of all of our carry funds, including
those that are no longer active. All other fund data presented
in this prospectus, and all other references to our investment
funds, are to our active investment funds.
References herein to active investments are to
investments that have not yet been fully realized, meaning that
the investment fund continues to own an interest in, and has not
yet completely exited, the investment.
(iv)
In addition, for purposes of the non-financial operating and
statistical data included in this prospectus, including the
aggregation of our
non-U.S. dollar
denominated investment funds, foreign currencies have been
converted to U.S. dollars at the spot rate as of the last
trading day of the reporting period when presenting period end
balances, and the average rate for the period has been utilized
when presenting activity during such period. With respect to
capital commitments raised in foreign currencies, the conversion
to U.S. dollars is based on the exchange rate as of the
date of closing of such capital commitment.
Unless indicated otherwise, the information included in this
prospectus assumes:
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no exercise by the underwriters of the option to purchase up to
an additional common units from us;
and
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the common units to be sold in this offering are sold at
$ per common unit, which is the
midpoint of the price range indicated on the front cover of this
prospectus.
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(v)
[Page
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(vi)
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all the information you
should consider before investing in our common units. You should
read this entire prospectus carefully, including the section
entitled Risk Factors and the financial statements
and the related notes, before you decide to invest in our common
units.
The
Carlyle Group
We are one of the worlds largest and most diversified
multi-product global alternative asset management firms. We
advise an array of specialized investment funds and other
investment vehicles that invest across a range of industries,
geographies, asset classes and investment strategies and seek to
deliver attractive returns for our fund investors. Since our
firm was founded in Washington, D.C. in 1987, we have grown
to become a leading global alternative asset manager with
approximately $147 billion in AUM across 89 funds and
52 fund of funds vehicles. We have approximately
1,300 employees, including more than 600 investment
professionals, in 33 offices across six continents, and we serve
over 1,400 active carry fund investors from 72 countries.
Across our Corporate Private Equity and Real Assets segments, we
have investments in over 200 portfolio companies that
employ more than 650,000 people.
The growth and development of our firm has been guided by
several fundamental tenets:
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Excellence in Investing. Our primary goal is to invest
wisely and create value for our fund investors. We strive to
generate superior investment returns by combining deep industry
expertise, a global network of local investment teams who can
leverage extensive firm-wide resources and a consistent and
disciplined investment process.
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Commitment to our Fund Investors. Our fund investors
come first. This commitment is a core component of our firm
culture and informs every aspect of our business. We believe
this philosophy is in the long-term best interests of Carlyle
and its owners, including our prospective common unitholders.
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Investment in the Firm. We have invested, and intend to
continue to invest, significant resources in hiring and
retaining a deep talent pool of investment professionals and in
building the infrastructure of the firm, including our expansive
local office network and our
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1
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comprehensive investor support team, which provides finance,
legal and compliance and tax services in addition to other
corporate services.
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Expansion of our Platform. We innovate
continuously to expand our investment capabilities through the
creation or acquisition of new asset-, sector- and
regionally-focused strategies in order to provide our fund
investors a variety of investment options.
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Unified Culture. We seek to leverage the local
market insights and operational capabilities that we have
developed across our global platform through a unified culture
we call One Carlyle. Our culture emphasizes
collaboration and sharing of knowledge and expertise across the
firm to create value.
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We believe that this offering will enable us to continue to
develop and grow our firm; strengthen our infrastructure; create
attractive investment products, strategies and funds for the
benefit of our fund investors; and attract and retain top
quality professionals. We manage our business for the long-term,
through economic cycles, leveraging investment and exit
opportunities in different parts of the world and across asset
classes. We believe it is an opportune time to capitalize on the
additional resources and growth prospects that we expect a
public offering will provide.
Our
Business
We operate our business across four segments: (1) Corporate
Private Equity, (2) Real Assets, (3) Global Market
Strategies and (4) Fund of Funds Solutions. We established
our Fund of Funds Solutions segment on July 1, 2011 at the
time we completed our acquisition of a 60% equity interest in,
and began to consolidate, AlpInvest.
We earn management fees pursuant to contractual arrangements
with the investment funds that we manage and fees for
transaction advisory and oversight services provided to
portfolio companies of these funds. We also typically receive a
performance fee from an investment fund, which may be either an
incentive fee or 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. Our ability to
generate carried interest is an important element of our
business and carried interest has historically accounted for a
significant portion of our revenue. In order to better align the
interests of our senior Carlyle professionals and the other
individuals who manage our carry funds with our own interests
and with those of the investors in these funds, such individuals
are allocated directly a portion of the carried interest in our
carry funds. See Organizational
Structure Reorganization for additional
information regarding the allocation of carried interest between
us and our senior Carlyle professionals before and after the
consummation of this offering. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Key Financial Measures for a
discussion of the composition of our revenues and expenses,
including additional information regarding how our management
fees and performance fees are structured and calculated.
The following tables set forth information regarding our segment
revenues, economic net income (ENI) and
distributable earnings by segment for the years ended
December 31, 2011 and 2010 and regarding our total
revenues, income before provision for income taxes and cash
distributions in conformity with U.S. generally accepted
accounting principles (GAAP) for such periods.
Please see Managements Discussion and Analysis of
Financial Condition and Results of Operations Key
Financial Measures for a discussion of the composition of
our revenues and expenses and Segment
Analysis for discussion and analysis of our segment
results.
2
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For the Year Ended December 31, 2011
|
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|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
|
|
|
|
|
|
Global Market
|
|
|
Fund of Funds
|
|
|
|
|
|
|
Equity
|
|
|
Real Assets
|
|
|
Strategies
|
|
|
Solutions(5)
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Total Revenues (GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,845.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income before provision for income taxes (GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,182.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income attributable to Carlyle Group (GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,356.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions (GAAP)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,498.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Revenues(2)
|
|
$
|
1,483.6
|
|
|
$
|
314.7
|
|
|
$
|
324.9
|
|
|
$
|
26.1
|
|
|
$
|
2,149.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Net Income(2)(3)
|
|
$
|
514.1
|
|
|
$
|
143.9
|
|
|
$
|
161.5
|
|
|
$
|
13.6
|
|
|
$
|
833.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Earnings(2)(4)
|
|
$
|
566.0
|
|
|
$
|
84.8
|
|
|
$
|
193.4
|
|
|
$
|
20.2
|
|
|
$
|
864.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Pro forma net income attributable to Carlyle Holdings(6)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income attributable to The Carlyle Group
L.P.(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Distributable Earnings(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
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|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
|
|
|
|
|
|
Global Market
|
|
|
Fund of Funds
|
|
|
|
|
|
|
Equity
|
|
|
Real Assets
|
|
|
Strategies
|
|
|
Solutions
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Total Revenues (GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,798.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes (GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,479.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Carlyle Group (GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,525.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions (GAAP)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
787.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Revenues(2)
|
|
$
|
1,897.2
|
|
|
$
|
235.0
|
|
|
$
|
253.6
|
|
|
|
n/a
|
|
|
$
|
2,385.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Net Income(2)(3)
|
|
$
|
819.3
|
|
|
$
|
90.7
|
|
|
$
|
104.0
|
|
|
|
n/a
|
|
|
$
|
1,014.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Earnings(2)(4)
|
|
$
|
307.2
|
|
|
$
|
12.7
|
|
|
$
|
22.6
|
|
|
|
n/a
|
|
|
$
|
342.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Cash distributions, net of
compensatory payments, distributions related to co-investments
and distributions related to the Mubadala investment in 2010
were $681.9 million and $105.8 million for the years ended
December 31, 2011 and 2010, respectively. See Cash
Distribution Policy.
|
|
(2)
|
|
Under GAAP, we are required to
consolidate certain of the investment funds that we advise.
However, for segment reporting purposes, we present revenues and
expenses on a basis that deconsolidates these funds.
|
|
(3)
|
|
ENI, a non-GAAP measure, represents
segment net income excluding the impact of income taxes,
acquisition-related items including amortization of acquired
intangibles and earn-outs, charges associated with equity-based
compensation issued in this offering or future acquisitions,
corporate actions and infrequently occurring or unusual events
(e.g., acquisition related costs, gains and losses on fair value
adjustments on contingent consideration, gains and losses from
the retirement of our debt, charges associated with lease
terminations and employee severance and settlements of legal
claims). For a further discussion about ENI and a reconciliation
to Income Before Provision for Income Taxes, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Key Financial
Measures Non-GAAP Financial
Measures Economic Net Income and
Non-GAAP Financial Measures, and
Note 14 to our combined and consolidated financial
statements appearing elsewhere in this prospectus.
|
|
(4)
|
|
Distributable Earnings, a non-GAAP
measure, is a component of ENI representing total ENI less
unrealized performance fees and unrealized investment income
plus unrealized performance fee compensation expense. For a
further discussion about Distributable Earnings and a
reconciliation to Income Before Provision for Income Taxes, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Key Financial
Measures Non-GAAP Financial Measures
Distributable Earnings,
Non-GAAP Financial Measures and Note 14 to our
combined and consolidated financial statements appearing
elsewhere in this prospectus. For a discussion of cash
distributions and the difference between Distributable Earnings
and such cash distribution during the historical periods
presented, see Cash Distribution Policy.
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|
(5)
|
|
We established our Fund of Funds
Solutions segment on July 1, 2011. These results are for
the period from July 1, 2011 to December 31, 2011.
|
|
|
|
(6)
|
|
Refer to Unaudited Pro Forma
Financial Information.
|
3
Corporate Private Equity. Our Corporate
Private Equity segment, established in 1990 with our first
U.S. buyout fund, advises our buyout and growth capital
funds, which pursue a wide variety of corporate investments of
different sizes and growth potentials. Our 26 active Corporate
Private Equity funds are each carry funds. They are organized
and operated by geography or industry and are advised by
separate teams of local professionals who live and work in the
markets where they invest. We believe this diversity of funds
allows us to deploy more targeted and specialized investment
expertise and strategies and offers our fund investors the
ability to tailor their investment choices.
Our Corporate Private Equity teams have two primary areas of
focus:
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|
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|
Buyout Funds. Our buyout teams advise a diverse
group of 17 active funds that invest in transactions that focus
either on a particular geography (United States, Europe, Asia,
Japan, South America or the Middle East and North Africa
(MENA)) or a particular industry (e.g., financial
services). As of December 31, 2011, our buyout funds had,
in the aggregate, approximately $47 billion in AUM.
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|
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Growth Capital Funds. Our nine active growth capital
funds are advised by three
regionally-focused
teams in the United States, Europe and Asia, with each team
generally focused on middle-market and growth companies
consistent with specific regional investment considerations. As
of December 31, 2011, our growth capital funds had, in the
aggregate, approximately $4 billion in AUM.
|
The following table presents certain data about our Corporate
Private Equity segment as of December 31, 2011 (dollar
amounts in billions; compound annual growth is presented since
December 31, 2003; amounts invested include co-investments).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Fee-
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Investments
|
|
|
Total
|
|
AUM
|
|
Earning
|
|
Active
|
|
Active
|
|
Available
|
|
Investment
|
|
Invested Since
|
|
Since
|
AUM
|
|
AUM
|
|
CAGR
|
|
AUM
|
|
Investments
|
|
Funds
|
|
Capital
|
|
Professionals
|
|
Inception
|
|
Inception
|
|
$
|
51
|
|
|
|
35
|
%
|
|
|
22
|
%
|
|
$
|
38
|
|
|
|
167
|
|
|
|
26
|
|
|
$
|
13
|
|
|
|
254
|
|
|
$
|
49
|
|
|
|
422
|
|
Real Assets. Our Real Assets segment,
established in 1997 with our first U.S. real estate fund,
advises our 17 active carry funds focused on real estate,
infrastructure and energy and renewable resources.
Our Real Assets teams have three primary areas of focus:
|
|
|
|
|
Real Estate. Our 10 active real estate funds
pursue real estate investment opportunities in Asia, Europe and
the United States and generally focus on acquiring
single-property opportunities rather than large-cap companies
with real estate portfolios. As of December 31, 2011, our
real estate funds had, in the aggregate, approximately
$12 billion in AUM.
|
|
|
|
Infrastructure. Our infrastructure investment
team focuses on investments in infrastructure companies and
assets. As of December 31, 2011, we advised one
infrastructure fund with approximately $1 billion in AUM.
|
|
|
|
Energy & Renewable Resources. Our
energy and renewable resources activities focus on buyouts,
growth capital investments and strategic joint ventures in the
midstream, upstream, power and oilfield services sectors, as
well as the renewable and alternative sectors of the energy
industry. We currently conduct these activities with Riverstone,
jointly advising six funds with approximately $17 billion
in AUM as of December 31, 2011. We and Riverstone have
mutually decided not to pursue additional jointly managed funds
(although we will continue to advise jointly with Riverstone the
six existing energy and renewable resources funds). We are
actively exploring new approaches through which to expand our
energy capabilities and intend to augment our significant
in-house expertise in this sector.
|
4
The following table presents certain data about our Real Assets
segment as of December 31, 2011 (dollar amounts in
billions; compound annual growth is presented since
December 31, 2003; amounts invested include co-investments;
investment professionals excludes Riverstone employees).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Fee-
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Investments
|
|
|
Total
|
|
AUM
|
|
Earning
|
|
Active
|
|
Active
|
|
Available
|
|
Investment
|
|
Invested Since
|
|
Since
|
AUM
|
|
AUM
|
|
CAGR
|
|
AUM
|
|
Investments
|
|
Funds
|
|
Capital
|
|
Professionals
|
|
Inception
|
|
Inception
|
|
$
|
31
|
|
|
|
21
|
%
|
|
|
37
|
%
|
|
$
|
22
|
|
|
|
330
|
|
|
|
17
|
|
|
$
|
8
|
|
|
|
136
|
|
|
$
|
26
|
|
|
|
552
|
|
Global Market Strategies. Our Global
Market Strategies segment, established in 1999 with our first
high yield fund, advises a group of 46 active funds that pursue
investment opportunities across various types of credit,
equities and alternative instruments, and (with regards to
certain macroeconomic strategies) currencies, commodities and
interest rate products and their derivatives. These funds
include:
Carry Funds. We advise six carry funds, with
an aggregate of $3 billion in AUM, in three different
strategies: distressed and corporate opportunities (including
liquid trading portfolios and control investments); corporate
mezzanine (targeting middle market companies); and energy
mezzanine opportunities (targeting debt investments in energy
and power projects and companies).
Hedge Funds. Through our 55% stake in Claren
Road Asset Management, LLC (Claren Road) we
advise two long/short credit hedge funds focusing on the global
high grade and high yield markets totaling, in the aggregate,
approximately $6 billion in AUM. Additionally, through our
55% stake in Emerging Sovereign Group LLC (ESG), we
advise six emerging markets equities and macroeconomic hedge
funds with an aggregate AUM of $2 billion.
Structured Credit Funds. Our 32 structured
credit funds, with an aggregate AUM of $13 billion, invest
primarily in performing senior secured bank loans through
structured vehicles and other investment products.
The following table presents certain data about our Global
Market Strategies segment as of December 31, 2011 (dollar
amounts in billions; compound annual growth is presented since
December 31, 2003).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
Fee-Earning
|
|
Active
|
|
Investment
|
AUM
|
|
AUM
|
|
AUM CAGR
|
|
AUM
|
|
Funds
|
|
Professionals(1)
|
|
$
|
24
|
|
|
|
16
|
%
|
|
|
33
|
%
|
|
$
|
23
|
|
|
|
46
|
|
|
|
145
|
|
|
|
|
(1)
|
|
Includes 31 middle office and back
office professionals.
|
Fund of Funds Solutions. Our Fund of
Funds Solutions segment was established on July 1, 2011
when we completed our acquisition of a 60% equity interest in
AlpInvest. AlpInvest is one of the worlds largest
investors in private equity and advises a global private equity
fund of funds program and related co-investment and secondary
activities. Its anchor clients are two large Dutch pension
funds, which were the founders and previous shareholders of the
company. Although we maintain ultimate control over AlpInvest,
AlpInvests historical management team (who are our
employees) will continue to exercise independent investment
authority without involvement by other Carlyle personnel.
AlpInvest has three primary areas of focus:
|
|
|
|
|
Fund Investments. AlpInvest fund of funds
vehicles make investment commitments directly to buyout, growth
capital, venture and other alternative asset funds advised by
other general partners (portfolio funds). As of
December 31, 2011, AlpInvest advised 25 fund of funds
vehicles totaling, in the aggregate, approximately
$30 billion in AUM.
|
|
|
|
Co-investments. AlpInvest invests alongside
other private equity and mezzanine funds in which it has a fund
investment throughout Europe, North America and Asia. As of
December 31, 2011, AlpInvest co-investments programs were
conducted through 15 fund of funds vehicles totaling, in
the aggregate, approximately $5 billion in AUM.
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5
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Secondary Investments. AlpInvest also advises
funds that acquire interests in portfolio funds in secondary
market transactions. As of December 31, 2011,
AlpInvests secondary investments program was conducted
through 12 fund of funds vehicles totaling, in the aggregate,
approximately $6 billion in AUM.
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In addition, although customized separate accounts and
co-mingled vehicles for clients other than AlpInvests
anchor clients do not currently represent a significant portion
of our AUM, we expect to grow our Fund of Funds Solutions
segment with these two products. See Business
Structure and Operation of Our Investment Funds
Incentive Arrangements/Fee Structure for a discussion of
the arrangements with the historical owners and management of
AlpInvest regarding the allocation of carried interest in
respect of the historical investments of and the historical and
certain future commitments to our fund of funds vehicles.
The following table presents certain data about our Fund of
Funds Solutions segment as of December 31, 2011 (dollar
amounts in billions).
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% of
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Fund of
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Amount
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Total
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Fee-Earning
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Funds
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Available
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Invested
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Investment
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AUM(1)
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AUM
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AUM
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Vehicles
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Capital
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Since Inception
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Professionals(2)
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$
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41
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28
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%
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$
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28
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52
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$
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15
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$
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38
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60
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(1)
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Under our arrangements with the
historical owners and management team of AlpInvest, such persons
are allocated all carried interest in respect of the historical
investments and commitments to our fund of funds vehicles that
existed as of December 31, 2010, 85% of the carried
interest in respect of commitments from the historical owners of
AlpInvest for the period between 2011 and 2020 and 60% of the
carried interest in respect of all other commitments (including
all future commitments from third parties).
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(2)
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Includes 24 middle office and back
office professionals.
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Competitive
Strengths
Since our founding in 1987, Carlyle has grown to become one of
the worlds largest and most diversified multi-product
global alternative asset management firms. We believe the
following competitive strengths position us well for future
growth:
Global Presence. We believe we have a
greater presence around the globe and in emerging markets than
any other alternative asset manager. We currently operate on six
continents and sponsor funds investing in the United States,
Asia, Europe, Japan, MENA and South America, with 12 carry funds
and their related co-investment vehicles representing
approximately $11 billion in AUM actively investing in
emerging markets. Our extensive network of investment
professionals is composed primarily of local individuals with
the knowledge, experience and relationships that allow them to
identify and take advantage of opportunities unavailable to
firms with less extensive footprints.
Diversified and Scalable Multi-Product
Platform. We have created separate
geographic, sector and asset specific fund groups, investing
significant resources to develop this extensive network of
investment professionals and offices. As a result, we benefit
from having 89 different funds (including 49 carry funds) and 52
fund of funds vehicles around the world. We believe this broad
fund platform and our investor services infrastructure provide
us with a scalable foundation to pursue future investment
opportunities in high-growth markets and to expand into new
products. Our diverse platform also enhances our resilience to
credit market turmoil by enabling us to invest during such times
in assets and geographies that are less dependent on leverage
than traditional U.S. buyout activity. We believe the
breadth of our product offerings also enhances our fundraising
by allowing us to offer investors greater flexibility to
allocate capital across different geographies, industries and
components of a companys capital structure.
Focus on Innovation. We have been at
the forefront of many recognized trends within our industry,
including the diversification of investment products and asset
classes, geographic expansion and raising strategic capital from
institutional investors. Within 10 years of the launch of
our first fund in 1990 to pursue buyout opportunities in the
United States, we had expanded
6
our buyout operations to Asia and Europe and added funds focused
on U.S. real estate, global energy and power, structured
credit and venture and growth capital opportunities in Asia,
Europe and the United States. Over the next 10 years, we
developed an increasing number of new, diverse products,
including funds focused on distressed opportunities,
infrastructure, global financial services, mezzanine investments
and real estate across Asia and Europe. We continued to innovate
in 2010 and 2011 with the significant expansion of our Global
Markets Strategies business, which has more than doubled its AUM
since the beginning of 2008, the formation of our Fund of Funds
Solutions segment and numerous new fund initiatives. We believe
our focus on innovation will enable us to continue to identify
and capitalize on new opportunities in high-growth geographies
and sectors.
Proven Ability to Consistently Attract Capital from a
High-Quality, Loyal Investor Base. Since
inception, we have raised approximately $117 billion in
capital (excluding acquisitions). We have successfully and
repeatedly raised long-term, non-redeemable capital commitments
to new and successor funds, with a broad and diverse base of
over 1,400 active carry fund investors from 72 countries.
Despite the recent challenges in the fundraising markets, from
December 31, 2007 through December 31, 2011, we had
closings for commitments totaling approximately $32 billion
across 30 funds and related co-investment vehicles, as well as
net inflows to our hedge funds. We have a demonstrated history
of attracting investors to multiple funds, with approximately
91% of commitments to our active carry funds (by dollar amount)
coming from investors who are committed to more than one active
carry fund, and approximately 58% of commitments to our active
carry funds (by dollar amount) coming from investors who are
committed to more than five active carry funds (each as of
December 31, 2011). We have a dedicated in-house fund
investor relations function, which we refer to as our LP
relations group, which includes 23 geographically focused
investor relations professionals and 31 product and client
segment specialists and support staff operating on a global
basis. We believe that our constant dialogue with our fund
investors and our commitment to providing them with the highest
quality service inspires loyalty and aids our efforts to
continue to attract investors across our investment platform.
7
Demonstrated Record of Investment
Performance. We have demonstrated a strong
and consistent investment track record, producing attractive
returns for our fund investors across segments, sectors and
geographies, and across economic cycles. The following table
summarizes the aggregate investment performance of our Corporate
Private Equity, Real Assets, and Fund of Funds Solutions
segments. Due to the diversified nature of the strategies in our
Global Market Strategies segment, we have included summarized
investment performance for the largest carry fund and two of our
largest hedge funds in this segment. For additional information,
including performance information of other Global Market
Strategies funds, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Segment Analysis Corporate
Private Equity Fund Performance Metrics,
Real Assets Fund Performance
Metrics Fund of Funds
Solutions Fund Performance Metrics, and
Global Market Strategies
Fund Performance Metrics.
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As of December 31, 2011
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Inception to December 31, 2011
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Realized/
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Realized/
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Partially
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Cumulative
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Partially
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Realized
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Invested
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Realized
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Gross
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Net
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Gross
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Capital(2)
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MOIC(3)
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MOIC(3)(4)
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IRR(5)
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IRR(6)
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IRR(4)(5)
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(Dollars in billions)
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Corporate Private Equity(1)
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$
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48.7
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1.8
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x
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2.6x
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27
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%
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18
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%
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31%
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Real Assets(1)
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$
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26.4
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1.5
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x
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2.0x
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17
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%
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10
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%
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29%
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Fund of Funds Solutions(1)
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$
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38.3
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1.3
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x
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n/a
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10
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%
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9
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%
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n/a
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As of
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December 31,
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2011
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Inception to December 31, 2011
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Net
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Net Annualized
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Total AUM
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Gross IRR(5)
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IRR(6)
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Return(7)
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(Dollars in billions)
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Global Market Strategies(8)
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CSP II (carry fund)
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$
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1.6
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15%
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10%
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n/a
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Claren Road Master Fund (hedge fund)
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$
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4.7
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n/a
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n/a
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11%
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Claren Road Opportunities Fund (hedge fund)
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$
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1.4
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n/a
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n/a
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18%
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The returns presented herein represent those of the applicable
Carlyle funds and not those of The Carlyle Group L.P. See
Risk Factors Risks Related to Our Business
Operations The historical returns attributable to
our funds, including those presented in this prospectus, should
not be considered as indicative of the future results of our
funds or of our future results or of any returns expected on an
investment in our common units.
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(1)
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For purposes of aggregation, funds
that report in foreign currency have been converted to U.S.
dollars at the reporting period spot rate.
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(2)
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Represents the original cost of all
capital called for investments since inception.
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(3)
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Multiple of invested capital
(MOIC) represents total fair value, before
management fees, expenses and carried interest, divided by
cumulative invested capital.
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(4)
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An investment is considered
realized when the investment fund has completely exited, and
ceases to own an interest in, the investment. An investment is
considered partially realized when the total proceeds received
in respect of such investment, including dividends, interest or
other distributions and/or return of capital represents at least
85% of invested capital and such investment is not yet fully
realized. Because part of our value creation strategy involves
pursuing best exit alternatives, we believe information
regarding Realized/Partially Realized MOIC and Gross IRR, when
considered together with the other investment performance
metrics presented, provides investors with meaningful
information regarding our investment performance by removing the
impact of investments where significant realization activity has
not yet occurred. Realized/Partially Realized MOIC and Gross IRR
have limitations as measures of investment performance, and
should not be considered in isolation. Such limitations include
the fact that these measures do not include the performance of
earlier stage and other investments that do not satisfy the
criteria provided above. The exclusion of such investments will
have a positive impact on Realized/Partially Realized MOIC and
Gross IRR in instances when the MOIC and Gross IRR in respect of
such investments are less than the aggregate MOIC and Gross IRR.
Our measurements of Realized/Partially Realized MOIC and Gross
IRR may not be comparable to those of other companies that use
similarly titled measures.
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8
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(5)
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Gross Internal Rate of Return
(IRR) represents the annualized IRR for the period
indicated on limited partner invested capital based on
contributions, distributions and unrealized value before
management fees, expenses and carried interest.
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(6)
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Net IRR represents the annualized
IRR for the period indicated on limited partner invested capital
based on contributions, distributions and unrealized value after
management fees, expenses and carried interest.
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(7)
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Net Annualized Return is presented
for fee-paying investors on a total return basis, net of all
fees and expenses.
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(8)
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Due to the disparate nature of the
underlying asset classes in which our Global Market Strategies
funds participate (e.g., syndicated loans, bonds, distressed
securities, mezzanine loans, emerging markets equities,
macroeconomic products) and the inherent difficulties in
aggregating the performance of closed-end and open-end funds,
the presentation of aggregate investment performance across this
segment would not be meaningful.
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Financial Strength. The investment
performance across our broad fund base has enabled us to
generate Economic Net Income of $833.1 million in 2011 and
$1.014 billion in 2010 and Distributable Earnings of $864.4
million and $342.5 million for the same periods. Our income
before provision for income taxes, a GAAP measure, was
approximately $1.2 billion in 2011 and $1.5 billion in
2010. This performance is also reflected in the rate of
appreciation of the investments in our carry funds in recent
periods, with a 34% increase in our carry fund value in 2010 and
a 16% increase in 2011. Additionally, distributions to our fund
investors have been robust, with more than $8 billion
distributed to fund investors in 2010 and approximately
$19 billion in 2011. We believe the investment pace and
available capital of our carry funds position us well for the
future. Our carry funds invested approximately $10 billion
in 2010 and more than $11 billion in 2011, and as of
December 31, 2011, these funds had approximately
$22 billion in capital commitments that had not yet been
invested.
Stable and Diverse Team of Talented Investment
Professionals With a Strong Alignment of
Interests. We have a talented team of more
than 600 investment professionals and we are assisted by our
Executive Operations Group of 27 operating executives, with an
average of over 40 years of relevant operating, financial
and regulatory experience, who are a valuable resource to our
portfolio companies and our firm. Our investment professionals
are supported by a centralized investor services and support
group, which includes more than 400 professionals. The interests
of our professionals are aligned with the interests of the
investors in our funds and in our firm. Since our inception
through December 31, 2011, we and our senior Carlyle
professionals, operating executives and other professionals have
invested or committed to invest in excess of $4 billion in
or alongside our funds. We have also sought to align the
long-term incentives of our senior Carlyle professionals with
our common unitholders, including through equity compensation
arrangements that include certain vesting, minimum retained
ownership and transfer restrictions. See
Management Vesting; Minimum Retained Ownership
Requirements and Transfer Restrictions.
Commitment to Responsible Global
Citizenship. We believe that being a good
corporate citizen is part of good business practice and creates
long-term value for our fund investors. We have worked to apply
the Private Equity Growth Capital Councils Guidelines for
Responsible Investment, which we helped to develop in 2008,
demonstrating our commitment to environmental, social and
governance standards in our investment activities. In addition,
we were the first global alternative asset management firm to
release a corporate citizenship report, which catalogues and
describes our corporate citizenship efforts, including our
responsible investment policy and practices and those of our
portfolio companies.
Our
Strategy for the Future
We intend to create value for our common unitholders by seeking
to:
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continue to generate attractive investment returns for our fund
investors across our multi-fund, multi-product global investment
platform, including by increasing the value of our current
portfolio and leveraging the strong capital position of our
investment funds to pursue new investment opportunities;
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9
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continue to inspire the confidence and loyalty of our more than
1,400 active carry fund investors, and further expand our
investor base, with a focus on client service and strong
investment performance;
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continue to grow our AUM by raising follow-on investment funds
across our four segments and by broadening our platform, through
both organic growth and selective acquisitions, where we believe
we can provide investors with differentiated products to meet
their needs;
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further advance our leadership position in core
non-U.S. geographic
markets, including high-growth emerging markets such as China,
Latin America, India, MENA and
Sub-Saharan
Africa; and
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continue to demonstrate principled industry leadership and to be
a responsible and respected member of the global community by
demonstrating our commitment to environmental, social and
governance standards in our investment activities.
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10
Investment
Risks
An investment in our common units involves substantial risks and
uncertainties. Some of the more significant challenges and risks
relating to an investment in our common units include those
associated with:
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adverse economic and market conditions, which can affect our
business and liquidity position in many ways, including by
reducing the value or performance of the investments made by our
investment funds and reducing the ability of our investment
funds to raise or deploy capital;
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changes in the debt financing markets, which could negatively
impact the ability of our funds and their portfolio companies to
obtain attractive financing or refinancing for their investments
and operations, and could increase the cost of such financing if
it is obtained, leading to lower-yielding investments;
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the potential volatility of our revenue, income and cash flow,
which is influenced by:
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the fact that carried interest is only received when investments
are realized and achieve a certain specified return;
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changes in the carrying values and performance of our
funds investments; and
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the life cycle of our carry funds, which influences the timing
of our accrual and realization of carried interest;
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the fact that the fees we receive for transaction advisory
services are dependent upon the level of transactional activity
during the period;
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our dependence on our founders and other key personnel and our
ability to attract, retain and motivate high quality employees
who will bring value to our operations;
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business and regulatory impediments to our efforts to expand
into new investment strategies, markets and businesses;
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the fact that most of our investment funds invest in illiquid,
long-term investments that are not marketable securities, and
such investments may lose significant value during an economic
downturn;
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the potential for poor performance of our investment
funds; and
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the possibility that we will not be able to continue to raise
capital from third-party investors on advantageous terms.
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As a limited partnership, we will qualify for and intend to rely
on exceptions from certain corporate governance and other
requirements under the rules of the NASDAQ Global Select Market.
For example, we will not be required to comply with the
requirements that a majority of the board of directors of our
general partner consist of independent directors and that we
have independent director oversight of executive officer
compensation and director nominations.
In addition, and as discussed in Material
U.S. Federal Tax Considerations:
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The Carlyle Group L.P. will be treated as a partnership for
U.S. federal income tax purposes, and our common
unitholders therefore will be required to take into account
their allocable share of items of income, gain, loss and
deduction of The Carlyle Group L.P. in computing their
U.S. federal income tax liability;
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Although we currently intend to make annual distributions in an
amount sufficient to cover the anticipated U.S. federal,
state and local income tax liabilities of holders of common
units in respect of their allocable share of our net taxable
income, it is possible that such tax
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11
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liabilities will exceed the cash distributions that holders of
common units receive from us; and
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Although not enacted, the U.S. Congress has considered
legislation that would have precluded us from qualifying as a
partnership for U.S. federal income tax purposes or
required us to hold carried interest through taxable subsidiary
corporations for taxable years after a ten-year transition
period and would have taxed individual holders of common units
with respect to certain income and gains now taxed at capital
gains rates, including gain on disposition of units, at
increased rates. Similar legislation could be enacted in the
future.
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Please see Risk Factors for a discussion of these
and other factors you should consider before making an
investment in our common units.
The Carlyle Group L.P. was formed in Delaware on July 18,
2011. Our principal executive offices are located at 1001
Pennsylvania Avenue, NW, Washington, D.C.
20004-2505,
and our telephone number is
(202) 729-5626.
12
Organizational
Structure
Our
Current Organizational Structure
Our business is currently 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 are under the
common ownership and control of the partners of our firm (who we
refer to as our senior Carlyle professionals) and
two strategic investors that own 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).
In addition, certain individuals engaged in our businesses own
interests in the general partners of our existing carry funds.
Certain of these individuals will, as described below,
contribute 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 this offering,
collectively, as our existing owners.
Reorganization
Prior to this offering, we will complete a series of
transactions pursuant to which our business will be reorganized
into a holding partnership structure as described under
Organizational Structure. Following the
reorganization and this offering, The Carlyle Group L.P. will be
a holding partnership and, through wholly-owned subsidiaries,
will hold equity interests in three Carlyle Holdings
partnerships (which we refer to collectively as Carlyle
Holdings), which in turn will own the four Parent
Entities. Through its wholly-owned subsidiaries, The Carlyle
Group L.P. will be the sole general partner of each of the
Carlyle Holdings partnerships. Accordingly, The Carlyle Group
L.P. will operate and control all of the business and affairs of
Carlyle Holdings and will consolidate the financial results of
Carlyle Holdings and its consolidated subsidiaries, and the
ownership interest of the limited partners of Carlyle Holdings
will be reflected as a non-controlling interest in The Carlyle
Group L.P.s consolidated financial statements. At the time
of this offering, our existing owners will be the only limited
partners of the Carlyle Holdings partnerships.
Certain existing and former owners of the Parent Entities
(including CalPERS and former and current senior Carlyle
professionals) have beneficial interests in investments in or
alongside our funds that were funded by such persons indirectly
through the Parent Entities. In order to minimize the extent of
third party ownership interests in firm assets, prior to the
completion of the offering we will (i) distribute a portion
of these interests (approximately $118.5 million as of
December 31, 2011) to the beneficial owners so that
they are held directly by such persons and are no longer
consolidated in our financial statements and
(ii) restructure the remainder of these interests
(approximately $84.8 million as of December 31,
2011) so that they are reflected as non-controlling
interests in our financial statements. In addition, prior to the
offering the Parent Entities will restructure the ownership of
certain carried interest rights allocated to retired senior
Carlyle professionals so that such carried interest rights will
be reflected as non-controlling interests in our financial
statements. Such restructured carried interest rights accounted
for approximately $42.3 million of our performance fee
revenue for the year ended December 31, 2011. Prior to the
date of the offering the Parent Entities will also make a cash
distribution of previously undistributed earnings to their
owners totaling $ . See
Unaudited Pro Forma Financial Information.
Our existing owners will then contribute to the Carlyle Holdings
partnerships their interests in the Parent Entities and a
portion of the equity interests they own in the general partners
of our existing investment funds and other entities that have
invested in or alongside our funds.
Accordingly, following the reorganization, subsidiaries of
Carlyle Holdings generally will be entitled to:
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all management fees payable in respect of all current and future
investment funds that we advise, as well as the fees for
transaction advisory and oversight services that may be payable
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13
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by these investment funds portfolio companies (subject to
certain third party interests, as described below);
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all carried interest earned in respect of all current and future
carry funds that we advise (subject to certain third party
interests, including those described below and to the allocation
to our investment professionals who work in these operations of
a portion of this carried interest as described below);
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all incentive fees (subject to certain interests in Claren Road
and ESG and, with respect to other funds earning incentive fees,
any performance-related allocations to investment
professionals); and
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all returns on investments of our own balance sheet capital that
we make following this offering (as well as on existing
investments with an aggregate value of approximately
$249.3 million as of December 31, 2011).
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In certain cases, the entities that receive management fees from
our investment funds are owned by Carlyle together with other
persons. For example, management fees from our energy and
renewables funds are received by an entity we own together with
Riverstone, and the Claren Road, ESG and AlpInvest management
companies are partially owned by the respective founders and
managers of these businesses. We may have similar arrangements
with respect to the ownership of the entities that advise our
funds in the future.
In order to better align the interests of our senior Carlyle
professionals and the other individuals who manage our carry
funds with our own interests and with those of the investors in
these funds, such individuals are allocated directly a portion
of the carried interest in our carry funds. Prior to the
reorganization, the level of such allocations vary by fund, but
generally are at least 50% of the carried interests in the fund.
As a result of the reorganization, the allocations to these
individuals will be approximately 45% of all carried interest,
on a blended average basis, earned in respect of investments
made prior to the date of the reorganization and approximately
45% of any carried interest that we earn in respect of
investments made from and after the date of the reorganization,
in each case with the exception of the Riverstone funds, where
we will retain essentially all of the carry to which we are
entitled under our arrangements for those funds. In addition,
under our arrangements with the historical owners and management
team of AlpInvest, such persons are allocated all carried
interest in respect of the historical investments and
commitments to our fund of funds vehicles that existed as of
December 31, 2010, 85% of the carried interest in respect
of commitments from the historical owners of AlpInvest for the
period between 2011 and 2020 and 60% of the carried interest in
respect of all other commitments (including all future
commitments from third parties). See Business
Structure and Operation of Our Investment Funds
Incentive Arrangements/Fee Structure.
14
The diagram below (which omits certain wholly-owned intermediate
holding companies) depicts our organizational structure
immediately following this offering. As discussed in greater
detail below and under Organizational Structure, The
Carlyle Group L.P. will hold, through wholly-owned subsidiaries,
a number of Carlyle Holdings partnership units that is equal to
the number of common units that The Carlyle Group L.P. has
issued and will benefit from the income of Carlyle Holdings to
the extent of its equity interests in the Carlyle Holdings
partnerships. While the holders of common units of The Carlyle
Group L.P. will be entitled to all of the economic rights in The
Carlyle Group L.P. immediately following this offering, our
existing owners will, like the wholly-owned subsidiaries of The
Carlyle Group L.P., hold Carlyle Holdings partnership units that
entitle them to economic rights in Carlyle Holdings to the
extent of their equity interests in the Carlyle Holdings
partnerships. Public investors will not directly hold equity
interests in the Carlyle Holdings partnerships.
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(1)
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The Carlyle Group L.P. common
unitholders will have only limited voting rights and will have
no right to remove our general partner or, except in limited
circumstances, elect the directors of our general partner. TCG
Carlyle Global Partners L.L.C., an entity wholly-owned by our
senior Carlyle professionals, will hold a special voting unit in
The Carlyle Group L.P. that will entitle it, on those few
matters that may be submitted for a vote of The Carlyle Group
L.P. common unitholders, to participate in the vote on the same
basis as the common unitholders and provide it with a number of
votes that is equal to the aggregate number of vested and
unvested partnership units in Carlyle Holdings held by the
limited partners of Carlyle Holdings on the relevant record
date. See Material Provisions of The Carlyle Group L.P.
Partnership Agreement Withdrawal or Removal of the
General Partner, Meetings; Voting
and Election of Directors of General
Partner.
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(2)
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Certain individuals engaged in our
business will continue to own interests directly in selected
operating subsidiaries, including, in certain instances,
entities that receive management fees from funds that we advise.
The Carlyle Holdings partnerships will also directly own
interests in selected operating subsidiaries. For additional
information concerning these interests see Organizational
Structure Our Organizational Structure Following
this Offering Certain Non-controlling Interests in
Operating Subsidiaries.
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15
The Carlyle Group L.P. intends to conduct all of its material
business activities through Carlyle Holdings. Each of the
Carlyle Holdings partnerships was formed to hold our interests
in different businesses. We expect that Carlyle Holdings I L.P.
will own all of our U.S. fee-generating businesses and many
of our
non-U.S. fee-generating
businesses, as well as our carried interests (and other
investment interests) that are expected to derive income that
would not be qualifying income for purposes of the
U.S. federal income tax publicly-traded partnership rules
and certain of our carried interests (and other investment
interests) that do not relate to investments in stock of
corporations or in debt, such as equity investments in entities
that are pass-through for U.S. federal income tax purposes.
We anticipate that Carlyle Holdings II L.P. will hold a
variety of assets, including our carried interests in many of
the investments by our carry funds in entities that are treated
as domestic corporations for U.S. federal income tax
purposes and in certain
non-U.S. entities.
Certain of our
non-U.S. fee-generating
businesses, as well as our
non-U.S. carried
interests (and other investment interests) that are expected to
derive income that would not be qualifying income for purposes
of the U.S. federal income tax publicly-traded partnership
rules and certain of our
non-U.S. carried
interests (and other investment interests) that do not relate to
investments in stock of corporations or in debt, such as equity
investments in entities that are pass-through for
U.S. federal income tax purposes will be held by Carlyle
Holdings III L.P.
The Carlyle Group L.P. has formed wholly-owned subsidiaries to
serve as the general partners of the Carlyle Holdings
partnerships: Carlyle Holdings I GP Inc. (a Delaware corporation
that is a domestic corporation for U.S. federal income tax
purposes), Carlyle Holdings II GP L.L.C. (a Delaware
limited liability company that is a disregarded entity and not
an association taxable as a corporation for U.S. federal
income tax purposes) and Carlyle Holdings III GP L.P. (a
Québec société en commandite that is a
foreign corporation for U.S. federal income tax purposes)
will serve as the general partners of Carlyle Holdings I L.P.,
Carlyle Holdings II L.P. and Carlyle Holdings III
L.P., respectively. Carlyle Holdings I GP Inc. and Carlyle
Holdings III GP L.P. will serve as the general partners of
Carlyle Holdings I L.P. and Carlyle Holdings III L.P.,
respectively, either directly or indirectly through wholly-owned
subsidiaries that are disregarded for federal income tax
purposes. We refer to Carlyle Holdings I GP Inc., Carlyle
Holdings II GP L.L.C. and Carlyle Holdings III GP L.P.
collectively as the Carlyle Holdings General
Partners.
Holding
Partnership Structure
As discussed in Material U.S. Federal Tax
Considerations, The Carlyle Group L.P. will be treated as
a partnership and not as a corporation for U.S. federal
income tax purposes, although our partnership agreement does not
restrict our ability to take actions that may result in our
being treated as an entity taxable as a corporation for
U.S. federal (and applicable state) income tax purposes. An
entity that is treated as a partnership for U.S. federal
income tax purposes is not a taxable entity and incurs no
U.S. federal income tax liability. Instead, each partner is
required to take into account its allocable share of items of
income, gain, loss and deduction of the partnership in computing
its U.S. federal income tax liability, whether or not cash
distributions are made. Investors in this offering will become
limited partners of The Carlyle Group L.P. Accordingly, an
investor in this offering generally will be required to pay
U.S. federal income taxes with respect to the income and
gain of The Carlyle Group L.P. that is allocated to such
investor, even if The Carlyle Group L.P. does not make cash
distributions. We believe that the Carlyle Holdings partnerships
will also be treated as partnerships and not as corporations for
U.S. federal income tax purposes. Accordingly, the holders
of partnership units in Carlyle Holdings, including The Carlyle
Group L.P.s
wholly-owned
subsidiaries, will incur U.S. federal, state and local
income taxes on their proportionate share of any net taxable
income of Carlyle Holdings. See Material U.S. Federal
Tax Considerations for more information about the tax
treatment of The Carlyle Group L.P. and Carlyle Holdings.
Each of the Carlyle Holdings partnerships will have an identical
number of partnership units outstanding, and we use the terms
Carlyle Holdings partnership unit or
partnership unit in/of Carlyle Holdings to refer
collectively to a partnership unit in each of the Carlyle
Holdings partnerships. The Carlyle Group L.P. will hold, through
wholly-owned subsidiaries, a number of
16
Carlyle Holdings partnership units equal to the number of common
units that The Carlyle Group L.P. has issued. The Carlyle
Holdings partnership units that will be held by The Carlyle
Group L.P.s wholly-owned subsidiaries will be economically
identical to the Carlyle Holdings partnership units that will be
held by our existing owners. Accordingly, the income of Carlyle
Holdings will benefit The Carlyle Group L.P. to the extent of
its equity interest in Carlyle Holdings. Immediately following
this offering, The Carlyle Group L.P. will hold Carlyle Holdings
partnership units representing % of
the total number of partnership units of Carlyle Holdings,
or % if the underwriters exercise
in full their option to purchase additional common units, and
our existing owners will hold Carlyle Holdings partnership units
representing % of the total number
of partnership units of Carlyle Holdings,
or % if the underwriters exercise
in full their option to purchase additional common units.
Under the terms of the partnership agreements of the Carlyle
Holdings partnerships, all of the Carlyle Holdings partnership
units received by our existing owners in the reorganization
described in Organizational Structure will be
subject to restrictions on transfer and, with the exception of
Mubadala and CalPERS, minimum retained ownership requirements.
All of the Carlyle Holdings partnership units received by our
founders, CalPERS and Mubadala as part of the Reorganization
will be fully vested as of the date of issuance. All of the
Carlyle Holdings partnership units received by our other
existing owners in exchange for their interests in carried
interest owned at the fund level relating to investments made by
our carry funds prior to the date of the Reorganization will be
fully vested as of the date of issuance. Of the remaining
Carlyle Holdings partnership units received as part of the
Reorganization by our other existing
owners, % will be fully vested as
of the date of issuance and % will
not be vested and, with specified exceptions, will be subject to
forfeiture if the employee ceases to be employed by us prior to
vesting. See Management Vesting; Minimum
Retained Ownership Requirements and Transfer Restrictions.
The Carlyle Group L.P. is managed and operated by our general
partner, Carlyle Group Management L.L.C., to whom we refer as
our general partner, which is in turn wholly-owned
by our senior Carlyle professionals. Our general partner will
not have any business activities other than managing and
operating us. We will reimburse our general partner and its
affiliates for all costs incurred in managing and operating us,
and our partnership agreement provides that our general partner
will determine the expenses that are allocable to us. Although
there are no ceilings on the expenses for which we will
reimburse our general partner and its affiliates, the expenses
to which they may be entitled to reimbursement from us, such as
director fees, are not expected to be material.
Certain
Corporate Governance Considerations
Voting. Unlike the holders of common stock in
a corporation, our common unitholders will have only limited
voting rights and will have no right to remove our general
partner or, except in the limited circumstances described below,
elect the directors of our general partner. In addition, TCG
Carlyle Global Partners L.L.C., an entity wholly-owned by our
senior Carlyle professionals, will hold a special voting unit
that provides it with a number of votes on any matter that may
be submitted for a vote of our common unitholders that is equal
to the aggregate number of vested and unvested Carlyle Holdings
partnership units held by the limited partners of Carlyle
Holdings. Accordingly, immediately following this offering, on
those few matters that may be submitted for a vote of the
limited partners of The Carlyle Group L.P., such as the approval
of amendments to the limited partnership agreement of The
Carlyle Group L.P. that the limited partnership agreement does
not authorize our general partner to approve without the consent
of the limited partners and the approval of certain mergers or
sales of all or substantially all of our assets, investors in
this offering will collectively
have % of the voting power of The
Carlyle Group L.P. limited partners,
or % if the underwriters exercise
in full their option to purchase additional common units, and
our existing owners will collectively
have % of the voting power of The
Carlyle Group L.P. limited partners,
or % if the underwriters exercise
in full their option to purchase additional common units. These
percentages correspond with the percentages of the Carlyle
Holdings
17
partnership units that will be held by The Carlyle Group L.P.
through its wholly-owned subsidiaries, on the one hand, and by
our existing owners, on the other hand. We refer to our common
units (other than those held by any person whom our general
partner may from time to time with such persons consent
designate as a non-voting common unitholder) and our special
voting units as voting units. Our common
unitholders voting rights will be further restricted by
the provision in our partnership agreement stating that any
common units held by a person that beneficially owns 20% or more
of any class of The Carlyle Group L.P. common units then
outstanding (other than our general partner and its affiliates,
or a direct or subsequently approved transferee of our general
partner or its affiliates) cannot be voted on any matter.
Election of Directors. In general, our common
unitholders will have no right to elect the directors of our
general partner. However, when our Senior Carlyle professionals
and other
then-current
or former Carlyle personnel hold less than 10% of the limited
partner voting power, our common unitholders will have the right
to vote in the election of the directors of our general partner.
This voting power condition will be measured on January 31,
of each year, and will be triggered if the total voting power
held by holders of the special voting units in The Carlyle Group
L.P. (including voting units held by our general partner and its
affiliates) in their capacity as such, or otherwise held by
then-current or former Carlyle personnel (treating voting units
deliverable to such persons pursuant to outstanding equity
awards as being held by them), collectively, constitutes less
than 10% of the voting power of the outstanding voting units of
The Carlyle Group L.P. Unless and until the foregoing voting
power condition is satisfied, our general partners board
of directors will be elected in accordance with its limited
liability company agreement, which provides that directors may
be appointed and removed by members of our general partner
holding a majority in interest of the voting power of the
members, which voting power is allocated to each member ratably
according to his or her aggregate ownership of our common units
and partnership units. See Material Provisions of The
Carlyle Group L.P. Partnership Agreement Election of
Directors of General Partner.
Conflicts of Interest and Duties of Our General
Partner. Although our general partner has no
business activities other than the management of our business,
conflicts of interest may arise in the future between us and our
common unitholders, on the one hand, and our general partner and
its affiliates, on the other. The resolution of these conflicts
may not always be in our best interests or that of our common
unitholders. In addition, we have certain duties and obligations
to our investment funds and their investors and we expect to
regularly take actions with respect to the purchase or sale of
investments in our investment funds, the structuring of
investment transactions for those funds or otherwise in a manner
consistent with such duties and obligations but that might at
the same time adversely affect our near-term results of
operations or cash flow.
Our partnership agreement limits the liability of, and reduces
or eliminates the duties (including fiduciary duties) owed by,
our general partner to our common unitholders. Our partnership
agreement also restricts the remedies available to common
unitholders for actions that might otherwise constitute breaches
of our general partners duties (including fiduciary
duties). By purchasing our common units, you are treated as
having consented to the provisions set forth in our partnership
agreement, including the provisions regarding conflicts of
interest situations that, in the absence of such provisions,
might be considered a breach of fiduciary or other duties under
applicable state law. For a more detailed description of the
conflicts of interest and fiduciary responsibilities of our
general partner, see Conflicts of Interest and Fiduciary
Responsibilities.
18
The
Offering
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Common units offered by The Carlyle Group L.P.
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common
units. |
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Common units outstanding after the offering transactions
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common
units
(or common
units if all outstanding Carlyle Holdings partnership units held
by our existing owners were exchanged for newly-issued common
units on a
one-for-one
basis). |
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Use of proceeds |
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We estimate that the net proceeds to The Carlyle Group L.P. from
this offering, after deducting estimated underwriting discounts,
will be approximately $ , or
$ if the underwriters exercise in
full their option to purchase additional common units. |
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The Carlyle Group L.P. intends to use all of these proceeds to
purchase newly issued Carlyle Holdings partnership units from
Carlyle Holdings, as described under Organizational
Structure Offering Transactions. We intend to
cause Carlyle Holdings to use approximately
$ of these proceeds to repay the
outstanding indebtedness under the revolving credit facility of
our existing senior secured credit facility, approximately
$ to repay indebtedness under a
loan agreement we entered into in connection with the
acquisition of Claren Road and the remainder for general
corporate purposes, including general operational needs, growth
initiatives, acquisitions and strategic investments and to fund
capital commitments to, and other investments in and alongside
of, our investment funds. We anticipate that the acquisitions we
may pursue will be those that would broaden our platform where
we believe we can provide investors with differentiated products
to meet their needs. Carlyle Holdings will also bear or
reimburse The Carlyle Group L.P. for all of the expenses of this
offering, which we estimate will be approximately
$ . See Use of Proceeds
and Capitalization. |
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Voting rights |
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Our general partner, Carlyle Group Management L.L.C., will
manage all of our operations and activities. You will not hold
an interest in our general partner, which is wholly-owned by our
senior Carlyle professionals. Unlike the holders of common stock
in a corporation, you will have only limited voting rights and
will have no right to remove our general partner or, except in
limited circumstances, elect the directors of our general
partner. |
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In addition, TCG Carlyle Global Partners L.L.C., an entity
wholly-owned by our senior Carlyle professionals, will hold a
special voting unit that provides it with a number of votes on
any matter that may be submitted for a vote of our common
unitholders that is equal to the aggregate number of vested and
unvested Carlyle Holdings partnership units held by the limited
partners of Carlyle Holdings. Accordingly, immediately following
this offering our existing owners generally will have sufficient
voting power to determine the |
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outcome of those few matters that may be submitted for a vote of
the limited partners of The Carlyle Group L.P. Our common
unitholders voting rights will be further restricted by
the provision in our partnership agreement stating that any
common units held by a person that beneficially owns 20% or more
of any class of The Carlyle Group L.P. common units then
outstanding (other than our general partner and its affiliates,
or a direct or subsequently approved transferee of our general
partner or its affiliates) cannot be voted on any matter. See
Material Provisions of The Carlyle Group L.P. Partnership
Agreement Withdrawal or Removal of the General
Partner, Meetings; Voting and
Election of Directors of General Partner. |
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Cash distribution policy |
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Our general partner currently intends to cause The Carlyle Group
L.P. to make quarterly distributions to our common unitholders
of its share of distributions from Carlyle Holdings, net of
taxes and amounts payable under the tax receivable agreement as
described below. We currently anticipate that we will cause
Carlyle Holdings to make quarterly distributions to its
partners, including The Carlyle Group L.P.s wholly owned
subsidiaries, that will enable The Carlyle Group L.P. to pay a
quarterly distribution of $ per
common unit. In addition, we currently anticipate that we will
cause Carlyle Holdings to make annual distributions to its
partners, including The Carlyle Group L.P.s wholly owned
subsidiaries, in an amount that, taken together with the other
above-described quarterly distributions, represents
substantially all of our Distributable Earnings in excess of the
amount determined by our general partner to be necessary or
appropriate to provide for the conduct of our business, to make
appropriate investments in our business and our funds or to
comply with applicable law or any of our financing agreements.
We anticipate that the aggregate amount of our distributions for
most years will be less than our Distributable Earnings for that
year due to these funding requirements. For a discussion of the
difference between Distributable Earnings and cash distributions
during the historical periods presented, see Cash
Distribution Policy. |
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Notwithstanding the foregoing, the declaration and payment of
any distributions will be at the sole discretion of our general
partner, which may change our distribution policy at any time.
Our general partner will take into account general economic and
business conditions, our strategic plans and prospects, our
business and investment opportunities, our financial condition
and operating results, working capital requirements and
anticipated cash needs, contractual restrictions and
obligations, legal, tax and regulatory restrictions, other
constraints on the payment of distributions by us to our common
unitholders or by our subsidiaries to us, and such other factors
as our general partner may deem relevant. |
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The Carlyle Group L.P. will be a holding partnership and will
have no material assets other than its ownership of |
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partnership units in Carlyle Holdings held through
wholly-owned
subsidiaries. We intend to cause Carlyle Holdings to make
distributions to its partners, including the wholly-owned
subsidiaries of The Carlyle Group L.P., in order to fund any
distributions we may declare on the common units. If Carlyle
Holdings makes such distributions, the limited partners of
Carlyle Holdings will be entitled to receive equivalent
distributions pro rata based on their partnership interests in
Carlyle Holdings. Because Carlyle Holdings I GP Inc. must pay
taxes and make payments under the tax receivable agreement, the
amounts ultimately distributed by The Carlyle Group L.P. to
common unitholders are expected to be less, on a per unit basis,
than the amounts distributed by the Carlyle Holdings
partnerships to the limited partners of the Carlyle Holdings
partnerships in respect of their Carlyle Holdings partnership
units. |
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In addition, the partnership agreements of the Carlyle Holdings
partnerships will provide for cash distributions, which we refer
to as tax distributions, to the partners of such
partnerships if our wholly-owned subsidiaries that are the
general partners of the Carlyle Holdings partnerships determine
that the taxable income of the relevant partnership will give
rise to taxable income for its partners. Generally, these tax
distributions will be computed based on our estimate of the net
taxable income of the relevant partnership allocable to a
partner multiplied by an assumed tax rate equal to the highest
effective marginal combined U.S. federal, state and local income
tax rate prescribed for an individual or corporate resident in
New York, New York (taking into account the non-deductibility of
certain expenses and the character of our income). The Carlyle
Holdings partnerships will make tax distributions only to the
extent distributions from such partnerships for the relevant
year were otherwise insufficient to cover such tax liabilities.
The Carlyle Group L.P. is not required to distribute to its
common unitholders any of the cash that its wholly-owned
subsidiaries may receive as a result of tax distributions by the
Carlyle Holdings partnerships. |
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For limitations on our ability to make distributions, see
Cash Distribution Policy. |
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Exchange rights of holders of Carlyle Holdings partnership units
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Prior to this offering we will enter into an exchange agreement
with our senior Carlyle professionals and the other limited
partners of the Carlyle Holdings partnerships so that these
holders, subject to the vesting and minimum retained ownership
requirements and transfer restrictions set forth in the
partnership agreements of the Carlyle Holdings partnerships, may
on a quarterly basis, from and after the first anniversary of
the date of the closing of this offering (subject to the terms
of the exchange agreement), exchange their Carlyle Holdings |
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partnership units for The Carlyle Group L.P. common units on a
one-for-one
basis, subject to customary conversion rate adjustments for
splits, unit distributions and reclassifications. In addition,
subject to certain requirements, CalPERS will generally be
permitted to exchange Carlyle Holdings partnership units for
common units from and after the closing of this offering. Any
common units received by CalPERS in any such exchange during the
lock-up
period described in Common Units Eligible For Future
Sale
Lock-Up
Arrangements would be subject to the restrictions
described in such section. A Carlyle Holdings limited partner
must exchange one partnership unit in each of the three Carlyle
Holdings partnerships to effect an exchange for a common unit.
As the number of Carlyle Holdings partnership units held by the
limited partners of the Carlyle Holdings partnerships declines,
the number of votes to which TCG Carlyle Global Partners L.L.C.
is entitled as a result of its ownership of the special voting
unit will be correspondingly reduced. For information concerning
transfer restrictions that will apply to holders of Carlyle
Holdings partnership units, including our senior Carlyle
professionals, see Management Vesting; Minimum
Retained Ownership Requirements and Transfer Restrictions. |
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Tax receivable agreement |
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Future exchanges of Carlyle Holdings partnership units are
expected to result in increases in the tax basis of the tangible
and intangible assets of Carlyle Holdings, primarily
attributable to a portion of the goodwill inherent in our
business. These increases in tax basis will increase (for tax
purposes) depreciation and amortization deductions and therefore
reduce the amount of tax that certain of our subsidiaries,
including Carlyle Holdings I GP Inc., which we refer 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. We will enter into a tax receivable agreement
with our existing owners whereby the corporate taxpayers will
agree to pay to our existing owners 85% of the amount of cash
tax savings, if any, in U.S. federal, state and local income tax
that they realize as a result of these increases in tax basis.
The corporate taxpayers will have the right to terminate the tax
receivable agreement by making payments to our existing owners
calculated by reference to the value of all future payments that
our existing owners would have been entitled to receive under
the tax receivable agreement using certain valuation
assumptions, including that any Carlyle Holdings partnership
units that have not been exchanged are deemed exchanged for the
market value of the common units at the time of termination, and
that the corporate taxpayers will have sufficient taxable income
in each future taxable year to fully realize all potential tax
savings. Based upon certain assumptions described in greater |
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detail under Certain Relationships and Related Person
Transactions Tax Receivable Agreement, we
estimate that if the corporate taxpayers were to exercise their
termination right immediately following this offering, the
aggregate amount of these termination payments would be
approximately $ million. See
Certain Relationships and Related Person
Transactions Tax Receivable Agreement. |
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Risk factors |
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See Risk Factors for a discussion of risks you
should carefully consider before deciding to invest in our
common units. |
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Proposed trading symbol |
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CG. |
In this prospectus, unless otherwise indicated, the number of
common units outstanding and the other information based thereon
does not reflect:
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common
units issuable upon exercise of the underwriters option to
purchase additional common units from us;
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common
units issuable upon exchange
of
Carlyle Holdings partnership units that will be held by our
existing owners immediately following the offering transactions;
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up
to
common units issuable upon exchange of up
to
Carlyle Holdings partnership units that may be issued in
connection with the contingently issuable equity interests
received by the sellers as part of our acquisition of Claren
Road, subject to adjustment as described below. See Note 3
to the combined and consolidated financial statements included
elsewhere in this prospectus; or
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interests that may be granted under the 2012 Carlyle Group
Equity Incentive Plan, or our Equity Incentive Plan,
consisting of:
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deferred
restricted common units that we expect to grant to our employees
at the time of this offering;
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phantom
deferred restricted common units that we expect to grant to our
employees at the time of this offering, which are settleable in
cash; and
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additional
common units or Carlyle Holdings partnership units available for
future grant under our Equity Incentive Plan, which are subject
to automatic annual increases.
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See Management Equity Incentive Plan
and IPO Date Equity Awards.
We have agreed to adjust the Carlyle Holdings partnership units
issuable to the Claren Road sellers to the extent necessary to
ensure that the implied value of
the
Carlyle Holdings partnership units received or to be received by
them upon fulfillment of the annual performance conditions
(inclusive of the contingently issuable equity interests
described above), calculated based on the initial public
offering price per common unit in this offering, is not less
than $41.0 million and not greater than $61.6 million
(assuming that all annual performance conditions are met). In
addition, we have agreed to adjust the consideration to the ESG
sellers, which adjustment may be made at our option in cash or
Carlyle Holdings partnership units, to the extent necessary to
ensure that the value of
the
Carlyle Holdings partnership units received by them, based on
the five-day
volume weighted average price per unit of our common units,
measured at the expiration of the
180-day
restricted period described under Common Units Eligible
For Future Sale
Lock-Up
Arrangements, is not less than $7.0 million and not
greater than $8.4 million.
See Pricing Sensitivity Analysis to see how some of
the information presented above would be affected by an initial
public offering price per common unit at the low-, mid- and
high-points of the price range indicated on the front cover of
this prospectus.
23
Summary
Financial and Other Data
The following summary financial and other data of Carlyle Group,
which comprises 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 controlled subsidiaries, which
are under common ownership and control by our individual senior
Carlyle professionals, entities affiliated with Mubadala and
CalPERS, should be read together with Organizational
Structure, Unaudited Pro Forma Financial
Information, Selected Historical Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
historical financial statements and related notes included
elsewhere in this prospectus. Carlyle Group is considered our
predecessor for accounting purposes, and its combined and
consolidated financial statements will be our historical
financial statements following this offering.
We derived the summary historical combined and consolidated
statements of operations data of Carlyle Group for each of the
years ended December 31, 2011, 2010 and 2009 and the
summary historical combined and consolidated balance sheet data
as of December 31, 2011 and 2010 from our audited combined
and consolidated financial statements which are included
elsewhere in this prospectus. We derived the summary historical
combined and consolidated balance sheet data of Carlyle Group as
of December 31, 2009 from our audited combined and
consolidated financial statements which are not included in this
prospectus. The combined and consolidated financial statements
of Carlyle Group have been prepared on substantially the same
basis for all historical periods presented; however, the
consolidated funds are not the same entities in all periods
shown due to changes in U.S. GAAP, changes in fund terms
and the creation and termination of funds.
Net income is determined in accordance with U.S. GAAP for
partnerships and is not comparable to net income of a
corporation. All distributions and compensation for services
rendered by Carlyles individual partners have been
reflected as distributions from equity rather than compensation
expense in the historical combined and consolidated financial
statements. Our
non-GAAP
presentation of Economic Net Income and Distributable Earnings
reflects, among other adjustments, pro forma compensation
expense for compensation to our senior Carlyle professionals,
which we have historically accounted for as distributions from
equity rather than as employee compensation. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Key Financial
Measures Non-GAAP Financial Measures.
The summary historical combined and consolidated financial and
other data is not indicative of the expected future operating
results of The Carlyle Group L.P. following the Reorganization
and the Offering Transactions (as defined below). Prior to this
offering, we will complete a series of transactions pursuant to
which our business will be reorganized into a holding
partnership structure as described in Organizational
Structure. See Organizational Structure and
Unaudited Pro Forma Financial Information.
The summary unaudited pro forma consolidated statement of
operations data for the year ended December 31, 2011
presents our consolidated results of operations giving pro forma
effect to the Reorganization and Offering Transactions described
under Organizational Structure, and the other
transactions described in Unaudited Pro Forma Financial
Information, as if such transactions had occurred on
January 1, 2011. The summary unaudited pro forma
consolidated balance sheet data as of December 31, 2011
presents our consolidated financial position giving pro forma
effect to the Reorganization and Offering Transactions described
under Organizational Structure, and the other
transactions described in Unaudited Pro Forma Financial
Information, as if such transactions had occurred on
December 31, 2011. The pro forma adjustments are based on
available information and upon assumptions that our management
believes are reasonable in order to reflect, on a pro forma
basis, the impact of these transactions on the historical
combined and consolidated financial information of Carlyle
Group. The unaudited condensed consolidated pro forma financial
information is included for informational purposes only and does
not purport to reflect the results of operations or financial
position of Carlyle Group that would have occurred had the
transactions
24
described above occurred on the dates indicated or had we
operated as a public company during the periods presented or for
any future period or date. The unaudited condensed consolidated
pro forma financial information should not be relied upon as
being indicative of our results of operations or financial
position had the transactions described under
Organizational Structure and the use of the
estimated net proceeds from this offering as described under
Use of Proceeds occurred on the dates assumed. The
unaudited pro forma consolidated financial information also does
not project our results of operations or financial position for
any future period or date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma(4)
for
|
|
|
|
|
|
|
the Year
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in millions)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund management fees
|
|
$
|
|
|
|
$
|
915.5
|
|
|
$
|
770.3
|
|
|
$
|
788.1
|
|
Performance fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
|
|
|
|
1,307.4
|
|
|
|
266.4
|
|
|
|
11.1
|
|
Unrealized
|
|
|
|
|
|
|
(185.8
|
)
|
|
|
1,215.6
|
|
|
|
485.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total performance fees
|
|
|
|
|
|
|
1,121.6
|
|
|
|
1,482.0
|
|
|
|
496.7
|
|
Investment income
|
|
|
|
|
|
|
78.4
|
|
|
|
72.6
|
|
|
|
5.0
|
|
Interest and other income
|
|
|
|
|
|
|
15.8
|
|
|
|
21.4
|
|
|
|
27.3
|
|
Interest and other income of Consolidated Funds
|
|
|
|
|
|
|
714.0
|
|
|
|
452.6
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
|
|
|
|
2,845.3
|
|
|
|
2,798.9
|
|
|
|
1,317.8
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base compensation
|
|
|
|
|
|
|
374.5
|
|
|
|
265.2
|
|
|
|
264.2
|
|
Performance fee related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
|
|
|
|
225.7
|
|
|
|
46.6
|
|
|
|
1.1
|
|
Unrealized
|
|
|
|
|
|
|
(122.3
|
)
|
|
|
117.2
|
|
|
|
83.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits
|
|
|
|
|
|
|
477.9
|
|
|
|
429.0
|
|
|
|
348.4
|
|
General, administrative and other expenses
|
|
|
|
|
|
|
323.5
|
|
|
|
177.2
|
|
|
|
236.6
|
|
Interest
|
|
|
|
|
|
|
60.6
|
|
|
|
17.8
|
|
|
|
30.6
|
|
Interest and other expenses of Consolidated Funds
|
|
|
|
|
|
|
453.1
|
|
|
|
233.3
|
|
|
|
0.7
|
|
Other non-operating expenses
|
|
|
|
|
|
|
32.0
|
|
|
|
|
|
|
|
|
|
Loss (gain) from early extinguishment of debt, net of related
expenses
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
(10.7
|
)
|
Equity issued for affiliate debt financing
|
|
|
|
|
|
|
|
|
|
|
214.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
|
|
|
|
1,347.1
|
|
|
|
1,073.8
|
|
|
|
605.6
|
|
Other Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment losses of Consolidated Funds
|
|
|
|
|
|
|
(323.3
|
)
|
|
|
(245.4
|
)
|
|
|
(33.8
|
)
|
Gain on business acquisition
|
|
|
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
1,182.8
|
|
|
|
1,479.7
|
|
|
|
678.4
|
|
Provision for income taxes
|
|
|
|
|
|
|
28.5
|
|
|
|
20.3
|
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
1,154.3
|
|
|
|
1,459.4
|
|
|
|
663.6
|
|
Net loss attributable to non-controlling interests in
consolidated entities
|
|
|
|
|
|
|
(202.6
|
)
|
|
|
(66.2
|
)
|
|
|
(30.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Carlyle Group (or The Carlyle Group
L.P. for pro forma)
|
|
$
|
|
|
|
$
|
1,356.9
|
|
|
$
|
1,525.6
|
|
|
$
|
694.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Net Income(1)(2)
|
|
|
|
|
|
$
|
833.1
|
|
|
$
|
1,014.0
|
|
|
$
|
416.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Earnings(1)(3)
|
|
|
|
|
|
$
|
864.4
|
|
|
$
|
342.5
|
|
|
$
|
165.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee-Earning Assets Under Management (at period end)
|
|
|
|
|
|
$
|
111,024.6
|
|
|
$
|
80,776.5
|
|
|
$
|
75,410.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Under Management (at period end)
|
|
|
|
|
|
$
|
146,968.6
|
|
|
$
|
107,511.8
|
|
|
$
|
89,831.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in millions)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
509.6
|
|
|
$
|
616.9
|
|
|
$
|
488.1
|
|
Investments and accrued performance fees
|
|
$
|
|
|
|
$
|
2,644.0
|
|
|
$
|
2,594.3
|
|
|
$
|
1,279.2
|
|
Investments of Consolidated
Funds(5)
|
|
$
|
|
|
|
$
|
19,507.3
|
|
|
$
|
11,864.6
|
|
|
$
|
163.9
|
|
Total assets
|
|
$
|
|
|
|
$
|
24,651.7
|
|
|
$
|
17,062.8
|
|
|
$
|
2,509.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
|
|
|
$
|
860.9
|
|
|
$
|
597.5
|
|
|
$
|
412.2
|
|
Subordinated loan payable to affiliate
|
|
$
|
|
|
|
$
|
262.5
|
|
|
$
|
494.0
|
|
|
$
|
|
|
Loans payable of Consolidated Funds
|
|
$
|
|
|
|
$
|
9,689.9
|
|
|
$
|
10,433.5
|
|
|
$
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
13,561.1
|
|
|
$
|
14,170.2
|
|
|
$
|
1,796.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interests in consolidated entities
|
|
$
|
|
|
|
$
|
1,923.4
|
|
|
$
|
694.0
|
|
|
$
|
|
|
Total members equity
|
|
$
|
|
|
|
$
|
817.3
|
|
|
$
|
895.2
|
|
|
$
|
437.5
|
|
Equity appropriated for Consolidated Funds
|
|
$
|
|
|
|
$
|
853.7
|
|
|
$
|
938.5
|
|
|
$
|
|
|
Non-controlling interests in consolidated entities
|
|
$
|
|
|
|
$
|
7,496.2
|
|
|
$
|
364.9
|
|
|
$
|
276.1
|
|
Total equity
|
|
$
|
|
|
|
$
|
9,167.2
|
|
|
$
|
2,198.6
|
|
|
$
|
713.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Under GAAP, we are required to
consolidate certain of the investment funds that we advise.
However, for segment reporting purposes, we present revenues and
expenses on a basis that deconsolidates these investment funds.
|
|
(2)
|
|
ENI, a non-GAAP measure, represents
segment net income excluding the impact of income taxes,
acquisition-related items including amortization of acquired
intangibles and earn-outs, charges associated with equity-based
compensation issued in this offering or future acquisitions,
corporate actions and infrequently occurring or unusual events
(e.g., acquisition related costs and gains and losses on fair
value adjustments on contingent consideration, gains and losses
from the retirement of our debt, charges associated with lease
terminations and employee severance and settlements of legal
claims). For discussion about the purposes for which our
management uses ENI and the reasons why we believe our
presentation of ENI provides useful information to investors
regarding our results of operations as well as a reconciliation
of Economic Net Income to Income Before Provision for Income
Taxes, see Managements Discussion and Analysis of
Financial Condition and Results of Operations Key
Financial Measures Non-GAAP Financial
Measures Economic Net Income and
Non-GAAP Financial Measures and
Note 14 to our combined and consolidated financial
statements appearing elsewhere in this prospectus.
|
|
(3)
|
|
Distributable Earnings, a non-GAAP
measure, is a component of ENI representing total ENI less
unrealized performance fees and unrealized investment income
plus unrealized performance fee compensation expense. For a
discussion about the purposes for which our management uses
Distributable Earnings and the reasons why we believe our
presentation of Distributable Earnings provides useful
information to investors regarding our results of operations as
well as a reconciliation of Distributable Earnings to Income
Before Provision for Income Taxes, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Key Financial Measures
Non-GAAP Financial Measures Distributable
Earnings and Non-GAAP Financial
Measures and Note 14 to our combined and consolidated
financial statements appearing elsewhere in this prospectus.
|
|
(4)
|
|
Refer to Unaudited Pro Forma
Financial Information.
|
|
(5)
|
|
The entities comprising our
consolidated funds are not the same entities for all periods
presented. Pursuant to revised consolidation guidance that
became effective January 1, 2010, we consolidated the existing
and any subsequently acquired CLOs where we hold a controlling
financial interest. The consolidation of funds during the
periods presented generally has the effect of grossing up
reported assets, liabilities, and cash flows, and has no effect
on net income attributable to Carlyle Group or members
equity.
|
26
RISK
FACTORS
An investment in our common units involves risks. You should
carefully consider the following information about these risks,
together with the other information contained in this
prospectus, before investing in our common units.
Risks
Related to Our Company
Adverse
economic and market conditions could negatively impact our
business in many ways, including by reducing the value or
performance of the investments made by our investment funds,
reducing the ability of our investment funds to raise or deploy
capital, and impacting our liquidity position, any of which
could materially reduce our revenue and cash flow and adversely
affect our financial condition.
Our business may be materially affected by conditions in the
global financial markets and economic conditions or events
throughout the world that are outside of our control, including
but not limited to changes in interest rates, availability of
credit, inflation rates, economic uncertainty, changes in laws
(including laws relating to taxation), trade barriers, commodity
prices, currency exchange rates and controls and national and
international political circumstances (including wars, terrorist
acts or security operations). These factors may affect the level
and volatility of securities prices and the liquidity and the
value of investments, and we may not be able to or may choose
not to manage our exposure to these market conditions
and/or other
events. In the event of a market downturn, each of our
businesses could be affected in different ways.
For example, the unprecedented turmoil in the global financial
markets during 2008 and 2009 provoked significant volatility of
securities prices, contraction in the availability of credit and
the failure of a number of companies, including leading
financing institutions, and had a significant material adverse
effect on our Corporate Private Equity, Real Assets and Global
Market Strategies businesses. During that period, many economies
around the world, including the U.S. economy, experienced
significant declines in employment, household wealth and
lending. In addition, the recent speculation regarding the
inability of Greece and certain other European countries to pay
their national debt, the response by Eurozone policy makers to
mitigate this sovereign debt crisis and the concerns regarding
the stability of the Eurozone currency have created uncertainty
in the credit markets. As a result, there has been a strain on
banks and other financial services participants, which could
adversely affect our ability to obtain credit on favorable terms
or at all. Those events led to a significantly diminished
availability of credit and an increase in the cost of financing.
The lack of credit in 2008 and 2009 materially hindered the
initiation of new, large-sized transactions for our Corporate
Private Equity and Real Assets segments and adversely impacted
our operating results in those periods. While the adverse
effects of that period have abated to a degree, global financial
markets have experienced significant volatility following the
downgrade by Standard & Poors on August 5,
2011 of the long-term credit rating of U.S. Treasury debt
from AAA to AA+. The capital market volatility we are currently
experiencing that became more pronounced beginning in August
2011 has continued to impact valuations of a significant number
of our funds investments and fund performance as of and
for the year ended December 31, 2011. There continue to be
signs of economic weakness such as relatively high levels of
unemployment in major markets including the United States and
Europe. Further, financial institutions have not yet provided
debt financing in amounts and on the terms commensurate with
what they provided prior to 2008.
Our funds may be affected by reduced opportunities to exit and
realize value from their investments, by lower than expected
returns on investments made prior to the deterioration of the
credit markets and by the fact that we may not be able to find
suitable investments for the funds to effectively deploy
capital, all of which could adversely affect the timing of new
funds and our ability to raise new funds. During periods of
difficult market conditions or slowdowns (which may be across
one or more industries or geographies), our funds
portfolio companies may experience adverse operating
performance, decreased revenues, financial losses, difficulty in
obtaining access to financing and increased funding costs.
Negative financial results in our funds portfolio
companies may result in lower
27
investment returns for our investment funds, which could
materially and adversely affect our ability to raise new funds
as well as our operating results and cash flow. During such
periods of weakness, our funds portfolio companies may
also have difficulty expanding their businesses and operations
or meeting their debt service obligations or other expenses as
they become due, including expenses payable to us. Furthermore,
such negative market conditions could potentially result in a
portfolio company entering bankruptcy proceedings, or in the
case of our Real Assets funds, the abandonment or foreclosure of
investments, thereby potentially resulting in a complete loss of
the funds investment in such portfolio company or real
assets and a significant negative impact to the funds
performance and consequently our operating results and cash
flow, as well as to our reputation. In addition, negative market
conditions would also increase the risk of default with respect
to investments held by our funds that have significant debt
investments, such as our Global Market Strategies funds.
Our operating performance may also be adversely affected by our
fixed costs and other expenses and the possibility that we would
be unable to scale back other costs within a time frame
sufficient to match any decreases in revenue relating to changes
in market and economic conditions. In order to reduce expenses
in the face of a difficult economic environment, we may need to
cut back or eliminate the use of certain services or service
providers, or terminate the employment of a significant number
of our personnel that, in each case, could be important to our
business and without which our operating results could be
adversely affected.
Finally, during periods of difficult market conditions or
slowdowns, our fund investment performance could suffer,
resulting in, for example, the payment of less or no carried
interest to us. The payment of less or no carried interest could
cause our cash flow from operations to significantly decrease,
which could materially and adversely affect our liquidity
position and the amount of cash we have on hand to conduct our
operations. Having less cash on hand could in turn require us to
rely on other sources of cash (such as the capital markets which
may not be available to us on acceptable terms) to conduct our
operations, which include, for example, funding significant
general partner and co-investment commitments to our carry funds
and fund of funds vehicles. Furthermore, during adverse economic
and market conditions, we might not be able to renew all or part
of our credit facility or find alternate financing on
commercially reasonable terms. As a result, our uses of cash may
exceed our sources of cash, thereby potentially affecting our
liquidity position.
Changes
in the debt financing markets could negatively impact the
ability of certain of our funds and their portfolio companies to
obtain attractive financing or re-financing for their
investments and could increase the cost of such financing if it
is obtained, which could lead to lower-yielding investments and
potentially decreasing our net income.
Any recurrence of the significant contraction in the market for
debt financing that occurred in 2008 and 2009 or other adverse
change to us relating to the terms of such debt financing with,
for example, higher rates, higher equity requirements
and/or more
restrictive covenants, particularly in the area of acquisition
financings for leveraged buyout and real assets transactions,
could have a material adverse impact on our business. In the
event that certain of our funds are unable to obtain committed
debt financing for potential acquisitions or can only obtain
debt at an increased interest rate or on unfavorable terms,
certain of our funds may have difficulty completing otherwise
profitable acquisitions or may generate profits that are lower
than would otherwise be the case, either of which could lead to
a decrease in the investment income earned by us. Similarly, our
funds portfolio companies regularly utilize the corporate
debt markets in order to obtain financing for their operations.
To the extent that the credit markets render such financing
difficult to obtain or more expensive, this may negatively
impact the operating performance of those portfolio companies
and, therefore, the investment returns of our funds. In
addition, to the extent that the markets make it difficult or
impossible to refinance debt that is maturing in the near term,
some of our portfolio companies may be unable to repay such debt
at maturity and may be forced to sell assets, undergo a
recapitalization or seek bankruptcy protection.
28
Our
revenue, net income and cash flow are variable, which may make
it difficult for us to achieve steady earnings growth on a
quarterly basis.
Our revenue, net income and cash flow are variable. For example,
our cash flow fluctuates due to the fact that we receive carried
interest from our carry funds and fund of funds vehicles only
when investments are realized and achieve a certain preferred
return. In addition, transaction fees received by our carry
funds can vary from quarter to quarter. We may also experience
fluctuations in our results, including our revenue and net
income, from quarter to quarter due to a number of other
factors, including changes in the carrying values and
performance of our funds investments that can result in
significant volatility in the carried interest that we have
accrued (or as to which we have reversed prior accruals) from
period to period, as well as changes in the amount of
distributions, dividends or interest paid in respect of
investments, changes in our operating expenses, the degree to
which we encounter competition and general economic and market
conditions. For instance, during the most recent economic
downturn, we recorded significant reductions in the carrying
values of many of the investments of the investment funds we
advise. The carrying value of fund investments may be more
variable during times of market volatility. Such variability in
the timing and amount of our accruals and realizations of
carried interest and transaction fees may lead to volatility in
the trading price of our common units and cause our results and
cash flow for a particular period not to be indicative of our
performance in a future period. We may not achieve steady growth
in net income and cash flow on a quarterly basis, which could in
turn lead to adverse movements in the price of our common units
or increased volatility in our common unit price generally. The
timing and receipt of carried interest also varies with the life
cycle of our carry funds. For instance, the significant
distributions made by our carry funds during 2010 and 2011 were
partly a function of the relatively large portion of our AUM
attributable to carry funds and investments that were in their
harvesting period during such time, as opposed to
the fundraising or investment periods which precede harvesting.
During periods in which a significant portion of our AUM is
attributable to carry funds and fund of funds vehicles or their
investments that are not in their harvesting periods, as has
been the case from time to time, we may receive substantially
lower distributions. Moreover, even if an investment proves to
be profitable, it may be several years before any profits can be
realized in cash (or other proceeds). We cannot predict
precisely when, or if, realizations of investments will occur.
For example, for an extended period beginning the latter half of
2007, the global credit crisis made it difficult for potential
purchasers to secure financing to purchase companies in our
investment funds portfolio, which limited the number of
potential realization events. A downturn in the equity markets
also makes it more difficult to exit investments by selling
equity securities. If we were to have a realization event in a
particular quarter, the event may have a significant impact on
our quarterly results and cash flow for that particular quarter
which may not be replicated in subsequent quarters.
We recognize revenue on investments in our investment funds
based on our allocable share of realized and unrealized gains
(or losses) reported by such investment funds, and a decline in
realized or unrealized gains, or an increase in realized or
unrealized losses, would adversely affect our revenue, which
could further increase the volatility of our quarterly results
and cash flow. Because our carry funds and fund of funds
vehicles have preferred investor return thresholds that need to
be met prior to us receiving any carried interest, declines in,
or failures to increase sufficiently the carrying value of, the
investment portfolios of a carry fund or fund of funds vehicle
may delay or eliminate any carried interest distributions paid
to us in respect of that fund or vehicle, since the value of the
assets in the fund or vehicle would need to recover to their
aggregate cost basis plus the preferred return over time before
we would be entitled to receive any carried interest from that
fund or vehicle.
With respect to certain of the investment funds and vehicles
that we advise, we are entitled to incentive fees that are paid
annually, semi-annually or quarterly if the net asset value of a
fund has increased. These funds also have high-water
mark provisions whereby if the funds have experienced
losses in prior periods, we will not be able to earn incentive
fees with respect to an investors account until the net
asset value of the investors account exceeds the highest
period end
29
value on which incentive fees were previously paid. The
incentive fees we earn are therefore dependent on the net asset
value of these funds or vehicles, which could lead to volatility
in our quarterly results and cash flow.
Our fee revenue may also depend on the pace of investment
activity in our funds. In many of our carry funds, the base
management fee may be reduced when the fund has invested
substantially all of its capital commitments. We may receive a
lower management fee from such funds after the investing period
and during the period the fund is harvesting its investments. As
a result, the variable pace at which many of our carry funds
invest capital may cause our management fee revenue to vary from
one quarter to the next. For example, the investment periods for
many of the large carry funds that we raised during the
particularly productive period from 2007 to early 2008 are,
unless extended, scheduled to expire beginning in 2012, which
will result in step-downs in the applicable management fee rates
for certain of these funds. Our management fee revenues will be
reduced by these step-downs in management fee rates, as well as
by any adverse impact on fee-earning AUM resulting from
successful realization activity in our carry funds. Our failure
to successfully replace and grow fee-earning AUM through the
integration of recent acquisitions and anticipated new
fundraising initiatives could have an adverse effect on our
management fee revenue.
We
depend on our founders and other key personnel, and the loss of
their services or investor confidence in such personnel could
have a material adverse effect on our business, results of
operations and financial condition.
We depend on the efforts, skill, reputations and business
contacts of our senior Carlyle professionals, including our
founders, Messrs. Conway, DAniello and Rubenstein,
and other key personnel, including members of our management
committee, operating committee, the investment committees of our
investment funds and senior investment teams, the information
and deal flow they and others generate during the normal course
of their activities and the synergies among the diverse fields
of expertise and knowledge held by our professionals.
Accordingly, our success will depend on the continued service of
these individuals. Our founders currently have no immediate
plans to cease providing services to our firm, but our founders
and other key personnel are not obligated to remain employed
with us. In addition, all of the Carlyle Holdings partnership
units received by our founders and a portion of the Carlyle
Holdings partnership units that other key personnel will receive
in the reorganization, as described in Organizational
Structure, will be fully vested upon issuance. Several key
personnel have left the firm in the past and others may do so in
the future, and we cannot predict the impact that the departure
of any key personnel will have on our ability to achieve our
investment objectives. The loss of the services of any of them
could have a material adverse effect on our revenues, net income
and cash flow and could harm our ability to maintain or grow AUM
in existing funds or raise additional funds in the future. Under
the provisions of the partnership agreements governing most of
our carry funds, the departure of various key Carlyle personnel
could, under certain circumstances, relieve fund investors of
their capital commitments to those funds, if such an event is
not cured to the satisfaction of the relevant fund investors
within a certain amount of time. We have historically relied in
part on the interests of these professionals in the investment
funds carried interest and incentive fees to discourage
them from leaving the firm. However, to the extent our
investment funds perform poorly, thereby reducing the potential
for carried interest and incentive fees, their interests in
carried interest and incentive fees become less valuable to them
and may become a less effective retention tool.
Our senior Carlyle professionals and other key personnel possess
substantial experience and expertise and have strong business
relationships with investors in our funds and other members of
the business community. As a result, the loss of these personnel
could jeopardize our relationships with investors in our funds
and members of the business community and result in the
reduction of AUM or fewer investment opportunities. For example,
if any of our senior Carlyle professionals were to join or form
a competing firm, that could have a material adverse effect on
our business, results of operations and financial condition.
30
Recruiting
and retaining professionals may be more difficult in the future,
which could adversely affect our business, results of operations
and financial condition.
Our most important asset is our people, and our continued
success is highly dependent upon the efforts of our senior and
other professionals. Our future success and growth depends to a
substantial degree on our ability to retain and motivate our
senior Carlyle professionals and other key personnel and to
strategically recruit, retain and motivate new talented
personnel, including new senior Carlyle professionals. However,
we may not be successful in our efforts to recruit, retain and
motivate the required personnel as the market for qualified
investment professionals is extremely competitive.
Following this offering, we may not be able to provide future
senior Carlyle professionals with equity interests in our
business to the same extent or with the same economic and tax
consequences as those from which our existing senior Carlyle
professionals previously benefited. For example, following this
offering, our investment professionals and other employees are
expected to be incentivized by the receipt of partnership units
in Carlyle Holdings, deferred restricted common units granted
pursuant to our equity plans, participation interests in carried
interest and bonus compensation. The portion of their economic
incentives comprising Carlyle Holdings partnership units and
grants of restricted units will be greater after the offering
than before the offering, and these incentives have different
economic and tax characteristics than the blend of financial
incentives we used before the offering.
If legislation were to be enacted by the U.S. Congress or
any state or local governments to treat carried interest as
ordinary income rather than as capital gain for tax purposes,
such legislation would materially increase the amount of taxes
that we and possibly our unitholders would be required to pay,
thereby adversely affecting our ability to recruit, retain and
motivate our current and future professionals. See
Risks Related to
U.S. Taxation Our structure involves complex
provisions of U.S. federal income tax law for which no
clear precedent or authority may be available. Our structure
also is subject to potential legislative, judicial or
administrative change and differing interpretations, possibly on
a retroactive basis and Although not
enacted, the U.S. Congress has considered legislation that
would have: (i) in some cases after a ten-year transition
period, precluded us from qualifying as a partnership for U.S.
federal income tax purposes or required us to hold carried
interest through taxable subsidiary corporations; and
(ii) taxed certain income and gains at increased rates. If
any similar legislation were to be enacted and apply to us, the
after tax income and gain related to our business, as well as
our distributions to you and the market price of our common
units, could be reduced. Moreover, the value of the common
units we may issue our senior Carlyle professionals at any given
time may subsequently fall (as reflected in the market price of
our common units), which could counteract the intended
incentives.
As a result of the foregoing, in order to recruit and retain
existing and future senior Carlyle professionals and other key
personnel, we may need to increase the level of compensation
that we pay to them. Accordingly, as we promote or hire new
senior Carlyle professionals and other key personnel over time
or attempt to retain the services of certain of our key
personnel, we may increase the level of compensation we pay to
these individuals, which could cause our total employee
compensation and benefits expense as a percentage of our total
revenue to increase and adversely affect our profitability. The
issuance of equity interests in our business in the future to
our senior Carlyle professionals and other personnel would also
dilute public common unitholders.
We strive to maintain a work environment that reinforces our
culture of collaboration, motivation and alignment of interests
with investors. If we do not continue to develop and implement
the right processes and tools to manage our changing enterprise
and maintain this culture, our ability to compete successfully
and achieve our business objectives could be impaired, which
could negatively impact our business, results of operations and
financial condition.
31
Given
the priority we afford the interests of our fund investors and
our focus on achieving superior investment performance, we may
reduce our AUM, restrain its growth, reduce our fees or
otherwise alter the terms under which we do business when we
deem it in the best interest of our fund investors
even in circumstances where such actions might be contrary to
the interests of unitholders.
In pursuing the interests of our fund investors, we may take
actions that could reduce the profits we could otherwise realize
in the short term. While we believe that our commitment to our
fund investors and our discipline in this regard is in the
long-term interest of us and our common unitholders, our common
unitholders should understand this approach may have an adverse
impact on our short-term profitability, and there is no
guarantee that it will be beneficial in the long term. One of
the means by which we seek to achieve superior investment
performance in each of our strategies might include limiting the
AUM in our strategies to an amount that we believe can be
invested appropriately in accordance with our investment
philosophy and current or anticipated economic and market
conditions. For instance, in 2009 we released JPY
50 billion ($542 million) of co-investment commitments
associated with our second Japan buyout fund (CJP II) in
exchange for an extension of the funds investment period.
In prioritizing the interests of our fund investors, we may also
take other actions that could adversely impact our short-term
results of operations when we deem such action appropriate. For
example, in 2009, we decided to shut down one of our Real Assets
funds and guaranteed to reimburse investors of the fund for
capital contributions made for investments and fees to the
extent investment proceeds did not cover such amounts.
Additionally, we may voluntarily reduce management fee rates and
terms for certain of our funds or strategies when we deem it
appropriate, even when doing so may reduce our short-term
revenue. For example, in 2009, we voluntarily increased the
transaction fee rebate for our latest U.S. buyout fund
(CP V) and our latest European buyout fund (CEP III)
from 65% to 80%, and voluntarily reduced CEP III management fees
by 20% for the years 2011 and 2012. We have also waived
management fees on certain leveraged finance vehicles at various
times to improve returns.
We may
not be successful in expanding into new investment strategies,
markets and businesses, which could adversely affect our
business, results of operations and financial
condition.
Our growth strategy is based, in part, on the expansion of our
platform through selective investment in, and development or
acquisition of, alternative asset management businesses or other
businesses complementary to our business. This strategy can
range from smaller-sized lift-outs of investment teams to
strategic alliances or acquisitions. This growth strategy
involves a number of risks, including the risk that the expected
synergies from an acquisition or strategic alliance will not be
realized, that the expected results will not be achieved or that
the investment process, controls and procedures that we have
developed around our existing platform will prove insufficient
or inadequate in the new investment strategy. We may also incur
significant charges in connection with such acquisitions and
investments and they may also potentially result in significant
losses and costs. For instance, in 2007, we made an investment
in a multi-strategy hedge fund joint venture, which we
liquidated at a significant loss in 2008 amid deteriorating
market conditions and global financial turmoil. Similarly, in
2006, we established an investment fund, which invested
primarily in U.S. agency mortgage-backed securities.
Beginning in March 2008, there was an unprecedented
deterioration in the market for U.S. agency mortgage backed
securities and the fund was forced to enter liquidation,
resulting in a recorded loss for us of approximately
$152 million. Such losses could adversely impact our
business, results of operations and financial condition, as well
as do harm to our professional reputation.
The success of our growth strategy will depend on, among other
things:
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the availability of suitable opportunities;
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the level of competition from other companies that may have
greater financial resources;
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our ability to value potential development or acquisition
opportunities accurately and negotiate acceptable terms for
those opportunities;
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our ability to obtain requisite approvals and licenses from the
relevant governmental authorities and to comply with applicable
laws and regulations without incurring undue costs and
delays; and
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our ability to successfully negotiate and enter into beneficial
arrangements with our counterparties.
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Moreover, even if we are able to identify and successfully
negotiate and complete an acquisition, these types of
transactions can be complex and we may encounter unexpected
difficulties or incur unexpected costs including:
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the diversion of managements attention to integration
matters;
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difficulties and costs associated with the integration of
operations and systems;
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difficulties and costs associated with the assimilation of
employees; and
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the risk that a change in ownership will negatively impact the
relationship between an acquiree and the investors in its
investment vehicles.
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Each transaction may also present additional unique challenges.
For example, our investment in AlpInvest faces the risk that the
other asset managers in whose funds AlpInvest invests may no
longer be willing to provide AlpInvest with investment
opportunities as favorable as in the past, if at all.
Our
organizational documents do not limit our ability to enter into
new lines of business, and we may, from time to time, expand
into new investment strategies, geographic markets and
businesses, each of which may result in additional risks and
uncertainties in our businesses.
We intend, to the extent that market conditions warrant, to seek
to grow our businesses and expand into new investment
strategies, geographic markets and businesses. Moreover, our
organizational documents do not limit us to the asset management
business. To the extent that we make strategic investments or
acquisitions in new geographic markets or businesses, undertake
other related strategic initiatives or enter into a new line of
business, we may face numerous risks and uncertainties,
including risks associated with the following:
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the required investment of capital and other resources;
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the possibility that we have insufficient expertise to engage in
such activities profitably or without incurring inappropriate
amounts of risk;
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the combination or integration of operational and management
systems and controls; and
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the broadening of our geographic footprint, including the risks
associated with conducting operations in certain foreign
jurisdictions where we currently have no presence.
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Further, entry into certain lines of business may subject us to
new laws and regulations with which we are not familiar or from
which we are currently exempt, and may lead to increased
litigation and regulatory risk. If a new business generates
insufficient revenue or if we are unable to efficiently manage
our expanded operations, our results of operations may be
adversely affected.
Our strategic initiatives may include joint ventures, which may
subject us to additional risks and uncertainties in that we may
be dependent upon, and subject to liability, losses or
reputational damage relating to, systems, controls and personnel
that are not under our control. We currently participate in
several joint ventures and may elect to participate in
additional joint venture opportunities in the future if we
believe that operating in such a structure is in our best
interests. There can be no assurances that our current joint
ventures will continue in their current form, or at all, in the
future or that we will be able to identify acceptable joint
venture partners in the future or that our participation in any
additional joint venture opportunities will be successful.
33
Although
not enacted, the U.S. Congress has considered legislation that
would have: (i) in some cases after a ten-year transition
period, precluded us from qualifying as a partnership for U.S.
federal income tax purposes or required us to hold carried
interest through taxable subsidiary corporations; and
(ii) taxed certain income and gains at increased rates. If
any similar legislation were to be enacted and apply to us, the
after tax income and gain related to our business, as well as
our distributions to you and the market price of our common
units, could be reduced.
Over the past several years, a number of legislative and
administrative proposals have been introduced and, in certain
cases, have been passed by the U.S. House of
Representatives. In May 2010, the U.S. House of
Representatives passed legislation, or May 2010 House
bill, that would have, in general, treated income and
gains now treated as capital gains, including gain on
disposition of interests, attributable to an investment services
partnership interest (ISPI) as income subject to a
new blended tax rate that is higher than the capital gains rate
applicable to such income under current law, except to the
extent such ISPI would have been considered under the
legislation to be a qualified capital interest. Your interest in
us, our interest in Carlyle Holdings II L.P. and the
interests that Carlyle Holdings II L.P. holds in entities
that are entitled to receive carried interest may have been
classified as ISPIs for purposes of this legislation. The
U.S. Senate considered but did not pass similar
legislation. Recently, on February 14, 2012, Representative
Levin introduced similar legislation, or 2012 Levin
bill, that would generally tax carried interest at
ordinary income rates. Unlike previous proposals, the 2012 Levin
bill includes exceptions, including exceptions for interests in
publicly traded partnerships like The Carlyle Group L.P., that
would not recharacterize all of the gain from a disposition of
units as ordinary income. It is unclear when or whether the
U.S. Congress will vote on this legislation or what
provisions will be included in any legislation, if enacted.
Both the May 2010 House bill and the 2012 Levin bill
provide that, for taxable years beginning 10 years after
the date of enactment, income derived with respect to an ISPI
that is not a qualified capital interest and that is subject to
the rules discussed above would not meet the qualifying income
requirements under the publicly traded partnership rules.
Therefore, if similar legislation is enacted, following such
ten-year period, we would be precluded from qualifying as a
partnership for U.S. federal income tax purposes or be
required to hold all such ISPIs through corporations, possibly
U.S. corporations. If we were taxed as a
U.S. corporation or required to hold all ISPIs through
corporations, our effective tax rate would increase
significantly. The federal statutory rate for corporations is
currently 35%. In addition, we could be subject to increased
state and local taxes. Furthermore, you could be subject to tax
on our conversion into a corporation or any restructuring
required in order for us to hold our ISPIs through a corporation.
On September 12, 2011, the Obama administration submitted
similar legislation to Congress in the American Jobs Act that
would tax income and gain, now treated as capital gains,
including gain on disposition of interests, attributable to an
ISPI at rates higher than the capital gains rate applicable to
such income under current law, except to the extent such ISPI
would be considered to be a qualified capital interest. The
proposed legislation would also characterize certain income and
gain in respect of ISPIs as non-qualifying income under the
publicly traded partnership rules after a
ten-year
transition period from the effective date, with an exception for
certain qualified capital interests. This proposed legislation
follows several prior statements by the Obama administration in
support of changing the taxation of carried interest.
Furthermore, in the American Jobs Act and in the Obama
administrations published revenue proposal for 2013, the
Obama administration proposed that current law regarding the
treatment of carried interest be changed to subject such income
to ordinary income tax (which is taxed at a higher rate than the
proposed blended tax rate under the House legislation). The
Obama administrations published revenue proposals for
2010, 2011 and 2012 contained similar proposals.
More recently, on February 22, 2012, the Obama
administration announced its framework of key
elements to change the U.S. federal income tax rules for
businesses. Few specifics were included, and it is unclear what
any actual legislation would provide, when it would be proposed
or what its prospects for enactment would be. Several parts of
the framework if enacted could adversely affect
34
us. First, the framework would reduce the deductibility of
interest for corporations in some manner not specified. A
reduction in interest deductions could increase our tax rate and
thereby reduce cash available for distribution to investors or
for other uses by us. Such a reduction could also increase the
effective cost of financing by companies in which we invest,
which could reduce the value of our carried interest in respect
of such companies. The framework suggests some entities
currently treated as partnerships for tax purposes should be
subject to an entity-level income tax similar to the corporate
income tax. If such a proposal caused us to be subject to
additional entity-level taxes, it could reduce cash available
for distribution to investors or for other uses by us. Finally,
the framework reiterates the Presidents support for
treatment of carried interest as ordinary income, as provided in
the Presidents revenue proposal for 2013 described above.
Because the framework did not include specifics, its effect on
us is unclear, but the framework reflects a commitment by the
President to try to change the tax law in ways that could be
adverse to us.
States and other jurisdictions have also considered legislation
to increase taxes with respect to carried interest. For example,
New York considered legislation under which you, even if a
non-resident, could be subject to New York state income tax on
income in respect of our common units as a result of certain
activities of our affiliates in New York. This legislation would
have been retroactive to January 1, 2010. It is unclear
when or whether similar legislation will be enacted. In
addition, states and other jurisdictions have considered
legislation to increase taxes involving other aspects of our
structure. In addition, states and other jurisdictions have
considered and enacted legislation which could increase taxes
imposed on our income and gain. For example, the District of
Columbia has recently passed legislation that could expand the
portion of our income that could be subject to District of
Columbia income tax.
We
will expend significant financial and other resources to comply
with the requirements of being a public entity.
As a public entity, we will be subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended
(the Exchange Act), and requirements of the
Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act).
These requirements may place a strain on our systems and
resources. The Exchange Act requires that we file annual,
quarterly and current reports with respect to our business and
financial condition. The Sarbanes-Oxley Act requires that we
maintain effective disclosure controls and procedures and
internal controls over financial reporting, which is discussed
below. See Our internal controls over
financial reporting do not currently meet all of the standards
contemplated by Section 404 of the Sarbanes-Oxley Act, and
failure to achieve and maintain effective internal controls over
financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our
business and common unit price. In order to maintain and
improve the effectiveness of our disclosure controls and
procedures, significant resources and management oversight will
be required. We will be implementing additional procedures and
processes for the purpose of addressing the standards and
requirements applicable to public companies. These activities
may divert managements attention from other business
concerns, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. We expect to incur significant additional annual expenses
related to these steps and, among other things, additional
directors and officers liability insurance, director fees,
reporting requirements of the Securities and Exchange Commission
(the SEC), transfer agent fees, hiring additional
accounting, legal and administrative personnel, increased
auditing and legal fees and similar expenses.
Our
internal controls over financial reporting do not currently meet
all of the standards contemplated by Section 404 of the
Sarbanes-Oxley Act, and failure to achieve and maintain
effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act could
have a material adverse effect on our business and common unit
price.
We have not previously been required to comply with the
requirements of the Sarbanes-Oxley Act, including the internal
control evaluation and certification requirements of
Section 404 of that
35
statute (Section 404), and we will not be
required to comply with all of those requirements until we have
been subject to the reporting requirements of the Exchange Act
for a specified period of time. Accordingly, our internal
controls over financial reporting do not currently meet all of
the standards contemplated by Section 404 that we will
eventually be required to meet. We are in the process of
addressing our internal controls over financial reporting and
are establishing formal policies, processes and practices
related to financial reporting and to the identification of key
financial reporting risks, assessment of their potential impact
and linkage of those risks to specific areas and activities
within our organization.
Additionally, we have begun the process of documenting our
internal control procedures to satisfy the requirements of
Section 404, which requires annual management assessments
of the effectiveness of our internal controls over financial
reporting and a report by our independent registered public
accounting firm addressing these assessments. Because we do not
currently have comprehensive documentation of our internal
controls and have not yet tested our internal controls in
accordance with Section 404, we cannot conclude in
accordance with Section 404 that we do not have a material
weakness in our internal controls or a combination of
significant deficiencies that could result in the conclusion
that we have a material weakness in our internal controls. As a
public entity, we will be required to complete our initial
assessment in a timely manner. If we are not able to implement
the requirements of Section 404 in a timely manner or with
adequate compliance, our operations, financial reporting or
financial results could be adversely affected, and our
independent registered public accounting firm may not be able to
certify as to the adequacy of our internal controls over
financial reporting. Matters impacting our internal controls may
cause us to be unable to report our financial information on a
timely basis and thereby subject us to adverse regulatory
consequences, including sanctions by the SEC or violations of
applicable stock exchange listing rules, and result in a breach
of the covenants under the agreements governing any of our
financing arrangements. There could also be a negative reaction
in the financial markets due to a loss of investor confidence in
us and the reliability of our financial statements. Confidence
in the reliability of our financial statements could also suffer
if our independent registered public accounting firm were to
report a material weakness in our internal controls over
financial reporting. This could materially adversely affect us
and lead to a decline in our common unit price.
Operational
risks may disrupt our businesses, result in losses or limit our
growth.
We rely heavily on our financial, accounting, information and
other data processing systems. If any of these systems do not
operate properly or are disabled or if there is any unauthorized
disclosure of data, whether as a result of tampering, a breach
of our network security systems, a cyber incident or attack or
otherwise, we could suffer substantial financial loss, increased
costs, a disruption of our businesses, liability to our funds
and fund investors regulatory intervention or reputational
damage. In addition, we operate in businesses that are highly
dependent on information systems and technology. Our information
systems and technology may not continue to be able to
accommodate our growth, and the cost of maintaining such systems
may increase from its current level. Such a failure to
accommodate growth, or an increase in costs related to such
information systems, could have a material adverse effect on us.
Furthermore, we depend on our headquarters in
Washington, D.C., where most of our administrative and
operations personnel are located, and our office in Arlington,
Virginia, which houses our treasury and finance functions, for
the continued operation of our business. A disaster or a
disruption in the infrastructure that supports our businesses,
including a disruption involving electronic communications or
other services used by us or third parties with whom we conduct
business, or directly affecting our headquarters, could have a
material adverse impact on our ability to continue to operate
our business without interruption. Our disaster recovery
programs may not be sufficient to mitigate the harm that may
result from such a disaster or disruption. In addition,
insurance and other safeguards might only partially reimburse us
for our losses, if at all.
36
In addition, sustaining our growth will also require us to
commit additional management, operational and financial
resources to identify new professionals to join our firm and to
maintain appropriate operational and financial systems to
adequately support expansion. Due to the fact that the market
for hiring talented professionals is competitive, we may not be
able to grow at the pace we desire.
Extensive
regulation in the United States and abroad affects our
activities and creates the potential for significant liabilities
and penalties.
Our business is subject to extensive regulation, including
periodic examinations, by governmental agencies and
self-regulatory organizations in the jurisdictions in which we
operate around the world. Many of these regulators are empowered
to conduct investigations and administrative proceedings that
can result in fines, suspensions of personnel or other
sanctions, including censure, the issuance of
cease-and-desist
orders or the suspension or expulsion of a broker-dealer or
investment adviser from registration or memberships. Even if an
investigation or proceeding does not result in a sanction or the
sanction imposed against us or our personnel by a regulator were
small in monetary amount, the adverse publicity relating to the
investigation, proceeding or imposition of these sanctions could
harm our reputation and cause us to lose existing fund investors
or fail to gain new investors or discourage others from doing
business with us. Some of our investment funds invest in
businesses that operate in highly regulated industries,
including in businesses that are regulated by the
U.S. Federal Communications Commission and
U.S. federal and state banking authorities. The regulatory
regimes to which such businesses are subject may, among other
things, condition our funds ability to invest in those
businesses upon the satisfaction of applicable ownership
restrictions or qualification requirements. Moreover, our
failure to obtain or maintain any regulatory approvals necessary
for our funds to invest in such industries may disqualify our
funds from participating in certain investments or require our
funds to divest themselves of certain assets. In addition, we
regularly rely on exemptions from various requirements of the
Securities Act of 1933, as amended (the Securities
Act), the Exchange Act, the Investment Company Act of
1940, as amended (the 1940 Act), and the
U.S. Employee Retirement Income Security Act of 1974, as
amended (ERISA), in conducting our asset management
activities in the United States. Similarly, in conducting our
asset management activities outside the United States, we rely
on available exemptions from the regulatory regimes of various
foreign jurisdictions. These exemptions from regulation within
the United States and abroad are sometimes highly complex and
may in certain circumstances depend on compliance by third
parties whom we do not control. If for any reason these
exemptions were to become unavailable to us, we could become
subject to regulatory action or third-party claims and our
business could be materially and adversely affected. Moreover,
the requirements imposed by our regulators are designed
primarily to ensure the integrity of the financial markets and
to protect investors in our funds and are not designed to
protect our common unitholders. Consequently, these regulations
often serve to limit our activities and impose burdensome
compliance requirements. See Business
Regulatory and Compliance Matters.
We may become subject to additional regulatory and compliance
burdens as we expand our product offerings and investment
platform. For example, if we were to sponsor a registered
investment company under the 1940 Act, such registered
investment company and our subsidiary that serves as its
investment adviser would be subject to the 1940 Act and the
rules thereunder, which, among other things, regulate the
relationship between a registered investment company and its
investment adviser and prohibit or severely restrict principal
transactions and joint transactions. This could increase our
compliance costs and create the potential for additional
liabilities and penalties.
Regulatory
changes in the United States could adversely affect our business
and the possibility of increased regulatory focus could result
in additional burdens and expenses on our
business.
As a result of the financial crisis and highly publicized
financial scandals, investors have exhibited concerns over the
integrity of the U.S. financial markets and the domestic
regulatory environment in which we operate in the United States.
There has been an active debate over the
37
appropriate extent of regulation and oversight of private
investment funds and their managers. We may be adversely
affected as a result of new or revised legislation or
regulations imposed by the SEC or other U.S. governmental
regulatory authorities or self-regulatory organizations that
supervise the financial markets. We also may be adversely
affected by changes in the interpretation or enforcement of
existing laws and rules by these governmental authorities and
self-regulatory organizations. Regulatory focus on our industry
is likely to intensify if, as has happened from time to time,
the alternative asset management industry falls into disfavor in
popular opinion or with state and federal legislators, as the
result of negative publicity or otherwise.
On July 21, 2010, President Obama signed into law the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act), which imposes significant new
regulations on almost every aspect of the U.S. financial
services industry, including aspects of our business. Among
other things, the Dodd-Frank Act includes the following
provisions, which could have an adverse impact on our ability to
conduct our business:
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The Dodd-Frank Act establishes the Financial Stability Oversight
Council (the FSOC), a federal agency acting as the
financial systems systemic risk regulator with the
authority to review the activities of nonbank financial
companies predominantly engaged in financial activities that are
designated as systemically important. Such
designation is applicable to companies where material financial
distress could pose risk to the financial stability of the
United States or if the nature, scope, size, scale,
concentration, interconnectedness or mix of their activities
could pose a threat to U.S. financial stability. On
October 11, 2011, the FSOC issued a proposed rule and
interpretive guidance regarding the process by which it will
designate nonbank financial companies as systemically important.
The regulation details a three-stage process, with the level of
scrutiny increasing at each stage. During Stage 1, the FSOC
will apply a broad set of uniform quantitative metrics to screen
out financial companies that do not warrant additional review.
The FSOC will consider whether a company has at least
$50 billion in total consolidated assets and whether it
meets other thresholds relating to credit default swaps
outstanding, derivative liabilities, loans and bonds
outstanding, a minimum leverage ratio of total consolidated
assets to total equity of 15 to 1, and a short-term debt ratio
of debt (with maturities less than 12 months) to total
consolidated assets of 10%. A company that meets both the asset
test and one of the other thresholds will be subject to
additional review. Although it is unlikely that we would be
designated as systemically important under the process outlined
in the proposed rule, the designation criteria could, and is
expected to, evolve over time. If the FSOC were to determine
that we were a systemically important nonbank financial company,
we would be subject to a heightened degree of regulation, which
could include a requirement to adopt heightened standards
relating to capital, leverage, liquidity, risk management,
credit exposure reporting and concentration limits, restrictions
on acquisitions and being subject to annual stress tests by the
Federal Reserve.
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The Dodd-Frank Act, under what has become known as the
Volcker Rule, generally prohibits depository
institution holding companies (including foreign banks with
U.S. branches and insurance companies with U.S. depository
institution subsidiaries), insured depository institutions and
subsidiaries and affiliates of such entities from investing in
or sponsoring private equity funds or hedge funds. The Volcker
Rule will become effective on July 21, 2012 and is subject
to certain transition periods and exceptions for certain
permitted activities that would enable certain
institutions subject to the Volcker Rule to continue investing
in private equity funds under certain conditions. Although we do
not currently anticipate that the Volcker Rule will adversely
affect our fundraising to any significant extent, there is
uncertainty regarding the implementation of the Volcker Rule and
its practical implications and there could be adverse
implications on our ability to raise funds from the types of
entities mentioned above as a result of this prohibition. On
October 11, 2011, the Federal Reserve and other federal
regulatory agencies issued a proposed rule implementing the
Volcker Rule; a final rule may not be issued until after the
effective date.
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The Dodd-Frank Act requires many private equity and hedge fund
advisers to register with the SEC under the Advisers Act, to
maintain extensive records and to file reports with information
that the regulators identify as necessary for monitoring
systemic risk. Although a Carlyle subsidiary has been registered
as an investment adviser for over 15 years, the Dodd-Frank
Act will affect our business and operations, including
increasing regulatory costs, imposing additional burdens on our
staff and potentially requiring the disclosure of sensitive
information.
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The Dodd-Frank Act authorizes federal regulatory agencies to
review and, in certain cases, prohibit compensation arrangements
at financial institutions that give employees incentives to
engage in conduct deemed to encourage inappropriate risk taking
by covered financial institutions. Such restrictions could limit
our ability to recruit and retain investment professionals and
senior management executives.
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The Dodd-Frank Act requires public companies to adopt and
disclose policies requiring, in the event the company is
required to issue an accounting restatement, the clawback of
related incentive compensation from current and former executive
officers.
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The Dodd-Frank Act amends the Exchange Act to compensate and
protect whistleblowers who voluntarily provide original
information to the SEC and establishes a fund to be used to pay
whistleblowers who will be entitled to receive a payment equal
to between 10% and 30% of certain monetary sanctions imposed in
a successful government action resulting from the information
provided by the whistleblower.
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Many of these provisions are subject to further rulemaking and
to the discretion of regulatory bodies, such as the FSOC and the
Federal Reserve.
In June 2010, the SEC approved
Rule 206(4)-5
under the Advisers Act regarding pay to play
practices by investment advisers involving campaign
contributions and other payments to government clients and
elected officials able to exert influence on such clients. The
rule prohibits investment advisers from providing advisory
services for compensation to a government client for two years,
subject to very limited exceptions, after the investment
adviser, its senior executives or its personnel involved in
soliciting investments from government entities make
contributions to certain candidates and officials in position to
influence the hiring of an investment adviser by such government
client. Advisers are required to implement compliance policies
designed, among other matters, to track contributions by certain
of the advisers employees and engagement of third parties
that solicit government entities and to keep certain records in
order to enable the SEC to determine compliance with the rule.
Any failure on our part to comply with the rule could expose us
to significant penalties and reputational damage. In addition,
there have been similar rules on a
state-level
regarding pay to play practices by investment
advisers. For example, in May 2009, we reached resolution with
the Office of the Attorney General of the State of New York (the
NYAG) regarding its inquiry into the use of
placement agents by various asset managers, including Carlyle,
to solicit New York public pension funds for private equity and
hedge fund investment commitments. We made a $20 million
payment to New York State as part of this resolution in November
2009 and agreed to adopt the NYAGs Code of Conduct.
In September 2010, California enacted legislation, which became
effective in January 2011, requiring placement agents who
solicit funds from the California state retirement systems, such
as CalPERS and the California State Teachers Retirement
System, to register as lobbyists. In addition to increased
reporting requirements, the legislation prohibits placement
agents from receiving contingent compensation for soliciting
investments from California state retirement systems. New York
City has enacted similar measures, which became effective on
January 1, 2011, that require asset management firms and
their employees that solicit investments from New York
Citys five public pension systems to register as
lobbyists. Like the California legislation, the New York City
measures impose significant compliance obligations on registered
lobbyists and their employers, including annual registration
fees, periodic disclosure reports and internal recordkeeping,
and also prohibit the acceptance of contingent fees. Moreover,
other states or municipalities may consider
39
similar legislation as that enacted in California and New York
City or adopt regulations or procedures with similar effect.
These types of measures could materially and adversely impact
our business.
It is impossible to determine the extent of the impact on us of
the Dodd-Frank Act or any other new laws, regulations or
initiatives that may be proposed or whether any of the proposals
will become law. Any changes in the regulatory framework
applicable to our business, including the changes described
above, may impose additional costs on us, require the attention
of our senior management or result in limitations on the manner
in which we conduct our business. Moreover, as calls for
additional regulation have increased, there may be a related
increase in regulatory investigations of the trading and other
investment activities of alternative asset management funds,
including our funds. Compliance with any new laws or regulations
could make compliance more difficult and expensive, affect the
manner in which we conduct our business and adversely affect our
profitability.
Recent
regulatory changes in jurisdictions outside the United States
could adversely affect our business.
Similar to the environment in the United States, the current
environment in jurisdictions outside the United States in which
we operate, in particular Europe, has become subject to further
regulation. Governmental regulators and other authorities in
Europe have proposed or implemented a number of initiatives and
additional rules and regulations that could adversely affect our
business.
In October 2010, the EU Council of Ministers adopted a directive
to amend the revised Capital Requirements Directive (CRD
III), which, among other things, requires European Union
(EU) member states to introduce stricter control on
remuneration of key employees and risk takers within specific
credit institutions and investment firms. The Financial Services
Authority (the FSA) has implemented CRD III by
amending its remuneration code although the extent of the
regulatory impact will differ depending on a firms size
and the nature of its activities.
In addition, in November 2010, the European Parliament voted to
approve the EU Directive on Alternative Investment
Fund Managers (the EU Directive), which
establishes a new EU regulatory regime for alternative
investment fund managers, including private equity and hedge
fund managers. The EU Directive generally applies to managers
with a registered office in the EU (or managing an EU-based fund
vehicle), as well as non-EU-based managers that market
securities of alternative investment funds in the European
Union. In general, the EU Directive will have a staged
implementation over a period of years beginning in mid-2013 for
EU-based managers (or EU-based funds) and no later than 2018 for
non-EU-based managers marketing non-EU-based funds into the
European Union. Compliance with the EU Directive will subject us
to a number of additional requirements, including rules relating
to the remuneration of certain personnel (principally adopting
the provisions of CRD III referred to above), certain capital
requirements for alternative investment fund managers, leverage
oversight for each investment fund, liquidity management and
retention of depositories for each investment fund. Compliance
with the requirements of the EU Directive will impose additional
compliance expense for us and could reduce our operating
flexibility and fund raising opportunities.
In December 2011, Chinas National Development and Reform
Commission issued a new circular regulating the activities of
private equity funds established in China. The circular includes
new rules relating to the establishment, fundraising and
investment scope of such funds; risk control mechanisms; basic
responsibilities and duties of fund managers; information
disclosure systems; and record filing. Compliance with these
requirements may impose additional expense, affect the manner in
which we conduct our business and adversely affect our
profitability.
Our investment businesses are subject to the risk that similar
measures might be introduced in other countries in which our
funds currently have investments or plan to invest in the
future, or that other legislative or regulatory measures that
negatively affect their respective portfolio investments might
be promulgated in any of the countries in which they invest. The
reporting related to such
40
initiatives may divert the attention of our personnel and the
management teams of our portfolio companies. Moreover, sensitive
business information relating to us or our portfolio companies
could be publicly released.
See Risks Related to Our Business Operations
Our funds make investments in companies that are based outside
of the United States, which may expose us to additional risks
not typically associated with investments in companies that are
based in the United States and
Business Regulatory and Compliance
Matters for more information.
We are
subject to substantial litigation risks and may face significant
liabilities and damage to our professional reputation as a
result of litigation allegations and negative
publicity.
The investment decisions we make in our asset management
business and the activities of our investment professionals on
behalf of portfolio companies of our carry funds may subject
them and us to the risk of third-party litigation arising from
investor dissatisfaction with the performance of those
investment funds, the activities of our portfolio companies and
a variety of other litigation claims and regulatory inquiries
and actions. From time to time we and our portfolio companies
have been and may be subject to regulatory actions and
shareholder class action suits relating to transactions in which
we have agreed to acquire public companies.
For example, on February 14, 2008, a private class action
lawsuit challenging club bids and other alleged
anti-competitive business practices was filed in the
U.S. District Court for the District of Massachusetts. The
complaint alleges, among other things, that certain private
equity firms, including Carlyle, violated Section 1 of the
Sherman Antitrust Act of 1890 (the Sherman Act) by
forming multi-sponsor consortiums for the purpose of bidding
collectively in corporate buyout auctions in certain going
private transactions, which the plaintiffs allege constitutes a
conspiracy in restraint of trade. It is difficult to
determine what impact, if any, this litigation (and any future
related litigation), together with any increased governmental
scrutiny or regulatory initiatives, will have on the private
equity industry generally or on us and our funds specifically.
As a result, the foregoing could have an adverse impact on us or
otherwise impede our ability to effectively achieve our asset
management objectives. See Business Legal
Proceedings for more information on this and other
proceedings.
In addition, to the extent that investors in our investment
funds suffer losses resulting from fraud, gross negligence,
willful misconduct or other similar misconduct, investors may
have remedies against us, our investment funds, our principals
or our affiliates under the federal securities laws
and/or state
law. The general partners and investment advisers to our
investment funds, including their directors, officers, other
employees and affiliates, are generally indemnified with respect
to their conduct in connection with the management of the
business and affairs of our private equity funds. For example,
we have agreed to indemnify directors and officers of Carlyle
Capital Corporation Limited in connection with the matters
involving that fund discussed under Business
Legal Proceedings. However, such indemnity generally does
not extend to actions determined to have involved fraud, gross
negligence, willful misconduct or other similar misconduct.
If any lawsuits were brought against us and resulted in a
finding of substantial legal liability, the lawsuit could
materially adversely affect our business, results of operations
or financial condition or cause significant reputational harm to
us, which could materially impact our business. We depend to a
large extent on our business relationships and our reputation
for integrity and
high-caliber
professional services to attract and retain investors and to
pursue investment opportunities for our funds. As a result,
allegations of improper conduct by private litigants or
regulators, whether the ultimate outcome is favorable or
unfavorable to us, as well as negative publicity and press
speculation about us, our investment activities or the private
equity industry in general, whether or not valid, may harm our
reputation, which may be more damaging to our business than to
other types of businesses.
41
In addition, with a workforce composed of many highly paid
professionals, we face the risk of litigation relating to claims
for compensation, which may, individually or in the aggregate,
be significant in amount. The cost of settling any such claims
could negatively impact our business, results of operations and
financial condition.
Employee
misconduct could harm us by impairing our ability to attract and
retain investors in our funds and subjecting us to significant
legal liability and reputational harm. Fraud and other deceptive
practices or other misconduct at our portfolio companies could
harm performance.
There is a risk that our employees could engage in misconduct
that adversely affects our business. Our ability to attract and
retain investors and to pursue investment opportunities for our
funds depends heavily upon the reputation of our professionals,
especially our senior Carlyle professionals. We are subject to a
number of obligations and standards arising from our asset
management business and our authority over the assets managed by
our asset management business. The violation of these
obligations and standards by any of our employees would
adversely affect our clients and us. Our business often requires
that we deal with confidential matters of great significance to
companies in which our funds may invest. If our employees were
to use or disclose confidential information improperly, we could
suffer serious harm to our reputation, financial position and
current and future business relationships, as well as face
potentially significant litigation. It is not always possible to
detect or deter employee misconduct, and the extensive
precautions we take to detect and prevent this activity may not
be effective in all cases. If any of our employees were to
engage in misconduct or were to be accused of such misconduct,
whether or not substantiated, our business and our reputation
could be adversely affected and a loss of investor confidence
could result, which would adversely impact our ability to raise
future funds.
We will also be adversely affected if there is misconduct by
senior management of portfolio companies in which our funds
invest. Such misconduct might undermine our due diligence
efforts with respect to such companies and it might negatively
affect the valuation of a funds investments.
In recent years, the U.S. Department of Justice (the
DOJ) and the SEC have devoted greater resources to
enforcement of the Foreign Corrupt Practices Act (the
FCPA). In addition, the United Kingdom has recently
significantly expanded the reach of its anti-bribery laws. While
we have developed and implemented policies and procedures
designed to ensure strict compliance by us and our personnel
with the FCPA, such policies and procedures may not be effective
in all instances to prevent violations. Any determination that
we have violated the FCPA or other applicable anti-corruption
laws could subject us to, among other things, civil and criminal
penalties, material fines, profit disgorgement, injunctions on
future conduct, securities litigation and a general loss of
investor confidence, any one of which could adversely affect our
business prospects, financial position or the market value of
our common units.
Certain
policies and procedures implemented to mitigate potential
conflicts of interest and address certain regulatory
requirements may reduce the synergies across our various
businesses and inhibit our ability to maintain our collaborative
culture.
We consider our One Carlyle philosophy and the
ability of our professionals to communicate and collaborate
across funds, industries and geographies one of our significant
competitive strengths. As a result of the expansion of our
platform into various lines of business in the alternative asset
management industry we are currently, and as we continue to
develop our managed account business and expand we will be,
subject to a number of actual and potential conflicts of
interest and subject to greater regulatory oversight than that
to which we would otherwise be subject if we had just one line
of business. In addition, as we expand our platform, the
allocation of investment opportunities among our investment
funds may become more complex. In addressing these conflicts and
regulatory requirements across our various businesses, we have
and may continue to implement certain policies and procedures
(for example, information barriers) that may reduce the positive
synergies that we cultivate across these businesses through our
One
42
Carlyle approach. For example, although we maintain
ultimate control over AlpInvest, AlpInvests historical
management team (who are our employees) will continue to
exercise independent investment authority without involvement by
other Carlyle personnel. See Risks Related to
Our Business Operations Our Fund of Funds Solutions
business is subject to additional risks. In addition, we
may come into possession of material
non-public
information with respect to issuers in which we may be
considering making an investment. As a consequence, we may be
precluded from providing such information or other ideas to our
other businesses that benefit from such information.
Risks
Related to Our Business Operations
Poor
performance of our investment funds would cause a decline in our
revenue, income and cash flow, may obligate us to repay carried
interest previously paid to us, and could adversely affect our
ability to raise capital for future investment
funds.
In the event that any of our investment funds were to perform
poorly, our revenue, income and cash flow could decline. In some
of our funds, such as our hedge funds, a reduction in the value
of our AUM in such funds could result in a reduction in
management fees and incentive fees we earn. In other funds
managed by us, such as our private equity funds, a reduction in
the value of the portfolio investments held in such funds could
result in a reduction in the carried interest we earn. Moreover,
we could experience losses on our investments of our own capital
as a result of poor investment performance by our investment
funds. Furthermore, if, as a result of poor performance of later
investments in a carry funds or fund of funds
vehicles life, the fund does not achieve certain
investment returns for the fund over its life, we will be
obligated to repay the amount by which carried interest that was
previously distributed to us exceeds the amount to which we are
ultimately entitled. These repayment obligations may be related
to amounts previously distributed to our senior Carlyle
professionals prior to the completion of this offering, with
respect to which our common unitholders did not receive any
benefit. See We may need to pay
giveback obligations if and when they are triggered
under the governing agreements with our investors.
Poor performance of our investment funds could make it more
difficult for us to raise new capital. Investors in carry funds
and fund of funds vehicles might decline to invest in future
investment funds we raise and investors in hedge funds or other
investment funds might withdraw their investments as a result of
the poor performance of the investment funds in which they are
invested. Investors and potential investors in our funds
continually assess our investment funds performance, and
our ability to raise capital for existing and future investment
funds and avoid excessive redemption levels will depend on our
investment funds continued satisfactory performance.
Accordingly, poor fund performance may deter future investment
in our funds and thereby decrease the capital invested in our
funds and ultimately, our management fee income. Alternatively,
in the face of poor fund performance, investors could demand
lower fees or fee concessions for existing or future funds which
would likewise decrease our revenue.
Our
asset management business depends in large part on our ability
to raise capital from
third-party
investors. If we are unable to raise capital from third-party
investors, we would be unable to collect management fees or
deploy their capital into investments and potentially collect
transaction fees or carried interest, which would materially
reduce our revenue and cash flow and adversely affect our
financial condition.
Our ability to raise capital from third-party investors depends
on a number of factors, including certain factors that are
outside our control. Certain factors, such as the performance of
the stock market, the pace of distributions from our funds and
from the funds of other asset managers or the asset allocation
rules or regulations or investment policies to which such
third-party investors are subject, could inhibit or restrict the
ability of third-party investors to make investments in our
investment funds. For example, during 2008 and 2009, many
third-party investors that invest in alternative assets and have
historically invested in our investment funds experienced
significant volatility in valuations of their
43
investment portfolios, including a significant decline in the
value of their overall private equity, real assets, venture
capital and hedge fund portfolios, which affected our ability to
raise capital from them. Coupled with a lack of distributions
from their existing private equity and real assets portfolios,
many of these investors were left with disproportionately
outsized remaining commitments to, and invested capital in, a
number of investment funds, which significantly limited their
ability to make new commitments to third-party managed
investment funds such as those advised by us. Although economic
conditions have improved and many investors have increased the
amount of commitments they are making to alternative investment
funds, there can be no assurance that this will continue.
Moreover, as some existing investors cease or significantly
curtail making commitments to alternative investment funds, we
may need to identify and attract new investors in order to
maintain or increase the size of our investment funds. There can
be no assurances that we can find or secure commitments from
those new investors. Our ability to raise new funds could
similarly be hampered if the general appeal of private equity
and alternative investments were to decline. An investment in a
limited partner interest in a private equity fund is more
illiquid and the returns on such investment may be more volatile
than an investment in securities for which there is a more
active and transparent market. Private equity and alternative
investments could fall into disfavor as a result of concerns
about liquidity and short-term performance. Such concerns could
be exhibited, in particular, by public pension funds, which have
historically been among the largest investors in alternative
assets. Many public pensions are significantly underfunded and
their funding problems have been exacerbated by the recent
economic downturn. Concerns with liquidity could cause such
public pension funds to reevaluate the appropriateness of
alternative investments. In addition, the evolving preferences
of our fund investors may necessitate that alternatives to the
traditional investment fund structure, such as managed accounts,
smaller funds and co-investment vehicles, become a larger part
of our business going forward. This could increase our cost of
raising capital at the scale we have historically achieved.
The failure to successfully raise capital commitments to new
investment funds may also expose us to credit risk in respect of
financing that we may provide such funds. When existing capital
commitments to a new investment fund are insufficient to fund in
full a new investment funds participation in a
transaction, we may lend money to or borrow money from financial
institutions on behalf of such investment funds to bridge this
difference and repay this financing with capital from subsequent
investors to the fund. Our inability to identify and secure
capital commitments from new investors to these funds may expose
us to losses (in the case of money that we lend directly to such
funds) or adversely impact our ability to repay such borrowings
or otherwise have an adverse impact on our liquidity position.
Finally, if we seek to expand into other business lines, we may
also be unable to raise a sufficient amount of capital to
adequately support such businesses.
The failure of our investment funds to raise capital in
sufficient amounts could result in a decrease in our AUM as well
as management fee and transaction fee revenue, or could result
in a decline in the rate of growth of our AUM and management fee
and transaction fee revenue, any of which could have a material
adverse impact on our revenues and financial condition. Our past
experience with growth of AUM provides no assurance with respect
to the future. For example, our next generation of large buyout
and other funds could be smaller in overall size than our
current large buyout and other funds. There can be no assurance
that any of our business segments will continue to experience
growth in AUM.
Some of our fund investors may have concerns about the prospect
of our becoming a publicly traded company, including concerns
that as a public company we will shift our focus from the
interests of our fund investors to those of our common
unitholders. Some of our fund investors may believe that we will
strive for near-term profit instead of superior risk-adjusted
returns for our fund investors over time or grow our AUM for the
purpose of generating additional management fees without regard
to whether we believe there are sufficient investment
opportunities to effectively deploy the additional capital.
There can be no assurance that we will be successful in our
efforts to address such concerns or to convince fund investors
that our decision to pursue this offering will not affect our
longstanding priorities or the way we conduct our business. A
decision by a significant number of our fund investors not to
commit additional
44
capital to our funds or to cease doing business with us
altogether could inhibit our ability to achieve our investment
objectives and could have a material adverse effect on our
business and financial condition.
Our
investors in future funds may negotiate to pay us lower
management fees and the economic terms of our future funds may
be less favorable to us than those of our existing funds, which
could adversely affect our revenues.
In connection with raising new funds or securing additional
investments in existing funds, we negotiate terms for such funds
and investments with existing and potential investors. The
outcome of such negotiations could result in our agreement to
terms that are materially less favorable to us than the terms of
prior funds we have advised or funds advised by our competitors.
Such terms could restrict our ability to raise investment funds
with investment objectives or strategies that compete with
existing funds, reduce fee revenues we earn, reduce the
percentage of profits on
third-party
capital that we share in or add expenses and obligations for us
in managing the fund or increase our potential liabilities, all
of which could ultimately reduce our profitability. For
instance, we have confronted and expect to continue to confront
requests from a variety of investors and groups representing
investors to increase the percentage of transaction fees we
share with our investors (or to decline to receive any
transaction fees from portfolio companies owned by our funds).
To the extent we accommodate such requests, it would result in a
decrease in the amount of fee revenue we earn. Moreover, certain
institutional investors have publicly criticized certain fund
fee and expense structures, including management fees. We have
confronted and expect to continue to confront requests from a
variety of investors and groups representing investors to
decrease fees and to modify our carried interest and incentive
fee structures, which could result in a reduction in or delay in
the timing of receipt of the fees and carried interest and
incentive fees we earn. Any modification of our existing fee or
carry arrangements or the fee or carry structures for new
investment funds could adversely affect our results of
operations. See The alternative asset
management business is intensely competitive.
In addition, we believe that certain institutional investors,
including sovereign wealth funds and public pension funds, could
in the future demonstrate an increased preference for
alternatives to the traditional investment fund structure, such
as managed accounts, smaller funds and co-investment vehicles.
There can be no assurance that such alternatives will be as
efficient as the traditional investment fund structure, or as to
the impact such a trend could have on the cost of our operations
or profitability if we were to implement these alternative
investment structures. Moreover, certain institutional investors
are demonstrating a preference to in-source their own investment
professionals and to make direct investments in alternative
assets without the assistance of private equity advisers like
us. Such institutional investors may become our competitors and
could cease to be our clients.
Valuation
methodologies for certain assets in our funds can involve
subjective judgments, and the fair value of assets established
pursuant to such methodologies may be incorrect, which could
result in the misstatement of fund performance and accrued
performance fees.
There are often no readily ascertainable market prices for a
substantial majority of illiquid investments of our investment
funds. We determine the fair value of the investments of each of
our investment funds at least quarterly based on the fair value
guidelines set forth by generally accepted accounting principles
in the United States. The fair value measurement accounting
guidance establishes a hierarchal disclosure framework that
ranks the observability of market 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 quoted prices,
or for which fair value can be measured from quoted prices in
active markets, generally will have a higher degree of market
price observability and a lesser degree of judgment applied in
determining fair value.
45
Investments for which market prices are not observable include
private investments in the equity of operating companies or real
estate properties. Fair values of such investments are
determined by reference to projected net earnings, earnings
before interest, taxes, depreciation and amortization
(EBITDA), the discounted cash flow method,
comparable values in 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 (for example, multiplying a
key performance metric of the investee company or asset, 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. In determining fair
values of real estate investments, we also consider projected
operating cash flows, sales of comparable assets, replacement
costs and capitalization rates (cap rates) analysis.
Additionally, where applicable, projected distributable cash
flow through debt maturity will also be considered in support of
the investments carrying value. 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, other valuation
techniques, including the discounted cash flow method, may be
used to value illiquid investments.
The determination of fair value using these methodologies takes
into consideration a range of factors including but not limited
to the price at which the investment was acquired, the nature of
the investment, local market conditions, trading values on
public exchanges for comparable securities, current and
projected operating performance and financing transactions
subsequent to the acquisition of the investment. These valuation
methodologies involve a significant degree of management
judgment. For example, as to investments that we share with
another sponsor, we may apply a different valuation methodology
than the other sponsor does or derive a different value than the
other sponsor has derived on the same investment, which could
cause some investors to question our valuations.
Because there is significant uncertainty in the valuation of, or
in the stability of the value of, illiquid investments, the fair
values of such investments as reflected in an investment
funds net asset value do not necessarily reflect the
prices that would be obtained by us on behalf of the investment
fund when such investments are realized. Realizations at values
significantly lower than the values at which investments have
been reflected in prior fund net asset values would result in
reduced earnings or losses for the applicable fund, the loss of
potential carried interest and incentive fees and in the case of
our hedge funds, management fees. Changes in values attributed
to investments from quarter to quarter may result in volatility
in the net asset values and results of operations that we report
from period to period. Also, a situation where asset values turn
out to be materially different than values reflected in prior
fund net asset values could cause investors to lose confidence
in us, which could in turn result in difficulty in raising
additional funds.
The
historical returns attributable to our funds, including those
presented in this prospectus, should not be considered as
indicative of the future results of our funds or of our future
results or of any returns expected on an investment in our
common units.
We have presented in this prospectus information relating to the
historical performance of our investment funds. The historical
and potential future returns of the investment funds that we
advise are not directly linked to returns on our common units.
Therefore, any continued positive performance of the investment
funds that we advise will not necessarily result in positive
returns on an investment in our common units. However, poor
performance of the investment funds that we advise would cause a
decline in our revenue from such investment funds, and could
therefore have a negative effect on our performance, our ability
to raise future funds and in all likelihood the returns on an
investment in our common units.
46
Moreover, with respect to the historical returns of our
investment funds:
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market conditions at times were significantly more favorable for
generating positive performance, particularly in our Corporate
Private Equity and Real Assets businesses, than the market
conditions we experienced in recent years and may continue to
experience for the foreseeable future;
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the rates of returns of our carry funds reflect unrealized gains
as of the applicable measurement date that may never be
realized, which may adversely affect the ultimate value realized
from those funds investments;
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unitholders will not benefit from any value that was created in
our funds prior to your investment in our common units to the
extent such value has been realized;
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in recent years, there has been increased competition for
private equity investment opportunities resulting from the
increased amount of capital invested in alternative investment
funds and high liquidity in debt markets, and the increased
competition for investments may reduce our returns in the future;
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the rates of returns of some of our funds in certain years have
been positively influenced by a number of investments that
experienced rapid and substantial increases in value following
the dates on which those investments were made, which may not
occur with respect to future investments;
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our investment funds returns in some years have benefited
from investment opportunities and general market conditions that
may not repeat themselves (including, for example, particularly
favorable borrowing conditions in the debt markets during 2005,
2006 and early 2007), and our current or future investment funds
might not be able to avail themselves of comparable investment
opportunities or market conditions; and
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we may create new funds in the future that reflect a different
asset mix and different investment strategies, as well as a
varied geographic and industry exposure as compared to our
present funds, and any such new funds could have different
returns than our existing or previous funds.
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In addition, future returns will be affected by the applicable
risks described elsewhere in this prospectus, including risks
related to the industries and businesses in which our funds may
invest. See Managements Discussion and Analysis of
Financial Condition and Results of Operations
Segment Analysis Fund Performance Metrics
for additional information.
Dependence
on significant leverage in investments by our funds could
adversely affect our ability to achieve attractive rates of
return on those investments.
Many of our carry funds and fund of funds vehicles
investments rely heavily on the use of leverage, and our ability
to achieve attractive rates of return on investments will depend
on our ability to access sufficient sources of indebtedness at
attractive rates. For example, in many private equity
investments, indebtedness may constitute and historically has
constituted up to 70% or more of a portfolio companys or
real estate assets total debt and equity capitalization,
including debt that may be incurred in connection with the
investment. The absence of available sources of sufficient debt
financing for extended periods of time could therefore
materially and adversely affect our Corporate Private Equity and
Real Assets businesses. In addition, an increase in either the
general levels of interest rates or in the risk spread demanded
by sources of indebtedness, such as the increase we experienced
during 2009, would make it more expensive to finance those
businesses investments. Increases in interest rates could
also make it more difficult to locate and consummate private
equity investments because other potential buyers, including
operating companies acting as strategic buyers, may be able to
bid for an asset at a higher price due to a lower overall cost
of capital or their ability to benefit from a higher amount of
cost savings following the acquisition of
47
the asset. In addition, a portion of the indebtedness used to
finance private equity investments often includes high-yield
debt securities issued in the capital markets. Availability of
capital from the high-yield debt markets is subject to
significant volatility, and there may be times when we might not
be able to access those markets at attractive rates, or at all,
when completing an investment. Finally, the interest payments on
the indebtedness used to finance our carry funds and fund
of funds vehicles investments are generally deductible
expenses for income tax purposes, subject to limitations under
applicable tax law and policy. Any change in such tax law or
policy to eliminate or substantially limit these income tax
deductions, as has been discussed from time to time in various
jurisdictions, would reduce the after-tax rates of return on the
affected investments, which may have an adverse impact on our
business and financial results. See Our funds
make investments in companies that are based outside of the
United States, which may expose us to additional risks not
typically associated with investing in companies that are based
in the United States.
Investments in highly leveraged entities are also inherently
more sensitive to declines in revenue, increases in expenses and
interest rates and adverse economic, market and industry
developments. The incurrence of a significant amount of
indebtedness by an entity could, among other things:
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subject the entity to a number of restrictive covenants, terms
and conditions, any violation of which could be viewed by
creditors as an event of default and could materially impact our
ability to realize value from the investment;
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allow even moderate reductions in operating cash flow to render
the entity unable to service its indebtedness, leading to a
bankruptcy or other reorganization of the entity and a loss of
part or all of the equity investment in it;
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give rise to an obligation to make mandatory prepayments of debt
using excess cash flow, which might limit the entitys
ability to respond to changing industry conditions to the extent
additional cash is needed for the response, to make unplanned
but necessary capital expenditures or to take advantage of
growth opportunities;
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limit the entitys ability to adjust to changing market
conditions, thereby placing it at a competitive disadvantage
compared to its competitors that have relatively less debt;
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limit the entitys ability to engage in strategic
acquisitions that might be necessary to generate attractive
returns or further growth; and
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limit the entitys ability to obtain additional financing
or increase the cost of obtaining such financing, including for
capital expenditures, working capital or other general corporate
purposes.
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As a result, the risk of loss associated with a leveraged entity
is generally greater than for companies with comparatively less
debt. For example, a number of investments consummated by
private equity sponsors during 2005, 2006 and 2007 that utilized
significant amounts of leverage subsequently experienced severe
economic stress and, in certain cases, defaulted on their debt
obligations due to a decrease in revenue and cash flow
precipitated by the subsequent downturn during 2008 and 2009.
Similarly, the leveraged nature of the investments of our Real
Assets funds increases the risk that a decline in the fair value
of the underlying real estate or tangible assets will result in
their abandonment or foreclosure. For example, in 2009 and 2010,
several investments of our real estate funds were foreclosed,
resulting in aggregate write-offs of approximately
$198 million in 2009 and $19 million in 2010.
When our private equity funds existing portfolio
investments reach the point when debt incurred to finance those
investments matures in significant amounts and must be either
repaid or refinanced, those investments may materially suffer if
they have not generated sufficient cash flow to repay maturing
debt and there is insufficient capacity and availability in the
financing markets to permit them to refinance maturing debt on
satisfactory terms, or at all. If a limited availability of
48
financing for such purposes were to persist for an extended
period of time, when significant amounts of the debt incurred to
finance our Corporate Private Equity and Real Assets funds
existing portfolio investments came due, these funds could be
materially and adversely affected.
Many of our Global Market Strategies funds may choose to use
leverage as part of their respective investment programs and
regularly borrow a substantial amount of their capital. The use
of leverage poses a significant degree of risk and enhances the
possibility of a significant loss in the value of the investment
portfolio. A fund may borrow money from time to time to purchase
or carry securities or may enter into derivative transactions
(such as total return swaps) with counterparties that have
embedded leverage. The interest expense and other costs incurred
in connection with such borrowing may not be recovered by
appreciation in the securities purchased or carried and will be
lost, and the timing and magnitude of such losses may be
accelerated or exacerbated, in the event of a decline in the
market value of such securities. Gains realized with borrowed
funds may cause the funds net asset value to increase at a
faster rate than would be the case without borrowings. However,
if investment results fail to cover the cost of borrowings, the
funds net asset value could also decrease faster than if
there had been no borrowings. Increases in interest rates could
also decrease the value of fixed-rate debt investment that our
investment funds make.
Any of the foregoing circumstances could have a material adverse
effect on our results of operations, financial condition and
cash flow.
A
decline in the pace or size of investments by our carry funds or
fund of funds vehicles could result in our receiving less
revenue from transaction fees.
The transaction fees that we earn are driven in part by the pace
at which our funds make investments and the size of those
investments. Any decline in that pace or the size of such
investments could reduce our transaction fees and could make it
more difficult for us to raise capital on our anticipated
schedule. Many factors could cause such a decline in the pace of
investment, including:
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the inability of our investment professionals to identify
attractive investment opportunities;
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competition for such opportunities among other potential
acquirers;
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decreased availability of capital on attractive terms; and
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our failure to consummate identified investment opportunities
because of business, regulatory or legal complexities and
adverse developments in the U.S. or global economy or
financial markets.
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For example, the more limited financing options for large
Corporate Private Equity and Real Assets investments resulting
from the credit market dislocations in 2008 and 2009 reduced the
pace and size of investments by our Corporate Private Equity and
Real Assets funds.
In addition, we have confronted and expect to continue to
confront requests from a variety of investors and groups
representing investors to increase the percentage of transaction
fees we share with our investors (or to decline to receive
transaction fees from portfolio companies held by our funds). To
the extent we accommodate such requests, it would result in a
decrease in the amount of fee revenue we earn. See
Our investors in future funds may negotiate to
pay us lower management fees and the economic terms of our
future funds may be less favorable to us than those of our
existing funds, which could adversely affect our revenues.
The
alternative asset management business is intensely
competitive.
The alternative asset management business is intensely
competitive, with competition based on a variety of factors,
including investment performance, business relationships,
quality of service provided to investors, investor liquidity and
willingness to invest, fund terms (including fees), brand
recognition and business reputation. Our alternative asset
management business competes with a
49
number of private equity funds, specialized investment funds,
hedge funds, corporate buyers, traditional asset managers, real
estate development companies, commercial banks, investment banks
and other financial institutions (as well as sovereign wealth
funds). For instance, Carlyle and Riverstone have mutually
decided not to pursue another jointly managed fund as
co-sponsors. Accordingly, we expect that our future energy and
renewable funds will compete with Riverstone, among other
alternative asset managers, for investment opportunities and
fund investors in the energy and renewable space. A number of
factors serve to increase our competitive risks:
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a number of our competitors in some of our businesses have
greater financial, technical, marketing and other resources and
more personnel than we do;
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some of our funds may not perform as well as competitors
funds or other available investment products;
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a significant number of investors have materially decreased or
temporarily suspended making new fund investments recently
because of the global economic downturn and poor returns in
their overall investment portfolios in 2008 and 2009;
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several of our competitors have significant amounts of capital,
and many of them have similar investment objectives to ours,
which may create additional competition for investment
opportunities and may reduce the size and duration of pricing
inefficiencies that otherwise could be exploited;
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some of these competitors may also have a lower cost of capital
and access to funding sources that are not available to us,
which may create competitive disadvantages for us with respect
to investment opportunities;
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some of our competitors may have higher risk tolerances,
different risk assessments or lower return thresholds than us,
which could allow them to consider a wider variety of
investments and to bid more aggressively than us for investments
that we want to make;
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some of our competitors may be subject to less regulation and
accordingly may have more flexibility to undertake and execute
certain businesses or investments than we do
and/or bear
less compliance expense than we do;
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some of our competitors may have more flexibility than us in
raising certain types of investment funds under the investment
management contracts they have negotiated with their investors;
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some of our competitors may have better expertise or be regarded
by investors as having better expertise in a specific asset
class or geographic region than we do;
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our competitors that are corporate buyers may be able to achieve
synergistic cost savings in respect of an investment, which may
provide them with a competitive advantage in bidding for an
investment;
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there are relatively few barriers to entry impeding the
formation of new alternative asset management firms, and the
successful efforts of new entrants into our various businesses,
including former star portfolio managers at large
diversified financial institutions as well as such institutions
themselves, is expected to continue to result in increased
competition;
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some investors may prefer to invest with an asset manager that
is not publicly traded or is smaller with only one or two
investment products that it manages; and
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other industry participants may, from time to time, seek to
recruit our investment professionals and other employees away
from us.
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We may lose investment opportunities in the future if we do not
match investment prices, structures and terms offered by our
competitors. Alternatively, we may experience decreased rates of
return and increased risks of loss if we match investment
prices, structures and terms offered by our
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competitors. Moreover, if we are forced to compete with other
alternative asset managers on the basis of price, we may not be
able to maintain our current fund fee and carried interest
terms. We have historically competed primarily on the
performance of our funds, and not on the level of our fees or
carried interest relative to those of our competitors. However,
there is a risk that fees and carried interest in the
alternative asset management industry will decline, without
regard to the historical performance of a manager. Fee or
carried interest income reductions on existing or future funds,
without corresponding decreases in our cost structure, would
adversely affect our revenues and profitability. See
Our investors in future funds may negotiate to
pay us lower management fees and the economic terms of our
future funds may be less favorable to us than those of our
existing funds, which could adversely affect our revenues.
In addition, the attractiveness of our investment funds relative
to investments in other investment products could decrease
depending on economic conditions. This competitive pressure
could adversely affect our ability to make successful
investments and limit our ability to raise future investment
funds, either of which would adversely impact our business,
revenue, results of operations and cash flow. See
Our investors in future funds may negotiate to
pay us lower management fees and the economic terms of our
future funds may be less favorable to us than those of our
existing funds, which could adversely affect our revenues.
The
due diligence process that we undertake in connection with
investments by our investment funds may not reveal all facts
that may be relevant in connection with an
investment.
Before making private equity and other investments, we conduct
due diligence that we deem reasonable and appropriate based on
the facts and circumstances applicable to each investment. The
objective of the due diligence process is to identify attractive
investment opportunities based on the facts and circumstances
surrounding an investment and, in the case of private equity
investments, prepare a framework that may be used from the date
of an acquisition to drive operational achievement and value
creation. When conducting due diligence, we may be required to
evaluate important and complex business, financial, tax,
accounting, environmental and legal issues. Outside consultants,
legal advisors, accountants and investment banks may be involved
in the due diligence process in varying degrees depending on the
type of investment. Nevertheless, when conducting due diligence
and making an assessment regarding an investment, we rely on the
resources available to us, including information provided by the
target of the investment and, in some circumstances, third-party
investigations. The due diligence process may at times be
subjective with respect to newly-organized companies for which
only limited information is available. Accordingly, we cannot be
certain that the due diligence investigation that we carry out
with respect to any investment opportunity will reveal or
highlight all relevant facts that may be necessary or helpful in
evaluating such investment opportunity. Instances of fraud,
accounting irregularities and other deceptive practices can be
difficult to detect, and fraud and other deceptive practices can
be widespread in certain jurisdictions. Several of our funds
invest in emerging market countries that may not have
established laws and regulations that are as stringent as in
more developed nations, or where existing laws and regulations
may not be consistently enforced. For example, our funds invest
throughout China, Latin America and MENA, and we have recently
hired investment professionals to facilitate investment in
Sub-Saharan
Africa. Due diligence on investment opportunities in these
jurisdictions is frequently more complicated because consistent
and uniform commercial practices in such locations may not have
developed. Fraud, accounting irregularities and deceptive
practices can be especially difficult to detect in such
locations. For example, two Chinese companies in which we have
minority investments have recently been made the subject of
internal investigations in connection with allegations of
financial or accounting irregularities, and a purported class
action has been brought against one of the Chinese companies and
certain of its present and former officers and directors,
including a Carlyle employee who is a former director of such
entity. We do not have sufficient information at this time to
give an assessment of the likely outcome of these matters or as
to the ultimate impact these allegations, if true, may have on
the value of our investments.
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We cannot be certain that our due diligence investigations will
result in investments being successful or that the actual
financial performance of an investment will not fall short of
the financial projections we used when evaluating that
investment. Failure to identify risks associated with our
investments could have a material adverse effect on our business.
Our
funds invest in relatively high-risk, illiquid assets, and we
may fail to realize any profits from these activities for a
considerable period of time or lose some or all of our principal
investments.
Many of our investment funds invest in securities that are not
publicly traded. In many cases, our investment funds may be
prohibited by contract or by applicable securities laws from
selling such securities for a period of time. Our investment
funds will not be able to sell these securities publicly unless
their sale is registered under applicable securities laws, or
unless an exemption from such registration is available. The
ability of many of our investment funds, particularly our
private equity funds, to dispose of investments is heavily
dependent on the public equity markets. For example, the ability
to realize any value from an investment may depend upon the
ability to complete an initial public offering of the portfolio
company in which such investment is held. Even if the securities
are publicly traded, large holdings of securities can often be
disposed of only over a substantial length of time, exposing the
investment returns to risks of downward movement in market
prices during the intended disposition period. Accordingly,
under certain conditions, our investment funds may be forced to
either sell securities at lower prices than they had expected to
realize or defer, potentially for a considerable period of time,
sales that they had planned to make. We have made and expect to
continue to make significant principal investments in our
current and future investment funds. Contributing capital to
these investment funds is subject to significant risks, and we
may lose some or all of the principal amount of our investments.
The
investments of our private equity funds are subject to a number
of inherent risks.
Our results are highly dependent on our continued ability to
generate attractive returns from our investments. Investments
made by our private equity funds involve a number of significant
risks inherent to private equity investing, including the
following:
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we advise funds that invest in businesses that operate in a
variety of industries that are subject to extensive domestic and
foreign regulation, such as the telecommunications industry, the
aerospace, defense and government services industry and the
healthcare industry (including companies that supply equipment
and services to governmental agencies), that may involve greater
risk due to rapidly changing market and governmental conditions
in those sectors;
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significant failures of our portfolio companies to comply with
laws and regulations applicable to them could affect the ability
of our funds to invest in other companies in certain industries
in the future and could harm our reputation;
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companies in which private equity investments are made may have
limited financial resources and may be unable to meet their
obligations, which may be accompanied by a deterioration in the
value of their equity securities or any collateral or guarantees
provided with respect to their debt;
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companies in which private equity investments are made are more
likely to depend on the management talents and efforts of a
small group of persons and, as a result, the death, disability,
resignation or termination of one or more of those persons could
have a material adverse impact on their business and prospects
and the investment made;
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companies in which private equity investments are made may from
time to time be parties to litigation, may be engaged in rapidly
changing businesses with products subject to a
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substantial risk of obsolescence and may require substantial
additional capital to support their operations, finance
expansion or maintain their competitive position;
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companies in which private equity investments are made generally
have less predictable operating results;
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instances of fraud and other deceptive practices committed by
senior management of portfolio companies in which our funds
invest may undermine our due diligence efforts with respect to
such companies and, upon the discovery of such fraud, negatively
affect the valuation of a funds investments as well as
contribute to overall market volatility that can negatively
impact a funds investment program;
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our funds may make investments that they do not advantageously
dispose of prior to the date the applicable fund is dissolved,
either by expiration of such funds term or otherwise,
resulting in a lower than expected return on the investments
and, potentially, on the fund itself;
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our funds generally establish the capital structure of portfolio
companies on the basis of the financial projections based
primarily on management judgments and assumptions, and general
economic conditions and other factors may cause actual
performance to fall short of these financial projections, which
could cause a substantial decrease in the value of our equity
holdings in the portfolio company and cause our funds
performance to fall short of our expectations; and
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executive officers, directors and employees of an equity sponsor
may be named as defendants in litigation involving a company in
which a private equity investment is made or is being made.
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Our
real estate funds are subject to the risks inherent in the
ownership and operation of real estate and the construction and
development of real estate.
Investments in our real estate funds will be subject to the
risks inherent in the ownership and operation of real estate and
real estate-related businesses and assets. These risks include
the following:
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those associated with the burdens of ownership of real property;
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general and local economic conditions;
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changes in supply of and demand for competing properties in an
area (as a result, for instance, of overbuilding);
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fluctuations in the average occupancy and room rates for hotel
properties;
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the financial resources of tenants;
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changes in building, environmental and other laws;
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energy and supply shortages;
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various uninsured or uninsurable risks;
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natural disasters;
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changes in government regulations (such as rent control);
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changes in real property tax rates;
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changes in interest rates;
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the reduced availability of mortgage funds which may render the
sale or refinancing of properties difficult or impracticable;
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negative developments in the economy that depress travel
activity;
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environmental liabilities;
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contingent liabilities on disposition of assets; and
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terrorist attacks, war and other factors that are beyond our
control.
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During 2008 and 2009, real estate markets in the United States,
Europe and Japan generally experienced increases in
capitalization rates and declines in value as a result of the
overall economic decline and the limited availability of
financing. As a result, the value of investments in our real
estate funds declined significantly. In addition, if our real
estate funds acquire direct or indirect interests in undeveloped
land or underdeveloped real property, which may often be
non-income producing, they will be subject to the risks normally
associated with such assets and development activities,
including risks relating to the availability and timely receipt
of zoning and other regulatory or environmental approvals, the
cost and timely completion of construction (including risks
beyond the control of our fund, such as weather or labor
conditions or material shortages) and the availability of both
construction and permanent financing on favorable terms.
Additionally, our funds properties may be managed by a
third party, which makes us dependent upon such third parties
and subjects us to risks associated with the actions of such
third parties. Any of these factors may cause the value of the
investments in our real estate funds to decline, which may have
a material impact on our results of operations.
We
often pursue investment opportunities that involve business,
regulatory, legal or other complexities.
As an element of our investment style, we may pursue unusually
complex investment opportunities. This can often take the form
of substantial business, regulatory or legal complexity that
would deter other asset managers. Our tolerance for complexity
presents risks, as such transactions can be more difficult,
expensive and time-consuming to finance and execute; it can be
more difficult to manage or realize value from the assets
acquired in such transactions; and such transactions sometimes
entail a higher level of regulatory scrutiny or a greater risk
of contingent liabilities. Any of these risks could harm the
performance of our funds.
Our
investment funds make investments in companies that we do not
control.
Investments by many of our investment funds will include debt
instruments and equity securities of companies that we do not
control. Such instruments and securities may be acquired by our
investment funds through trading activities or through purchases
of securities from the issuer. In addition, our funds may
acquire minority equity interests in large transactions, which
may be structured as consortium transactions due to
the size of the investment and the amount of capital required to
be invested. A consortium transaction involves an equity
investment in which two or more private equity firms serve
together or collectively as equity sponsors. We participated in
a number of consortium transactions in prior years due to the
increased size of many of the transactions in which we were
involved. Consortium transactions generally entail a reduced
level of control by our firm over the investment because
governance rights must be shared with the other consortium
sponsors. Accordingly, we may not be able to control decisions
relating to a consortium investment, including decisions
relating to the management and operation of the company and the
timing and nature of any exit. Our funds may also dispose of a
portion of their majority equity investments in portfolio
companies over time in a manner that results in the funds
retaining a minority investment. Those investments may be
subject to the risk that the company in which the investment is
made may make business, financial or management decisions with
which we do not agree or that the majority stakeholders or the
management of the company may take risks or otherwise act in a
manner that does not serve our interests. If any of the
foregoing were to occur, the value of investments by our funds
could decrease and our financial condition, results of
operations and cash flow could suffer as a result.
54
Our
funds make investments in companies that are based outside of
the United States, which may expose us to additional risks not
typically associated with investing in companies that are based
in the United States.
Many of our investment funds generally invest a significant
portion of their assets in the equity, debt, loans or other
securities of issuers that are based outside of the United
States. A substantial amount of these investments consist of
investments made by our carry funds. For example, as of December
31, 2011, approximately 41% of the equity invested by our carry
funds was attributable to foreign investments. Investments in
non-U.S. securities
involve risks not typically associated with investing in
U.S. securities, including:
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certain economic and political risks, including potential
exchange control regulations and restrictions on our
non-U.S. investments
and repatriation of profits on investments or of capital
invested, the risks of political, economic or social
instability, the possibility of expropriation or confiscatory
taxation and adverse economic and political developments;
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the imposition of
non-U.S. taxes
on gains from the sale of investments by our funds;
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the absence of uniform accounting, auditing and financial
reporting standards, practices and disclosure requirements and
less government supervision and regulation;
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changes in laws or clarifications to existing laws that could
impact our tax treaty positions, which could adversely impact
the returns on our investments;
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differences in the legal and regulatory environment or enhanced
legal and regulatory compliance;
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limitations on borrowings to be used to fund acquisitions or
dividends;
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political hostility to investments by foreign or private equity
investors;
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less liquid markets;
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reliance on a more limited number of commodity inputs, service
providers
and/or
distribution mechanisms;
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adverse fluctuations in currency exchange rates and costs
associated with conversion of investment principal and income
from one currency into another;
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higher rates of inflation;
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higher transaction costs;
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less government supervision of exchanges, brokers and issuers;
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less developed bankruptcy, corporate, partnership and other laws;
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difficulty in enforcing contractual obligations;
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less stringent requirements relating to fiduciary duties;
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fewer investor protections; and
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greater price volatility.
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We operate in numerous national and subnational jurisdictions
throughout the world and are subject to complex taxation
requirements that could result in the imposition of taxes upon
us that exceed the amounts we reserve for such purposes. In
addition, the portfolio companies of our funds are typically
subject to taxation in the jurisdictions in which they operate.
In Denmark, Germany and France, for example, the deductibility
of interest and other financing expenses in companies in which
our funds have invested or may invest in the future may be
limited. This could adversely affect portfolio companies that
operate in those countries and limit the benefit of additional
investments in those countries.
55
Our funds investments that are denominated in a foreign
currency will be subject to the risk that the value of a
particular currency will change in relation to one or more other
currencies. Among the factors that may affect currency values
are trade balances, levels of short-term interest rates,
differences in relative values of similar assets in different
currencies, long-term opportunities for investment and capital
appreciation and political developments. We may employ hedging
techniques to minimize these risks, but we can offer no
assurance that such strategies will be effective. If we engage
in hedging transactions, we may be exposed to additional risks
associated with such transactions. See Risks
Related to Our Business Operations Risk management
activities may adversely affect the return on our funds
investments.
We may
need to pay giveback obligations if and when they
are triggered under the governing agreements with our
investors.
If, at the end of the life of a carry fund (or earlier with
respect to certain of our real estate funds), the carry fund has
not achieved investment returns that (in most cases) exceed the
preferred return threshold or (in all cases) the general partner
receives net profits over the life of the fund in excess of its
allocable share under the applicable partnership agreement, we
will be obligated to repay an amount equal to the extent to
which carried interest that was previously distributed to us
exceeds the amounts to which we are ultimately entitled. These
repayment obligations may be related to amounts previously
distributed to our senior Carlyle professionals prior to the
completion of this offering, with respect to which our common
unitholders did not receive any benefit. This obligation is
known as a giveback obligation. As of
December 31, 2011, we had accrued a giveback obligation of
$136.5 million, representing the giveback obligation that
would need to be paid if the carry funds were liquidated at
their current fair values at that date. If, as of
December 31, 2011, all of the investments held by our carry
funds were deemed worthless, the amount of realized and
distributed carried interest subject to potential giveback would
have been $856.7 million, on an after-tax basis where
applicable. Although a giveback obligation is several to each
person who received a distribution, and not a joint obligation,
the governing agreements of our funds generally provide that to
the extent a recipient does not fund his or her respective
share, then we may have to fund such additional amounts beyond
the amount of carried interest we retained, although we
generally will retain the right to pursue any remedies that we
have under such governing agreements against those carried
interest recipients who fail to fund their obligations. We have
historically withheld a portion of the cash from carried
interest distributions to individual senior Carlyle
professionals and other employees as security for their
potential giveback obligations. However, we have not at this
time set aside cash reserves relating to our secondary liability
for such giveback obligations or in respect of giveback
obligations related to carried interest we may receive and
retain in the future. We intend to monitor our giveback
obligations and may need to use or reserve cash to repay such
giveback obligations instead of using the cash for other
purposes. See Business Structure and Operation
of Our Investment Funds Incentive
Arrangements / Fee Structure and
Managements Discussion and Analysis of Financial
Condition and Results of Operations Contractual
Obligations Contingent Obligations (Giveback)
and Notes 2 and 10 to the combined and consolidated
financial statements appearing elsewhere in this prospectus.
Our
investment funds often make common equity investments that rank
junior to preferred equity and debt in a companys capital
structure.
In most cases, the companies in which our investment funds
invest have, or are permitted to have, outstanding indebtedness
or equity securities that rank senior to our funds
investment. By their terms, such instruments may provide that
their holders are entitled to receive payments of dividends,
interest or principal on or before the dates on which payments
are to be made in respect of our investment. Also, in the event
of insolvency, liquidation, dissolution, reorganization or
bankruptcy of a company in which an investment is made, holders
of securities ranking senior to our investment would typically
be entitled to receive payment in full before distributions
could be made in respect of our investment. After repaying
senior security holders, the company may not have any remaining
assets to use for
56
repaying amounts owed in respect of our investment. To the
extent that any assets remain, holders of claims that rank
equally with our investment would be entitled to share on an
equal and ratable basis in distributions that are made out of
those assets. Also, during periods of financial distress or
following an insolvency, the ability of our funds to influence a
companys affairs and to take actions to protect their
investments may be substantially less than that of the senior
creditors.
Third-party
investors in substantially all of our carry funds have the right
to remove the general partner of the fund for cause, to
accelerate the liquidation date of the investment fund without
cause by a simple majority vote and to terminate the investment
period under certain circumstances and investors in certain of
the investment funds we advise may redeem their investments.
These events would lead to a decrease in our revenues, which
could be substantial.
The governing agreements of substantially all of our carry funds
provide that, subject to certain conditions, third-party
investors in those funds have the right to remove the general
partner of the fund for cause (other than the AlpInvest fund of
funds vehicles) or to accelerate the liquidation date of the
investment fund without cause by a simple majority vote,
resulting in a reduction in management fees we would earn from
such investment funds and a significant reduction in the
expected amounts of total carried interest and incentive fees
from those funds. Carried interest and incentive fees could be
significantly reduced as a result of our inability to maximize
the value of investments by an investment fund during the
liquidation process or in the event of the triggering of a
giveback obligation. Finally, the applicable funds
would cease to exist after completion of liquidation and
winding-up.
In addition, the governing agreements of our investment funds
provide that in the event certain key persons in our
investment funds do not meet specified time commitments with
regard to managing the fund (for example, Messrs. Conway,
DAniello and Rubenstein, in the case of our private equity
funds), then investors in certain funds have the right to vote
to terminate the investment period by a simple majority vote in
accordance with specified procedures, accelerate the withdrawal
of their capital on an
investor-by-investor
basis, or the funds investment period will automatically
terminate and the vote of a simple majority of investors is
required to restart it. In addition to having a significant
negative impact on our revenue, net income and cash flow, the
occurrence of such an event with respect to any of our
investment funds would likely result in significant reputational
damage to us and could negatively impact our future fundraising
efforts.
The AlpInvest fund of funds vehicles generally provide for
suspension or termination of investment commitments in the event
of cause, key person or regulatory events, changes in control of
Carlyle or of majority ownership of AlpInvest, and, in some
cases, other performance metrics, but generally have not
provided for liquidation without cause. Where AlpInvest fund of
funds vehicles include key person provisions, they
are focused on specific existing AlpInvest personnel. While we
believe that existing AlpInvest management have appropriate
incentives to remain at AlpInvest, based on equity ownership,
profit participation and other contractual provisions, we are
not able to guarantee the ongoing participation of AlpInvest
management team members in respect of the AlpInvest fund of
funds vehicles. In addition, AlpInvest fund of funds vehicles
have historically had few or even a single investor. In such
cases, an individual investor may hold disproportionate
authority over decisions reserved for
third-party
investors.
Investors in our hedge funds may generally redeem their
investments on an annual,
semi-annual
or quarterly basis following the expiration of a specified
period of time when capital may not be withdrawn (typically
between one and three years), subject to the applicable
funds specific redemption provisions. In a declining
market, the pace of redemptions and consequent reduction in our
AUM could accelerate. The decrease in revenues that would result
from significant redemptions in our hedge funds could have a
material adverse effect on our business, revenue and cash flow.
In addition, because our investment funds generally have an
adviser that is registered under the Advisers Act, the
management agreements of all of our investment funds would be
terminated upon
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an assignment of these agreements without investor
consent, which assignment may be deemed to occur in the event
these advisers were to experience a change of control. We cannot
be certain that consents required to assignments of our
investment management agreements will be obtained if a change of
control occurs. Assignment of these agreements
without investor consent could cause us to lose the fees we earn
from such investment funds.
Third-party
investors in our investment funds with commitment-based
structures may not satisfy their contractual obligation to fund
capital calls when requested by us, which could adversely affect
a funds operations and performance.
Investors in our carry funds and fund of funds vehicles make
capital commitments to those funds that we are entitled to call
from those investors at any time during prescribed periods. We
depend on investors fulfilling their commitments when we call
capital from them in order for those funds to consummate
investments and otherwise pay their obligations (for example,
management fees) when due. Any investor that did not fund a
capital call would generally be subject to several possible
penalties, including having a significant amount of its existing
investment forfeited in that fund. However, the impact of the
penalty is directly correlated to the amount of capital
previously invested by the investor in the fund and if an
investor has invested little or no capital, for instance early
in the life of the fund, then the forfeiture penalty may not be
as meaningful. Investors may also negotiate for lesser or
reduced penalties at the outset of the fund, thereby inhibiting
our ability to enforce the funding of a capital call. If
investors were to fail to satisfy a significant amount of
capital calls for any particular fund or funds, the operation
and performance of those funds could be materially and adversely
affected.
Our
failure to deal appropriately with conflicts of interest in our
investment business could damage our reputation and adversely
affect our businesses.
As we have expanded and as we continue to expand the number and
scope of our businesses, we increasingly confront potential
conflicts of interest relating to our funds investment
activities. Certain of our funds may have overlapping investment
objectives, including funds that have different fee structures,
and potential conflicts may arise with respect to our decisions
regarding how to allocate investment opportunities among those
funds. For example, a decision to acquire material non-public
information about a company while pursuing an investment
opportunity for a particular fund gives rise to a potential
conflict of interest when it results in our having to restrict
the ability of other funds to take any action. We may also cause
different private equity funds to invest in a single portfolio
company, for example where the fund that made an initial
investment no longer has capital available to invest. We may
also cause different funds that we manage to purchase different
classes of securities in the same portfolio company. For
example, one of our CLO funds could acquire a debt security
issued by the same company in which one of our buyout funds owns
common equity securities. A direct conflict of interest could
arise between the debt holders and the equity holders if such a
company were to develop insolvency concerns, and that conflict
would have to be carefully managed by us. In addition, conflicts
of interest may exist in the valuation of our investments and
regarding decisions about the allocation of specific investment
opportunities among us and our funds and the allocation of fees
and costs among us, our funds and their portfolio companies.
Lastly, in certain infrequent instances we may purchase an
investment alongside one of our investment funds or sell an
investment to one of our investment funds and conflicts may
arise in respect of the allocation, pricing and timing of such
investments and the ultimate disposition of such investments. To
the extent we fail to appropriately deal with any such
conflicts, it could negatively impact our reputation and ability
to raise additional funds and the willingness of counterparties
to do business with us or result in potential litigation against
us.
58
Risk
management activities may adversely affect the return on our
funds investments.
When managing our exposure to market risks, we may (on our own
behalf or on behalf of our funds) from time to time use forward
contracts, options, swaps, caps, collars and floors or pursue
other strategies or use other forms of derivative instruments to
limit our exposure to changes in the relative values of
investments that may result from market developments, including
changes in prevailing interest rates, currency exchange rates
and commodity prices. The scope of risk management activities
undertaken by us varies based on the level and volatility of
interest rates, prevailing foreign currency exchange rates, the
types of investments that are made and other changing market
conditions. The use of hedging transactions and other derivative
instruments to reduce the effects of a decline in the value of a
position does not eliminate the possibility of fluctuations in
the value of the position or prevent losses if the value of the
position declines. Such transactions may also limit the
opportunity for gain if the value of a position increases.
Moreover, it may not be possible to limit the exposure to a
market development that is so generally anticipated that a
hedging or other derivative transaction cannot be entered into
at an acceptable price. The success of any hedging or other
derivative transaction generally will depend on our ability to
correctly predict market changes, the degree of correlation
between price movements of a derivative instrument and the
position being hedged, the creditworthiness of the counterparty
and other factors. As a result, while we may enter into such a
transaction in order to reduce our exposure to market risks, the
transaction may result in poorer overall investment performance
than if it had not been executed.
Certain
of our fund investments may be concentrated in particular asset
types or geographic regions, which could exacerbate any negative
performance of those funds to the extent those concentrated
investments perform poorly.
The governing agreements of our investment funds contain only
limited investment restrictions and only limited requirements as
to diversification of fund investments, either by geographic
region or asset type. For example, we advise funds that invest
predominantly in the United States, Europe, Asia, Japan or MENA;
and we advise funds that invest in a single industry sector,
such as financial services. During periods of difficult market
conditions or slowdowns in these sectors or geographic regions,
decreased revenue, difficulty in obtaining access to financing
and increased funding costs experienced by our funds may be
exacerbated by this concentration of investments, which would
result in lower investment returns for our funds. Such
concentration may increase the risk that events affecting a
specific geographic region or asset type will have an adverse or
disparate impact on such investment funds, as compared to funds
that invest more broadly.
Certain
of our investment funds may invest in securities of companies
that are experiencing significant financial or business
difficulties, including companies involved in bankruptcy or
other reorganization and liquidation proceedings. Such
investments may be subject to a greater risk of poor performance
or loss.
Certain of our investment funds, especially our distressed and
corporate opportunities funds, may invest in business
enterprises involved in work-outs, liquidations,
reorganizations, bankruptcies and similar transactions and may
purchase high risk receivables. An investment in such business
enterprises entails the risk that the transaction in which such
business enterprise is involved either will be unsuccessful,
will take considerable time or will result in a distribution of
cash or a new security the value of which will be less than the
purchase price to the fund of the security or other financial
instrument in respect of which such distribution is received. In
addition, if an anticipated transaction does not in fact occur,
the fund may be required to sell its investment at a loss.
Investments in troubled companies may also be adversely affected
by U.S. federal and state laws relating to, among other
things, fraudulent conveyances, voidable preferences, lender
liability and a bankruptcy courts discretionary power to
disallow, subordinate or disenfranchise particular claims.
Investments in securities and private claims of troubled
companies made in connection with an
59
attempt to influence a restructuring proposal or plan of
reorganization in a bankruptcy case may also involve substantial
litigation. Because there is substantial uncertainty concerning
the outcome of transactions involving financially troubled
companies, there is a potential risk of loss by a fund of its
entire investment in such company.
Our
private equity funds performance, and our performance, may
be adversely affected by the financial performance of our
portfolio companies and the industries in which our funds
invest.
Our performance and the performance of our private equity funds
is significantly impacted by the value of the companies in which
our funds have invested. Our funds invest in companies in many
different industries, each of which is subject to volatility
based upon economic and market factors. Over the last few years,
the credit crisis has caused significant fluctuations in the
value of securities held by our funds and the global economic
recession had a significant impact in overall performance
activity and the demands for many of the goods and services
provided by portfolio companies of the funds we advise. Although
the U.S. economy has begun to improve, there remain many
obstacles to continued growth in the economy such as high
unemployment, global geopolitical events, risks of inflation and
high deficit levels for governments in the United
States and abroad. These factors and other general economic
trends are likely to impact the performance of portfolio
companies in many industries and in particular, industries that
are more impacted by changes in consumer demand, such as the
consumer products sector and real estate. In addition, the value
of our investments in portfolio companies in the financial
services industry is impacted by the overall health and
stability of the credit markets. For example, the recent
speculation regarding the inability of Greece and certain other
European countries to pay their national debt, the response by
Eurozone policy makers to mitigate this sovereign debt crisis
and the concerns regarding the stability of the Eurozone
currency have created uncertainty in the credit markets. As a
result, there has been a strain on banks and other financial
services participants, including our portfolio companies in the
financial services industry, which could have a material adverse
impact on such portfolio companies. The performance of our
private equity funds, and our performance, may be adversely
affected to the extent our fund portfolio companies in these
industries experience adverse performance or additional pressure
due to downward trends. In respect of real estate, various
factors could halt or limit a recovery in the housing market and
have an adverse effect on investment performance, including, but
not limited to, continued high unemployment, a low level of
consumer confidence in the economy
and/or the
residential real estate market and rising mortgage interest
rates.
The
financial projections of our portfolio companies could prove
inaccurate.
Our funds generally establish the capital structure of portfolio
companies on the basis of financial projections prepared by the
management of such portfolio companies. These projected
operating results will normally be based primarily on judgments
of the management of the portfolio companies. In all cases,
projections are only estimates of future results that are based
upon assumptions made at the time that the projections are
developed. General economic conditions, which are not
predictable, along with other factors may cause actual
performance to fall short of the financial projections that were
used to establish a given portfolio companys capital
structure. Because of the leverage that we typically employ in
our investments, this could cause a substantial decrease in the
value of our equity holdings in the portfolio company. The
inaccuracy of financial projections could thus cause our
funds performance to fall short of our expectations.
Contingent
liabilities could harm fund performance.
We may cause our funds to acquire an investment that is subject
to contingent liabilities. Such contingent liabilities could be
unknown to us at the time of acquisition or, if they are known
to us, we may not accurately assess or protect against the risks
that they present. Acquired contingent liabilities could thus
result in unforeseen losses for our funds. In addition, in
connection with the disposition of an investment in a portfolio
company, a fund may be required to make
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representations about the business and financial affairs of such
portfolio company typical of those made in connection with the
sale of a business. A fund may also be required to indemnify the
purchasers of such investment to the extent that any such
representations are inaccurate. These arrangements may result in
the incurrence of contingent liabilities by a fund, even after
the disposition of an investment. Accordingly, the inaccuracy of
representations and warranties made by a fund could harm such
funds performance.
We and
our investment funds are subject to risks in using prime
brokers, custodians, administrators and other
agents.
We and many of our investment funds depend on the services of
prime brokers, custodians, administrators and other agents to
carry out certain securities transactions. The counterparty to
one or more of our or our funds contractual arrangements
could default on its obligations under the contract. If a
counterparty defaults, we and our funds may be unable to take
action to cover the exposure and we or one or more of our funds
could incur material losses. The consolidation and elimination
of counterparties resulting from the disruption in the financial
markets has increased our concentration of counterparty risk and
has decreased the number of potential counterparties. Our funds
generally are not restricted from dealing with any particular
counterparty or from concentrating any or all of their
transactions with one counterparty. In the event of the
insolvency of a party that is holding our assets or those of our
funds as collateral, we and our funds may not be able to recover
equivalent assets in full as we and our funds will rank among
the counterpartys unsecured creditors. In addition, our
and our funds cash held with a prime broker, custodian or
counterparty may not be segregated from the prime brokers,
custodians or counterpartys own cash, and we and our
funds therefore may rank as unsecured creditors in relation
thereto. The inability to recover our or our investment
funds assets could have a material impact on us or on the
performance of our funds.
Our
Fund of Funds Solutions business is subject to additional
risks.
We established our Fund of Funds Solutions business on
July 1, 2011 at the time we completed our acquisition of
AlpInvest. Our Fund of Funds Solutions business is subject to
additional risks, including the following:
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The AlpInvest business is subject to business and other risks
and uncertainties generally consistent with our business as a
whole, including without limitation legal and regulatory risks,
the avoidance or management of conflicts of interest and the
ability to attract and retain investment professionals and other
personnel.
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We will restrict our
day-to-day
participation in the AlpInvest business, which may in turn limit
our ability to address risks arising from the AlpInvest business
for so long as AlpInvest maintains separate investment
operations. Although we maintain ultimate control over
AlpInvest, AlpInvests historical management team (who are
our employees) will continue to exercise independent investment
authority without involvement by other Carlyle personnel. For so
long as these arrangements are in place, Carlyle representatives
will serve on the board of AlpInvest but we will observe
substantial restrictions on our ability to access investment
information or engage in
day-to-day
participation in the AlpInvest investment business, including a
restriction that AlpInvest investment decisions are made and
maintained without involvement by other Carlyle personnel and
that no specific investment data, other than data on the
investment performance of its client mandates, will be shared.
As such, we will have a reduced ability to identify or respond
to investment and other operational issues that may arise within
the AlpInvest business, relative to other Carlyle investment
funds.
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AlpInvest is currently subject to capital requirements which may
limit our ability to withdraw cash from AlpInvest, or require
additional investments of capital in order for AlpInvest to
maintain certain licenses to operate its business.
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Historically, the main part of AlpInvest capital commitments
have been obtained from its initial co-owners, with such owners
thereby holding highly concentrated voting rights with respect
to potential suspension or termination of investment commitments
made to AlpInvest.
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AlpInvest is expected to seek to broaden its client base by
advising separate accounts for investors on an
account-by-account
basis. AlpInvest has only limited experience in attracting new
clients and may not be successful in this strategy.
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AlpInvests co-investment business is subject to the risk
that other private equity sponsors, alongside whom AlpInvest has
historically invested in leveraged buyouts and growth capital
transactions throughout Europe, North America and Asia, will no
longer be willing to provide AlpInvest with investment
opportunities as favorable as in the past, if at all, as a
result of our ownership of AlpInvest.
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AlpInvests secondary investments business is subject to
the risk that opportunities in the secondary investments market
may not be as favorable as the recent past.
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Our
hedge fund investments are subject to additional
risks.
Investments by the hedge funds we advise are subject to
additional risks, including the following:
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Generally, there are few limitations on the execution of these
hedge funds investment strategies, which are subject to
the sole discretion of the management company or the general
partner of such funds.
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These funds may engage in short-selling, which is subject to a
theoretically unlimited risk of loss because there is no limit
on how much the price of a security may appreciate before the
short position is closed out. A fund may be subject to losses if
a security lender demands return of the lent securities and an
alternative lending source cannot be found or if the fund is
otherwise unable to borrow securities that are necessary to
hedge its positions.
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These funds may be limited in their ability to engage in short
selling or other activities as a result of regulatory mandates.
Such regulatory actions may limit our ability to engage in
hedging activities and therefore impair our investment
strategies. In addition, these funds may invest in securities
and other assets for which appropriate market hedges do not
exist or cannot be acquired on attractive terms.
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These funds are exposed to the risk that a counterparty will not
settle a transaction in accordance with its terms and conditions
because of a dispute over the terms of the contract (whether or
not bona fide) or because of a credit or liquidity problem, thus
causing the fund to suffer a loss.
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Credit risk may arise through a default by one of several large
institutions that are dependent on one another to meet their
liquidity or operational needs, so that a default by one
institution causes a series of defaults by the other
institutions. This systemic risk could have a
further material adverse effect on the financial intermediaries
(such as prime brokers, clearing agencies, clearing houses,
banks, securities firms and exchanges) with which these funds
transact on a daily basis.
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The efficacy of investment and trading strategies depend largely
on the ability to establish and maintain an overall market
position in a combination of financial instruments, which can be
difficult to execute.
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These funds may make investments or hold trading positions in
markets that are volatile and may become illiquid.
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These funds investments are subject to risks relating to
investments in commodities, futures, options and other
derivatives, the prices of which are highly volatile and may be
subject to a theoretically unlimited risk of loss in certain
circumstances. In addition, the funds assets are
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subject to the risk of the failure of any of the exchanges on
which their positions trade or of their clearinghouses or
counterparties.
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These funds may make investments that they do not advantageously
dispose of prior to the date the applicable fund is dissolved,
either by expiration of such funds term or otherwise.
Although we generally expect that investments will be disposed
of prior to dissolution or be suitable for in-kind distribution
at dissolution, and the general partners of the funds have a
limited ability to extend the term of the fund with the consent
of fund investors or the advisory board of the fund, as
applicable, our funds may have to sell, distribute or otherwise
dispose of investments at a disadvantageous time as a result of
dissolution. This would result in a lower than expected return
on the investments and, perhaps, on the fund itself.
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Risks
Related to Our Organizational Structure
Our
common unitholders do not elect our general partner or, except
in limited circumstances, vote on our general partners
directors and will have limited ability to influence decisions
regarding our business.
Our general partner, Carlyle Group Management L.L.C., which is
owned by our senior Carlyle professionals, will manage all of
our operations and activities. The limited liability company
agreement of Carlyle Group Management L.L.C. establishes a board
of directors that will be responsible for the oversight of our
business and operations. Unlike the holders of common stock in a
corporation, our common unitholders will have only limited
voting rights and will have no right to remove our general
partner or, except in the limited circumstances described below,
elect the directors of our general partner. Our common
unitholders will have no right to elect the directors of our
general partner unless, as determined on January 31 of each
year, the total voting power held by holders of the special
voting units in The Carlyle Group L.P. (including voting units
held by our general partner and its affiliates) in their
capacity as such, or otherwise held by then-current or former
Carlyle personnel (treating voting units deliverable to such
persons pursuant to outstanding equity awards as being held by
them), collectively, constitutes less than 10% of the voting
power of the outstanding voting units of The Carlyle Group L.P.
Unless and until the foregoing voting power condition is
satisfied, our general partners board of directors will be
elected in accordance with its limited liability company
agreement, which provides that directors may be appointed and
removed by members of our general partner holding a majority in
interest of the voting power of the members, which voting power
is allocated to each member ratably according to his or her
aggregate relative ownership of our common units and partnership
units. Immediately following this offering our existing owners
will collectively have % of the
voting power of The Carlyle Group L.P. limited partners,
or % if the underwriters exercise
in full their option to purchase additional common units. As a
result, our common unitholders will have limited ability to
influence decisions regarding our business. See Material
Provisions of The Carlyle Group L.P. Partnership
Agreement Election of Directors of General
Partner.
Our
senior Carlyle professionals will be able to determine the
outcome of those few matters that may be submitted for a vote of
the limited partners.
Immediately following this offering, our existing owners will
beneficially own % of the equity in
our business, or % if the
underwriters exercise in full their option to purchase
additional common units. TCG Carlyle Global Partners L.L.C., an
entity wholly-owned by our senior Carlyle professionals, will
hold a special voting unit that provides it with a number of
votes on any matter that may be submitted for a vote of our
common unitholders (voting together as a single class on all
such matters) that is equal to the aggregate number of vested
and unvested Carlyle Holdings partnership units held by the
limited partners of Carlyle Holdings. Accordingly, immediately
following this offering our existing owners generally will have
sufficient voting power to determine the outcome of those few
matters that may be submitted for a vote of the limited partners
of The Carlyle Group L.P. See Material Provisions of The
Carlyle Group L.P. Partnership
63
Agreement Withdrawal or Removal of the General
Partner, Meetings; Voting and
Election of Directors of General Partner.
Our common unitholders voting rights will be further
restricted by the provision in our partnership agreement stating
that any common units held by a person that beneficially owns
20% or more of any class of The Carlyle Group L.P. common units
then outstanding (other than our general partner and its
affiliates, or a direct or subsequently approved transferee of
our general partner or its affiliates) cannot be voted on any
matter. In addition, our partnership agreement will contain
provisions limiting the ability of our common unitholders to
call meetings or to acquire information about our operations, as
well as other provisions limiting the ability of our common
unitholders to influence the manner or direction of our
management. Our partnership agreement also will not restrict our
general partners ability to take actions that may result
in our being treated as an entity taxable as a corporation for
U.S. federal (and applicable state) income tax purposes.
Furthermore, the common unitholders will not be entitled to
dissenters rights of appraisal under our partnership
agreement or applicable Delaware law in the event of a merger or
consolidation, a sale of substantially all of our assets or any
other transaction or event.
As a result of these matters and the provisions referred to
under Our common unitholders do not elect our
general partner or, except in limited circumstances, vote on our
general partners directors and will have limited ability
to influence decisions regarding our business, our common
unitholders may be deprived of an opportunity to receive a
premium for their common units in the future through a sale of
The Carlyle Group L.P., and the trading prices of our common
units may be adversely affected by the absence or reduction of a
takeover premium in the trading price.
We are
permitted to repurchase all of the outstanding common units
under certain circumstances, and this repurchase may occur at an
undesirable time or price.
We have the right to acquire all of our then-outstanding common
units at the then-current trading price either if 10% or less of
our common units are held by persons other than our general
partner and its affiliates or if we are required to register as
an investment company under the 1940 Act. As a result of our
general partners right to purchase outstanding common
units, a holder of common units may have his common units
purchased at an undesirable time or price.
We are
a limited partnership and as a result will qualify for and
intend to rely on exceptions from certain corporate governance
and other requirements under the rules of the NASDAQ Global
Select Market and the Securities and Exchange
Commission.
We are a limited partnership and will qualify for exceptions
from certain corporate governance and other requirements of the
rules of the NASDAQ Global Select Market. Pursuant to these
exceptions, limited partnerships may elect not to comply with
certain corporate governance requirements of the NASDAQ Global
Select Market, including the requirements (1) that a
majority of the board of directors of our general partner
consist of independent directors, (2) that we have
independent director oversight of executive officer compensation
and director nominations and (3) that we obtain unitholder
approval for (a) certain private placements of units that
equal or exceed 20% of the outstanding common units or voting
power, (b) certain acquisitions of stock or assets of
another company or (c) a change of control transaction. In
addition, we will not be required to hold annual meetings of our
common unitholders. Following this offering, we intend to avail
ourselves of these exceptions. Accordingly, you will not have
the same protections afforded to equityholders of entities that
are subject to all of the corporate governance requirements of
the NASDAQ Global Select Market.
In addition, on March 30, 2011, the SEC proposed rules to
implement provisions of the
Dodd-Frank
Act pertaining to compensation committee independence and the
role and disclosure of compensation consultants and other
advisers to the compensation committee. The SECs proposed
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rules, if adopted, would direct each of the national securities
exchanges (including the NASDAQ Global Select Market) to develop
listing standards requiring, among other things, that:
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compensation committees be composed of fully independent
directors, as determined pursuant to new independence
requirements;
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compensation committees be explicitly charged with hiring and
overseeing compensation consultants, legal counsel and other
committee advisors; and
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compensation committees be required to consider, when engaging
compensation consultants, legal counsel or other advisors,
certain independence factors, including factors that examine the
relationship between the consultant or advisors employer
and the company.
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As a limited partnership, we will not be subject to these
compensation committee independence requirements if and when
they are adopted by the NASDAQ Global Select Market under the
SECs proposed rules.
Potential
conflicts of interest may arise among our general partner, its
affiliates and us. Our general partner and its affiliates have
limited fiduciary duties to us and our common unitholders, which
may permit them to favor their own interests to the detriment of
us and our common unitholders.
Conflicts of interest may arise among our general partner and
its affiliates, on the one hand, and us and our common
unitholders, on the other hand. As a result of these conflicts,
our general partner may favor its own interests and the
interests of its affiliates over the interests of our common
unitholders. These conflicts include, among others, the
following:
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our general partner determines the amount and timing of our
investments and dispositions, indebtedness, issuances of
additional partnership interests and amounts of reserves, each
of which can affect the amount of cash that is available for
distribution to you;
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our general partner is allowed to take into account the
interests of parties other than us and the common unitholders in
resolving conflicts of interest, which has the effect of
limiting its duties (including fiduciary duties) to our common
unitholders. For example, our subsidiaries that serve as the
general partners of our investment funds have certain duties and
obligations to those funds and their investors as a result of
which we expect to regularly take actions in a manner consistent
with such duties and obligations but that might adversely affect
our near-term results of operations or cash flow;
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because our senior Carlyle professionals hold their Carlyle
Holdings partnership units directly or through entities that are
not subject to corporate income taxation and The Carlyle Group
L.P. holds Carlyle Holdings partnership units through
wholly-owned subsidiaries, some of which are subject to
corporate income taxation, conflicts may arise between our
senior Carlyle professionals and The Carlyle Group L.P. relating
to the selection, structuring and disposition of investments and
other matters. For example, the earlier disposition of assets
following an exchange or acquisition transaction by a senior
Carlyle professional generally will accelerate payments under
the tax receivable agreement and increase the present value of
such payments, and the disposition of assets before an exchange
or acquisition transaction will increase an existing
owners tax liability without giving rise to any rights of
an existing owner to receive payments under the tax receivable
agreement;
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our partnership agreement does not prohibit affiliates of the
general partner, including its owners, from engaging in other
businesses or activities, including those that might directly
compete with us;
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our general partner has limited its liability and reduced or
eliminated its duties (including fiduciary duties) under the
partnership agreement, while also restricting the remedies
available to our common unitholders for actions that, without
these limitations, might constitute breaches of duty (including
fiduciary duty). In addition, we have agreed to indemnify our
general
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partner and its affiliates to the fullest extent permitted by
law, except with respect to conduct involving bad faith, fraud
or willful misconduct. By purchasing our common units, you
will have agreed and consented to the provisions set forth in
our partnership agreement, including the provisions regarding
conflicts of interest situations that, in the absence of such
provisions, might constitute a breach of fiduciary or other
duties under applicable state law;
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our partnership agreement will not restrict our general partner
from causing us to pay it or its affiliates for any services
rendered, or from entering into additional contractual
arrangements with any of these entities on our behalf, so long
as our general partner agrees to the terms of any such
additional contractual arrangements in good faith as determined
under the partnership agreement;
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our general partner determines how much debt we incur and that
decision may adversely affect our credit ratings;
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our general partner determines which costs incurred by it and
its affiliates are reimbursable by us;
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our general partner controls the enforcement of obligations owed
to us by it and its affiliates; and
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our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
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See Certain Relationships and Related Person
Transactions and Conflicts of Interest and Fiduciary
Responsibilities.
Our
partnership agreement will contain provisions that reduce or
eliminate duties (including fiduciary duties) of our general
partner and limit remedies available to common unitholders for
actions that might otherwise constitute a breach of duty. It
will be difficult for a common unitholder to successfully
challenge a resolution of a conflict of interest by our general
partner or by its conflicts committee.
Our partnership agreement will contain provisions that waive or
consent to conduct by our general partner and its affiliates
that might otherwise raise issues about compliance with
fiduciary duties or applicable law. For example, our partnership
agreement will provide that when our general partner is acting
in its individual capacity, as opposed to in its capacity as our
general partner, it may act without any fiduciary obligations to
us or our common unitholders whatsoever. When our general
partner, in its capacity as our general partner, is permitted to
or required to make a decision in its sole
discretion or discretion or pursuant to any
provision of our partnership agreement not subject to an express
standard of good faith, then our general partner
will be entitled to consider only such interests and factors as
it desires, including its own interests, and will have no duty
or obligation (fiduciary or otherwise) to give any consideration
to any interest of or factors affecting us or any limited
partners and will not be subject to any different standards
imposed by the partnership agreement, otherwise existing at law,
in equity or otherwise.
The modifications of fiduciary duties contained in our
partnership agreement are expressly permitted by Delaware law.
Hence, we and our common unitholders will only have recourse and
be able to seek remedies against our general partner if our
general partner breaches its obligations pursuant to our
partnership agreement. Unless our general partner breaches its
obligations pursuant to our partnership agreement, we and our
common unitholders will not have any recourse against our
general partner even if our general partner were to act in a
manner that was inconsistent with traditional fiduciary duties.
Furthermore, even if there has been a breach of the obligations
set forth in our partnership agreement, our partnership
agreement will provide that our general partner and its officers
and directors will not be liable to us or our common unitholders
for errors of judgment or for any acts or omissions unless there
has been a final and non-appealable judgment by a court of
competent jurisdiction determining that the general partner or
its officers and directors acted in bad
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faith or engaged in fraud or willful misconduct. These
modifications are detrimental to the common unitholders because
they restrict the remedies available to common unitholders for
actions that without those limitations might constitute breaches
of duty (including fiduciary duty).
Whenever a potential conflict of interest exists between us, any
of our subsidiaries or any of our partners, and our general
partner or its affiliates, our general partner may resolve such
conflict of interest. Our general partners resolution of
the conflict of interest will conclusively be deemed approved by
the partnership and all of our partners, and not to constitute a
breach of the partnership agreement or any duty, unless the
general partner subjectively believes such determination or
action is opposed to the best interests of the partnership. A
common unitholder seeking to challenge this resolution of the
conflict of interest would bear the burden of proving that the
general partner subjectively believed that such resolution was
opposed to the best interests of the partnership. This is
different from the situation with Delaware corporations, where a
conflict resolution by an interested party would be presumed to
be unfair and the interested party would have the burden of
demonstrating that the resolution was fair.
Also, if our general partner obtains the approval of the
conflicts committee of our general partner, any determination or
action by the general partner will be conclusively deemed to be
made or taken in good faith and not a breach by our general
partner of the partnership agreement or any duties it may owe to
us or our common unitholders. This is different from the
situation with Delaware corporations, where a conflict
resolution by a committee consisting solely of independent
directors may, in certain circumstances, merely shift the burden
of demonstrating unfairness to the plaintiff. By purchasing
our common units, you will have agreed and consented to the
provisions set forth in our partnership agreement, including the
provisions regarding conflicts of interest situations that, in
the absence of such provisions, might constitute a breach of
fiduciary or other duties under applicable state law. As a
result, common unitholders will, as a practical matter, not be
able to successfully challenge an informed decision by the
conflicts committee. See Certain Relationships and Related
Person Transactions and Conflicts of Interest and
Fiduciary Responsibilities.
The
control of our general partner may be transferred to a third
party without common unitholder consent.
Our general partner may transfer its general partner interest to
a third party in a merger or consolidation without the consent
of our common unitholders. Furthermore, at any time, the members
of our general partner may sell or transfer all or part of their
limited liability company interests in our general partner
without the approval of the common unitholders, subject to
certain restrictions as described elsewhere in this prospectus.
A new general partner may not be willing or able to form new
investment funds and could form funds that have investment
objectives and governing terms that differ materially from those
of our current investment funds. A new owner could also have a
different investment philosophy, employ investment professionals
who are less experienced, be unsuccessful in identifying
investment opportunities or have a track record that is not as
successful as Carlyles track record. If any of the
foregoing were to occur, we could experience difficulty in
making new investments, and the value of our existing
investments, our business, our results of operations and our
financial condition could materially suffer.
Our
ability to pay periodic distributions to our common unitholders
may be limited by our holding partnership structure, applicable
provisions of Delaware law and contractual restrictions and
obligations.
The Carlyle Group L.P. will be a holding partnership and will
have no material assets other than the ownership of the
partnership units in Carlyle Holdings held through wholly-owned
subsidiaries. The Carlyle Group L.P. has no independent means of
generating revenue. Accordingly, we intend to cause Carlyle
Holdings to make distributions to its partners, including The
Carlyle Group L.P.s wholly-owned subsidiaries, to fund any
distributions The Carlyle Group L.P. may
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declare on the common units. If Carlyle Holdings makes such
distributions, the limited partners of Carlyle Holdings will be
entitled to receive equivalent distributions pro rata based on
their partnership interests in Carlyle Holdings. Because Carlyle
Holdings I GP Inc. must pay taxes and make payments under the
tax receivable agreement, the amounts ultimately distributed by
The Carlyle Group L.P. to common unitholders are expected to be
less, on a per unit basis, than the amounts distributed by the
Carlyle Holdings partnerships to the limited partners of the
Carlyle Holdings partnerships in respect of their Carlyle
Holdings partnership units.
The declaration and payment of any distributions will be at the
sole discretion of our general partner, which may change our
distribution policy at any time and there can be no assurance
that any distributions, whether quarterly or otherwise, will or
can be paid. Our ability to make cash distributions to our
common unitholders will depend on a number of factors, including
among other things, general economic and business conditions,
our strategic plans and prospects, our business and investment
opportunities, our financial condition and operating results,
working capital requirements and anticipated cash needs,
contractual restrictions and obligations, including fulfilling
our current and future capital commitments, legal, tax and
regulatory restrictions, restrictions and other implications on
the payment of distributions by us to our common unitholders or
by our subsidiaries to us, payments required pursuant to the tax
receivable agreement and such other factors as our general
partner may deem relevant.
Under the Delaware Limited Partnership Act, we may not make a
distribution to a partner if after the distribution all our
liabilities, other than liabilities to partners on account of
their partnership interests and liabilities for which the
recourse of creditors is limited to specific property of the
partnership, would exceed the fair value of our assets. If we
were to make such an impermissible distribution, any limited
partner who received a distribution and knew at the time of the
distribution that the distribution was in violation of the
Delaware Limited Partnership Act would be liable to us for the
amount of the distribution for three years. In addition, the
terms of our credit facility or other financing arrangements may
from time to time include covenants or other restrictions that
could constrain our ability to make distributions.
We will be required to pay our existing owners for most of
the benefits relating to any additional tax depreciation or
amortization deductions that we may claim as a result of the tax
basis
step-up we
receive in connection with subsequent sales or exchanges of
Carlyle Holdings partnership units and related transactions. In
certain cases, payments under the tax receivable agreement with
our existing owners may be accelerated
and/or
significantly exceed the actual tax benefits we realize and our
ability to make payments under the tax receivable agreement may
be limited by our structure.
Holders of partnership units in Carlyle Holdings (other than The
Carlyle Group L.P.s
wholly-owned
subsidiaries), subject to the vesting and minimum retained
ownership requirements and transfer restrictions applicable to
such holders as set forth in the partnership agreements of the
Carlyle Holdings partnerships, may on a quarterly basis, from
and after the first anniversary of the date of the closing of
this offering (subject to the terms of the exchange agreement),
exchange their Carlyle Holdings partnership units for The
Carlyle Group L.P. common units on a
one-for-one
basis. In addition, subject to certain requirements, CalPERS
will generally be permitted to exchange Carlyle Holdings
partnership units for common units from and after the closing of
this offering. Any common units received by CalPERS in any such
exchange during the
lock-up
period described in Common Units Eligible For Future
Sale
Lock-Up
Arrangements would be subject to the restrictions
described in such section. A Carlyle Holdings limited partner
must exchange one partnership unit in each of the three Carlyle
Holdings partnerships to effect an exchange for a common unit.
The exchanges are expected to result in increases in the tax
basis of the tangible and intangible assets of Carlyle Holdings.
These increases in tax basis may increase (for tax purposes)
depreciation and amortization deductions and therefore reduce
the amount of tax that Carlyle Holdings I GP Inc. and any other
entity which may in the future pay taxes and become obligated to
make payments under the tax receivable agreement as described in
the fourth succeeding paragraph
68
below, which we refer to as the corporate taxpayers,
would otherwise be required to pay in the future, although the
IRS may challenge all or part of that tax basis increase, and a
court could sustain such a challenge.
We will enter into a tax receivable agreement with our existing
owners that will provide for the payment by the corporate
taxpayers to our existing owners of 85% of the amount of cash
savings, if any, in U.S. federal, state and local income
tax or franchise tax that the corporate taxpayers realize as a
result of these increases in tax basis and of certain other tax
benefits related to entering into the tax receivable agreement,
including tax benefits attributable to payments under the tax
receivable agreement. This payment obligation is an obligation
of the corporate taxpayers and not of Carlyle Holdings. While
the actual increase in tax basis, as well as the amount and
timing of any payments under this agreement, will vary depending
upon a number of factors, including the timing of exchanges, the
price of our common units at the time of the exchange, the
extent to which such exchanges are taxable and the amount and
timing of our income, we expect that as a result of the size of
the transfers and increases in the tax basis of the tangible and
intangible assets of Carlyle Holdings, the payments that we may
make to our existing owners will be substantial. The payments
under the tax receivable agreement are not conditioned upon our
existing owners continued ownership of us. In the event
that The Carlyle Group L.P. or any of its wholly-owned
subsidiaries that are not treated as corporations for
U.S. federal income tax purposes become taxable as a
corporation for U.S. federal income tax purposes, these
entities will also be obligated to make payments under the tax
receivable agreement on the same basis and to the same extent as
the corporate taxpayers.
The tax receivable agreement provides that upon certain changes
of control, or if, at any time, the corporate taxpayers elect an
early termination of the tax receivable agreement, the corporate
taxpayers obligations under the tax receivable agreement
(with respect to all Carlyle Holdings partnership units whether
or not previously exchanged) would be calculated by reference to
the value of all future payments that our existing owners would
have been entitled to receive under the tax receivable agreement
using certain valuation assumptions, including that the
corporate taxpayers will have sufficient taxable income to
fully utilize the deductions arising from the increased tax
deductions and tax basis and other benefits related to entering
into the tax receivable agreement and, in the case of an early
termination election, that any Carlyle Holdings partnership
units that have not been exchanged are deemed exchanged for the
market value of the common units at the time of termination. In
addition, our existing owners will not reimburse us for any
payments previously made under the tax receivable agreement if
such tax basis increase is successfully challenged by the IRS.
The corporate taxpayers ability to achieve benefits from
any tax basis increase, and the payments to be made under this
agreement, will depend upon a number of factors, including the
timing and amount of our future income. As a result, even in the
absence of a change of control or an election to terminate the
tax receivable agreement, payments to our existing owners under
the tax receivable agreement could be in excess of the corporate
taxpayers actual cash tax savings.
Accordingly, it is possible that the actual cash tax savings
realized by the corporate taxpayers may be significantly less
than the corresponding tax receivable agreement payments. There
may be a material negative effect on our liquidity if the
payments under the tax receivable agreement exceed the actual
cash tax savings that the corporate taxpayers realize in respect
of the tax attributes subject to the tax receivable agreement
and/or
distributions to the corporate taxpayers by Carlyle Holdings are
not sufficient to permit the corporate taxpayers to make
payments under the tax receivable agreement after they have paid
taxes and other expenses. Based upon certain assumptions
described in greater detail below under Certain
Relationships and Related Person Transactions Tax
Receivable Agreement, we estimate that if the corporate
taxpayers were to exercise their termination right immediately
following this offering, the aggregate amount of these
termination payments would be approximately
$ million. The foregoing
number is merely an estimate and the actual payments could
differ materially. We may need to incur debt to finance payments
under
69
the tax receivable agreement to the extent our cash resources
are insufficient to meet our obligations under the tax
receivable agreement as a result of timing discrepancies or
otherwise.
In the event that The Carlyle Group L.P. or any of its
wholly-owned subsidiaries become taxable as a corporation for
U.S. federal income tax purposes, these entities will also
be obligated to make payments under the tax receivable agreement
on the same basis and to the same extent as the corporate
taxpayers.
See Certain Relationships and Related Person
Transactions Tax Receivable Agreement.
Our
GAAP financial statements will reflect increased compensation
and benefits expense and significant non-cash equity-based
compensation charges following this offering.
Prior to this offering, our compensation and benefits expense
has reflected compensation (primarily salary and bonus) solely
to our employees who are not senior Carlyle professionals.
Historically, all payments for services rendered by our senior
Carlyle professionals have been accounted for as partnership
distributions rather than as compensation and benefits expense.
As a result, our consolidated financial statements have not
reflected compensation and benefits expense for services
rendered by these individuals. Following this offering, all of
our senior Carlyle professionals and other employees will
receive a base salary that will be paid by us and accounted for
as compensation and benefits expense. Our senior Carlyle
professionals and other employees are also eligible to receive
discretionary cash bonuses based on the performance of Carlyle
and the investments of the funds that we advise and other
matters. The base salaries and any discretionary cash bonuses
paid to our senior Carlyle professionals will be represented as
compensation and benefits expense on our GAAP financials
following the offering. In addition, as part of the
Reorganization, our founders, CalPERS and Mubadala will
receive Carlyle
Holdings partnership units, all of which will be vested, and our
other existing owners will
receive
Carlyle Holdings partnership units, of
which
will be unvested
and
will be vested. In addition, we expect to
grant unvested
deferred restricted common units to our employees at the time of
this offering. See Management IPO Date Equity
Awards. The grant date fair value of the unvested Carlyle
Holdings partnership units and deferred restricted common units
(which will be the initial public offering price per common unit
in this offering) will be charged to expense as such units vest
over the assumed service periods, which range up to six years,
on a straight-line basis. The amortization of this non-cash
equity-based compensation will increase our GAAP expenses
substantially during the relevant periods and, as a result, we
may record significant net losses for a number of years
following this offering. See Unaudited Pro Forma Financial
Information and Managements Discussion and
Analysis of Financial Condition and Results of Operation
for additional information.
If The
Carlyle Group L.P. were deemed to be an investment
company under the 1940 Act, applicable restrictions could
make it impractical for us to continue our business as
contemplated and could have a material adverse effect on our
business.
An entity generally will be deemed to be an investment
company for purposes of the 1940 Act if:
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it is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing,
reinvesting or trading in securities; or
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absent an applicable exemption, it owns or proposes to acquire
investment securities having a value exceeding 40% of the value
of its total assets (exclusive of U.S. government
securities and cash items) on an unconsolidated basis.
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We believe that we are engaged primarily in the business of
providing asset management services and not in the business of
investing, reinvesting or trading in securities. We hold
ourselves out as an asset management firm and do not propose to
engage primarily in the business of investing, reinvesting or
trading in securities. Accordingly, we do not believe that The
Carlyle Group L.P. is, or
70
following this offering will be, an orthodox
investment company as defined in section 3(a)(1)(A) of the
1940 Act and described in the first bullet point above.
Furthermore, following this offering, The Carlyle Group L.P.
will have no material assets other than its interests in certain
wholly-owned subsidiaries, which in turn will have no material
assets other than general partner interests in the Carlyle
Holdings partnerships. These wholly-owned subsidiaries will be
the sole general partners of the Carlyle Holdings partnerships
and will be vested with all management and control over the
Carlyle Holdings partnerships. We do not believe that the equity
interests of The Carlyle Group L.P. in its wholly-owned
subsidiaries or the general partner interests of these
wholly-owned subsidiaries in the Carlyle Holdings partnerships
are investment securities. Moreover, because we believe that the
capital interests of the general partners of our funds in their
respective funds are neither securities nor investment
securities, we believe that less than 40% of The Carlyle Group
L.P.s total assets (exclusive of U.S. government
securities and cash items) on an unconsolidated basis after this
offering will be composed of assets that could be considered
investment securities. Accordingly, we do not believe that The
Carlyle Group L.P. is, or following this offering will be, an
inadvertent investment company by virtue of the 40% test in
section 3(a)(1)(C) of the 1940 Act as described in the
second bullet point above. In addition, we believe that The
Carlyle Group L.P. is not an investment company under
section 3(b)(1) of the 1940 Act because it is primarily
engaged in a non-investment company business.
The 1940 Act and the rules thereunder contain detailed
parameters for the organization and operation of investment
companies. Among other things, the 1940 Act and the rules
thereunder limit or prohibit transactions with affiliates,
impose limitations on the issuance of debt and equity
securities, generally prohibit the issuance of options and
impose certain governance requirements. We intend to conduct our
operations so that The Carlyle Group L.P. will not be deemed to
be an investment company under the 1940 Act. If anything were to
happen which would cause The Carlyle Group L.P. to be deemed to
be an investment company under the 1940 Act, requirements
imposed by the 1940 Act, including limitations on our capital
structure, ability to transact business with affiliates
(including us) and ability to compensate key employees, could
make it impractical for us to continue our business as currently
conducted, impair the agreements and arrangements between and
among The Carlyle Group L.P., Carlyle Holdings and our senior
Carlyle professionals, or any combination thereof, and
materially adversely affect our business, results of operations
and financial condition. In addition, we may be required to
limit the amount of investments that we make as a principal or
otherwise conduct our business in a manner that does not subject
us to the registration and other requirements of the 1940 Act.
Changes
in accounting standards issued by the Financial Accounting
Standards Board (FASB) or other standard-setting
bodies may adversely affect our financial
statements.
Our financial statements are prepared in accordance with GAAP as
defined in the Accounting Standards Codification
(ASC) of the FASB. From time to time, we are
required to adopt new or revised accounting standards or
guidance that are incorporated into the ASC. It is possible that
future accounting standards we are required to adopt could
change the current accounting treatment that we apply to our
combined and consolidated financial statements and that such
changes could have a material adverse effect on our financial
condition and results of operations.
In addition, the FASB is working on several projects with the
International Accounting Standards Board, which could result in
significant changes as GAAP converges with International
Financial Reporting Standards (IFRS), including how
our financial statements are presented. Furthermore, the SEC is
considering whether and how to incorporate IFRS into the
U.S. financial reporting system. The accounting changes
being proposed by the FASB will be a complete change to how we
account for and report significant areas of our business. The
effective dates and transition methods are not known; however,
issuers may be required to or may choose to adopt the new
standards retrospectively. In this case, the issuer will report
results under the new accounting method as of the effective
date, as well as for all periods presented. The changes to GAAP
and ultimate conversion to IFRS will impose special demands on
issuers in the areas of governance,
71
employee training, internal controls and disclosure and will
likely affect how we manage our business, as it will likely
affect other business processes such as the design of
compensation plans.
Risks
Related to Our Common Units and this Offering
There
may not be an active trading market for our common units, which
may cause our common units to trade at a discount from the
initial offering price and make it difficult to sell the common
units you purchase.
Prior to this offering, there has not been a public trading
market for our common units. It is possible that after this
offering an active trading market will not develop or continue
or, if developed, that any market will not be sustained, which
would make it difficult for you to sell your common units at an
attractive price or at all. The initial public offering price
per common unit will be determined by agreement among us and the
representatives of the underwriters, and may not be indicative
of the price at which our common units will trade in the public
market after this offering.
The
market price of our common units may decline due to the large
number of common units eligible for exchange and future
sale.
The market price of our common units could decline as a result
of sales of a large number of common units in the market after
the offering or the perception that such sales could occur.
These sales, or the possibility that these sales may occur, also
might make it more difficult for us to sell common units in the
future at a time and at a price that we deem appropriate. See
Common Units Eligible for Future Sale. Subject to
the lock-up
restrictions described below, we may issue and sell in the
future additional common units.
In addition, upon completion of this offering our existing
owners will own an aggregate
of Carlyle
Holdings partnership units. Prior to this offering we will enter
into an exchange agreement with the limited partners of the
Carlyle Holdings partnerships so that these holders, subject to
the vesting and minimum retained ownership requirements and
transfer restrictions applicable to such limited partners as set
forth in the partnership agreements of the Carlyle Holdings
partnerships, may on a quarterly basis, from and after the first
anniversary of the date of the closing of this offering (subject
to the terms of the exchange agreement), exchange their Carlyle
Holdings partnership units for The Carlyle Group L.P. common
units on a
one-for-one
basis, subject to customary conversion rate adjustments for
splits, unit distributions and reclassifications. In addition,
subject to certain requirements, CalPERS will generally be
permitted to exchange Carlyle Holdings partnership units for
common units from and after the closing of this offering. Any
common units received by CalPERS in any such exchange during the
lock-up
period described in Common Units Eligible For Future
Sale
Lock-Up
Arrangements would be subject to the restrictions
described in such section. A Carlyle Holdings limited partner
must exchange one partnership unit in each of the three Carlyle
Holdings partnerships to effect an exchange for a common unit.
The common units we issue upon such exchanges would be
restricted securities, as defined in Rule 144
under the Securities Act, unless we register such issuances.
However, we will enter into one or more registration rights
agreements with the limited partners of Carlyle Holdings that
would require us to register these common units under the
Securities Act. See Common Units Eligible for Future
Sale Registration Rights and Certain
Relationships and Related Person Transactions
Registration Rights Agreements. While the partnership
agreements of the Carlyle Holdings partnerships and related
agreements will contractually restrict our existing owners
ability to transfer the Carlyle Holdings partnership units or
The Carlyle Group L.P. common units they hold, these contractual
provisions may lapse over time or be waived, modified or amended
at any time. See Management Vesting; Minimum
Retained Ownership Requirements and Transfer Restrictions.
Mubadala will have the ability to sell its equity interests
(whether held in the form of common units, partnership units or
otherwise) subject to the transfer restrictions set forth in the
subscription
72
agreement described under Common Units Eligible for Future
Sale
Lock-Up
Arrangements Mubadala Transfer Restrictions.
Except for the restrictions described under Common Units
Eligible for Future Sale
Lock-Up
Arrangements, the Carlyle Holdings partnership units held
by CalPERS are not subject to transfer restrictions; however,
pursuant to the terms of the exchange agreement, CalPERS may not
exchange its partnership units for common units until the first
anniversary of the date of the closing of this offering. We have
agreed to provide Mubadala and CalPERS with registration rights
to effect certain sales. See Common Units Eligible for
Future Sale Registration Rights.
Under our Equity Incentive Plan, we intend to
grant
deferred restricted common units
and
phantom deferred restricted common units to our employees at the
time of this offering. Additional common units and Carlyle
Holdings partnership units will be available for future grant
under our Equity Incentive Plan, which plan provides for
automatic annual increases in the number of units available for
future issuance. See Management Equity
Incentive Plan and IPO Date Equity
Awards. We intend to file one or more registration
statements on
Form S-8
under the Securities Act to register common units or securities
convertible into or exchangeable for common units issued or
available for future grant under our Equity Incentive Plan
(including pursuant to automatic annual increases). Any such
Form S-8
registration statement will automatically become effective upon
filing. Accordingly, common units registered under such
registration statement will be available for sale in the open
market. We expect that the initial registration statement on
Form S-8
will
cover
common units.
In addition, our partnership agreement authorizes us to issue an
unlimited number of additional partnership securities and
options, rights, warrants and appreciation rights relating to
partnership securities for the consideration and on the terms
and conditions established by our general partner in its sole
discretion without the approval of any limited partners. In
accordance with the Delaware Limited Partnership Act and the
provisions of our partnership agreement, we may also issue
additional partnership interests that have certain designations,
preferences, rights, powers and duties that are different from,
and may be senior to, those applicable to common units.
Similarly, the Carlyle Holdings partnership agreements authorize
the wholly-owned subsidiaries of The Carlyle Group L.P. which
are the general partners of those partnerships to issue an
unlimited number of additional partnership securities of the
Carlyle Holdings partnerships with such designations,
preferences, rights, powers and duties that are different from,
and may be senior to, those applicable to the Carlyle Holdings
partnerships units, and which may be exchangeable for our common
units.
If
securities or industry analysts do not publish research or
reports about our business, or if they downgrade their
recommendations regarding our common units, our stock price and
trading volume could decline.
The trading market for our common units will be influenced by
the research and reports that industry or securities analysts
publish about us or our business. If any of the analysts who
cover us downgrades our common units or publishes inaccurate or
unfavorable research about our business, our common unit stock
price may decline. If analysts cease coverage of us or fail to
regularly publish reports on us, we could lose visibility in the
financial markets, which in turn could cause our common unit
stock price or trading volume to decline and our common units to
be less liquid.
The
market price of our common units may be volatile, which could
cause the value of your investment to decline.
Even if a trading market develops, the market price of our
common units may be highly volatile and could be subject to wide
fluctuations. Securities markets worldwide experience
significant price and volume fluctuations. This market
volatility, as well as general economic, market or political
conditions, could reduce the market price of common units in
spite of our operating performance. In addition, our operating
results could be below the expectations of public market
analysts and investors due to a number of potential factors,
including variations in our quarterly operating results or
distributions to unitholders, additions or departures of key
management personnel, failure to
73
meet analysts earnings estimates, publication of research
reports about our industry, litigation and government
investigations, changes or proposed changes in laws or
regulations or differing interpretations or enforcement thereof
affecting our business, adverse market reaction to any
indebtedness we may incur or securities we may issue in the
future, changes in market valuations of similar companies or
speculation in the press or investment community, announcements
by our competitors of significant contracts, acquisitions,
dispositions, strategic partnerships, joint ventures or capital
commitments, adverse publicity about the industries in which we
participate or individual scandals, and in response the market
price of our common units could decrease significantly. You may
be unable to resell your common units at or above the initial
public offering price.
In the past few years, stock markets have experienced extreme
price and volume fluctuations. In the past, following periods of
volatility in the overall market and the market price of a
companys securities, securities class action litigation
has often been instituted against public companies. This type of
litigation, if instituted against us, could result in
substantial costs and a diversion of our managements
attention and resources.
You
will suffer dilution in the net tangible book value of the
common units you purchase.
The initial public offering price per common unit will be
substantially higher than our pro forma net tangible book value
per common unit immediately after this offering. As a result,
you will pay a price per common unit that substantially exceeds
the book value of our total tangible assets after subtracting
our total liabilities. At an initial public offering price of
$ per common unit, you will incur
immediate dilution in an amount of
$ per common unit, assuming that
the underwriters do not exercise their option to purchase
additional common units. See Certain Relationships and
Related Person Transactions Exchange Agreement
and Dilution.
Risks
Related to U.S. Taxation
Our
structure involves complex provisions of U.S. federal income tax
law for which no clear precedent or authority may be available.
Our structure also is subject to potential legislative, judicial
or administrative change and differing interpretations, possibly
on a retroactive basis.
The U.S. federal income tax treatment of common unitholders
depends in some instances on determinations of fact and
interpretations of complex provisions of U.S. federal
income tax law for which no clear precedent or authority may be
available. You should be aware that the U.S. federal income
tax rules are constantly under review by persons involved in the
legislative process, the IRS and the U.S. Treasury
Department, frequently resulting in revised interpretations of
established concepts, statutory changes, revisions to
regulations and other modifications and interpretations. The IRS
pays close attention to the proper application of tax laws to
partnerships. The present U.S. federal income tax treatment
of an investment in our common units may be modified by
administrative, legislative or judicial interpretation at any
time, possibly on a retroactive basis, and any such action may
affect investments and commitments previously made. Changes to
the U.S. federal income tax laws and interpretations
thereof could make it more difficult or impossible to meet the
exception for us to be treated as a partnership for
U.S. federal income tax purposes that is not taxable as a
corporation (referred to as the Qualifying Income
Exception), affect or cause us to change our investments
and commitments, affect the tax considerations of an investment
in us, change the character or treatment of portions of our
income (including, for instance, the treatment of carried
interest as ordinary income rather than capital gain) and
adversely affect an investment in our common units. For example,
as discussed above under Risks Related to Our
Company Although not enacted, the U.S. Congress
has considered legislation that would have: (i) in some
cases after a ten-year transition period, precluded us from
qualifying as a partnership for U.S. federal income tax purposes
or required us to hold carried interest through taxable
subsidiary corporations; and (ii) taxed certain income and
gains at increased rates. If any similar legislation were to be
enacted and apply to us, the after tax income and gain related
to our business, as well as our distributions to you and the
market price of our common units, could be reduced, the
74
U.S. Congress has considered various legislative proposals
to treat all or part of the capital gain and dividend income
that is recognized by an investment partnership and allocable to
a partner affiliated with the sponsor of the partnership (i.e.,
a portion of the carried interest) as ordinary income to such
partner for U.S. federal income tax purposes.
Our organizational documents and governing agreements will
permit our general partner to modify our limited partnership
agreement from time to time, without the consent of the common
unitholders, to address certain changes in U.S. federal
income tax regulations, legislation or interpretation. In some
circumstances, such revisions could have a material adverse
impact on some or all common unitholders. For instance, our
general partner could elect at some point to treat us as an
association taxable as a corporation for U.S. federal (and
applicable state) income tax purposes. If our general partner
were to do this, the U.S. federal income tax consequences
of owning our common units would be materially different.
Moreover, we will apply certain assumptions and conventions in
an attempt to comply with applicable rules and to report income,
gain, deduction, loss and credit to common unitholders in a
manner that reflects such common unitholders beneficial
ownership of partnership items, taking into account variation in
ownership interests during each taxable year because of trading
activity. As a result, a common unitholder transferring units
may be allocated income, gain, loss and deductions realized
after the date of transfer. However, those assumptions and
conventions may not be in compliance with all aspects of
applicable tax requirements. It is possible that the IRS will
assert successfully that the conventions and assumptions used by
us do not satisfy the technical requirements of the Internal
Revenue Code
and/or
Treasury regulations and could require that items of income,
gain, deductions, loss or credit, including interest deductions,
be adjusted, reallocated or disallowed in a manner that
adversely affects common unitholders.
If we
were treated as a corporation for U.S. federal income tax or
state tax purposes or otherwise became subject to additional
entity level taxation (including as a result of changes to
current law), then our distributions to you would be
substantially reduced and the value of our common units would be
adversely affected.
The value of your investment in us depends in part on our being
treated as a partnership for U.S. federal income tax
purposes, which requires that 90% or more of our gross income
for every taxable year consist of qualifying income, as defined
in Section 7704 of the Internal Revenue Code and that our
partnership not be registered under the 1940 Act. Qualifying
income generally includes dividends, interest, capital gains
from the sale or other disposition of stocks and securities and
certain other forms of investment income. We may not meet these
requirements or current law may change so as to cause, in either
event, us to be treated as a corporation for U.S. federal
income tax purposes or otherwise subject to U.S. federal
income tax. Moreover, the anticipated after-tax benefit of an
investment in our common units depends largely on our being
treated as a partnership for U.S. federal income tax
purposes. We have not requested, and do not plan to request, a
ruling from the IRS on this or any other matter affecting us.
If we were treated as a corporation for U.S. federal income
tax purposes, we would pay U.S. federal income tax on our
taxable income at the applicable tax rates. In addition, we
would likely be liable for state and local income
and/or
franchise tax on all our income. Distributions to you would
generally be taxed again as corporate distributions, and no
income, gains, losses, deductions or credits would otherwise
flow through to you. Because a tax would be imposed upon us as a
corporation, our distributions to you would be substantially
reduced which would cause a reduction in the value of our common
units.
Current law may change, causing us to be treated as a
corporation for U.S. federal or state income tax purposes
or otherwise subjecting us to additional entity level taxation.
See Risks Related to Our
Company Although not enacted, the U.S. Congress
has considered legislation that would have: (i) in some
cases after a ten-year transition period, precluded us from
qualifying as a partnership for U.S. federal income tax purposes
or required us to hold carried interest through taxable
subsidiary corporations; and (ii) taxed certain income and
gains at increased rates. If any
75
similar legislation were to be enacted and apply to us, the
after tax income and gain related to our business, as well as
our distributions to you and the market price of our common
units, could be reduced. For example, because of
widespread state budget deficits, several states are evaluating
ways to subject partnerships to entity level taxation through
the imposition of state income, franchise or other forms of
taxation. If any state were to impose a tax upon us as an
entity, our distributions to you would be reduced.
You
will be subject to U.S. federal income tax on your share of our
taxable income, regardless of whether you receive any cash
distributions from us.
As long as 90% of our gross income for each taxable year
constitutes qualifying income as defined in Section 7704 of
the Internal Revenue Code and we are not required to register as
an investment company under the 1940 Act on a continuing basis,
and assuming there is no change in law, we will be treated, for
U.S. federal income tax purposes, as a partnership and not
as an association or a publicly traded partnership taxable as a
corporation. Accordingly, you will be required to take into
account your allocable share of our items of income, gain, loss
and deduction. Distributions to you generally will be taxable
for U.S. federal income tax purposes only to the extent the
amount distributed exceeds your tax basis in the common unit.
That treatment contrasts with the treatment of a shareholder in
a corporation. For example, a shareholder in a corporation who
receives a distribution of earnings from the corporation
generally will report the distribution as dividend income for
U.S. federal income tax purposes. In contrast, a holder of
our common units who receives a distribution of earnings from us
will not report the distribution as dividend income (and will
treat the distribution as taxable only to the extent the amount
distributed exceeds the unitholders tax basis in the
common units), but will instead report the holders
allocable share of items of our income for U.S. federal
income tax purposes. As a result, you may be subject to
U.S. federal, state, local and possibly, in some cases,
foreign income taxation on your allocable share of our items of
income, gain, loss, deduction and credit (including our
allocable share of those items of any entity in which we invest
that is treated as a partnership or is otherwise subject to tax
on a flow through basis) for each of our taxable years ending
with or within your taxable years, regardless of whether or not
you receive cash distributions from us. See Material
U.S. Federal Tax Considerations. See also
Risks Related to Our
Company Although not enacted, the U.S. Congress
has considered legislation that would have: (i) in some
cases after a ten-year transition period, precluded us from
qualifying as a partnership for U.S. federal income tax purposes
or required us to hold carried interest through taxable
subsidiary corporations; and (ii) taxed certain income and
gains at increased rates. If any similar legislation were to be
enacted and apply to us, the after tax income and gain related
to our business, as well as our distributions to you and the
market price of our common units, could be reduced.
You may not receive cash distributions equal to your allocable
share of our net taxable income or even the tax liability that
results from that income. In addition, certain of our holdings,
including holdings, if any, in a controlled foreign corporation
(CFC) and a passive foreign investment company
(PFIC) may produce taxable income prior to the
receipt of cash relating to such income, and common unitholders
that are U.S. taxpayers will be required to take such
income into account in determining their taxable income. In the
event of an inadvertent termination of our partnership status
for which the IRS has granted us limited relief, each holder of
our common units may be obligated to make such adjustments as
the IRS may require to maintain our status as a partnership.
Such adjustments may require persons holding our common units to
recognize additional amounts in income during the years in which
they hold such units.
The
Carlyle Group L.P.s interest in certain of our businesses
will be held through Carlyle Holdings I GP Inc., which will be
treated as a corporation for U.S. federal income tax purposes;
such corporation may be liable for significant taxes and may
create other adverse tax consequences, which could potentially
adversely affect the value of your investment.
In light of the publicly-traded partnership rules under
U.S. federal income tax law and other requirements, The
Carlyle Group L.P. will hold its interest in certain of our
businesses through
76
Carlyle Holdings I GP Inc., which will be treated as a
corporation for U.S. federal income tax purposes. Such
corporation could be liable for significant U.S. federal
income taxes and applicable state, local and other taxes that
would not otherwise be incurred, which could adversely affect
the value of your investment. Those additional taxes have not
applied to our existing owners in our organizational structure
in effect before this offering and will not apply to our
existing owners following this offering to the extent they own
equity interests directly or indirectly in the Carlyle Holdings
partnerships.
Complying
with certain tax-related requirements may cause us to invest
through foreign or domestic corporations subject to corporate
income tax or enter into acquisitions, borrowings, financings or
arrangements we may not have otherwise entered
into.
In order for us to be treated as a partnership for
U.S. federal income tax purposes and not as an association
or publicly traded partnership taxable as a corporation, we must
meet the Qualifying Income Exception discussed above on a
continuing basis and we must not be required to register as an
investment company under the 1940 Act. In order to effect such
treatment, we (or our subsidiaries) may be required to invest
through foreign or domestic corporations subject to corporate
income tax, forgo attractive investment opportunities or enter
into acquisitions, borrowings, financings or other transactions
we may not have otherwise entered into. This may adversely
affect our ability to operate solely to maximize our cash flow.
Our structure also may impede our ability to engage in certain
corporate acquisitive transactions because we generally intend
to hold all of our assets through the Carlyle Holdings
partnerships. In addition, we may be unable to participate in
certain corporate reorganization transactions that would be
tax-free to our common unit holders if we were a corporation.
Tax
gain or loss on disposition of our common units could be more or
less than expected.
If you sell your common units, you will recognize a gain or loss
equal to the difference between the amount realized and the
adjusted tax basis in those common units. Prior distributions to
you in excess of the total net taxable income allocated to you,
which decreased the tax basis in your common units, will in
effect become taxable income to you if the common units are sold
at a price greater than your tax basis in those common units,
even if the price is less than the original cost. A portion of
the amount realized, whether or not representing gain, may be
ordinary income to you.
Because
we do not intend to make, or cause to be made, an otherwise
available election under Section 754 of the Internal
Revenue Code to adjust our asset basis or the asset basis of
certain of the Carlyle Holdings partnerships, a holder of common
units could be allocated more taxable income in respect of those
common units prior to disposition than if we had made such an
election.
We currently do not intend to make, or cause to be made or, an
election to adjust asset basis under Section 754 of the
Internal Revenue Code with respect to us or Carlyle
Holdings II L.P. If no such election is made, there
generally will be no adjustment to the basis of the assets of
Carlyle Holdings II L.P. upon our acquisition of interests
in Carlyle Holdings II L.P. in connection with this
offering, or to our assets or to the assets of Carlyle
Holdings II L.P. upon a subsequent transferees
acquisition of common units from a prior holder of such common
units, even if the purchase price for those interests or units,
as applicable, is greater than the share of the aggregate tax
basis of our assets or the assets of Carlyle Holdings II
L.P. attributable to those interests or units immediately prior
to the acquisition. Consequently, upon a sale of an asset by us,
Carlyle Holdings II L.P., gain allocable to a holder of
common units could include built-in gain in the asset existing
at the time we acquired those interests, or such holder acquired
such units, which built-in gain would otherwise generally be
eliminated if we had made a Section 754 election. See
Material U.S. Federal Tax Considerations
Consequences to U.S. Holders of Common Units
Section 754 Election.
77
Non-U.S.
persons face unique U.S. tax issues from owning common units
that may result in adverse tax consequences to
them.
In light of our intended investment activities, we generally do
not expect to generate significant amounts of income treated as
effectively connected income with respect to
non-U.S. holders
of our common units (ECI). However, there can be no
assurance that we will not generate ECI currently or in the
future and, subject to the qualifying income rules described
under Material U.S. Federal Tax
Considerations Taxation of our Partnership and the
Carlyle Holdings Partnerships, we are under no obligation
to minimize ECI. To the extent our income is treated as ECI,
non-U.S. holders
generally would be subject to withholding tax on their allocable
shares of such income, would be required to file a
U.S. federal income tax return for such year reporting
their allocable shares of income effectively connected with such
trade or business and any other income treated as ECI, and would
be subject to U.S. federal income tax at regular
U.S. tax rates on any such income (state and local income
taxes and filings may also apply in that event). In addition,
certain income of
non-U.S. holders
from U.S. sources not connected to any such U.S. trade
or business conducted by us could be treated as ECI.
Non-U.S. holders
that are corporations may also be subject to a 30% branch
profits tax on their allocable share of such income. In
addition, certain income from U.S. sources that is not ECI
allocable to
non-U.S. holders
will be reduced by withholding taxes imposed at the highest
effective applicable tax rate. A portion of any gain recognized
by a
non-U.S. holder
on the sale or exchange of common units could also be treated as
ECI.
Tax-exempt
entities face unique tax issues from owning common units that
may result in adverse tax consequences to them.
In light of our intended investment activities, we generally do
not expect to make investments directly in operating businesses
that generate significant amounts of unrelated business taxable
income for tax-exempt holders of our common units
(UBTI). However, certain of our investments may be
treated as debt-financed investments, which may give rise to
debt-financed UBTI. Accordingly, no assurance can be given that
we will not generate UBTI currently or in the future and,
subject to the qualifying income rules described under
Material U.S. Federal Tax Considerations
Taxation of our Partnership and the Carlyle Holdings
Partnerships, we are under no obligation to minimize UBTI.
Consequently, a holder of common units that is a tax-exempt
organization may be subject to unrelated business income
tax to the extent that its allocable share of our income
consists of UBTI. A tax-exempt partner of a partnership could be
treated as earning UBTI if the partnership regularly engages in
a trade or business that is unrelated to the exempt function of
the tax-exempt partner, if the partnership derives income from
debt-financed property or if the partnership interest itself is
debt-financed.
We
cannot match transferors and transferees of common units, and we
will therefore adopt certain income tax accounting positions
that may not conform with all aspects of applicable tax
requirements. The IRS may challenge this treatment, which could
adversely affect the value of our common units.
Because we cannot match transferors and transferees of common
units, we will adopt depreciation, amortization and other tax
accounting positions that may not conform with all aspects of
existing Treasury regulations. A successful IRS challenge to
those positions could adversely affect the amount of tax
benefits available to our common unitholders. It also could
affect the timing of these tax benefits or the amount of gain on
the sale of common units and could have a negative impact on the
value of our common units or result in audits of and adjustments
to our common unitholders tax returns.
In addition, our taxable income and losses will be determined
and apportioned among investors using conventions we regard as
consistent with applicable law. As a result, if you transfer
your common units, you may be allocated income, gain, loss and
deduction realized by us after the date of transfer. Similarly,
a transferee may be allocated income, gain, loss and deduction
realized by us prior to the date of the transferees
acquisition of our common units. A transferee may also bear the
78
cost of withholding tax imposed with respect to income allocated
to a transferor through a reduction in the cash distributed to
the transferee.
The sale or exchange of 50% or more of our capital and profit
interests will result in the termination of our partnership for
U.S. federal income tax purposes. We will be considered to
have been terminated for U.S. federal income tax purposes
if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a
twelve-month
period. Our termination would, among other things, result in the
closing of our taxable year for all common unitholders and could
result in a deferral of depreciation deductions allowable in
computing our taxable income. See Material
U.S. Federal Tax Considerations for a description of
the consequences of our termination for U.S. federal income
tax purposes.
Common
unitholders may be subject to state and local taxes and return
filing requirements as a result of investing in our common
units.
In addition to U.S. federal income taxes, our common
unitholders may be subject to other taxes, including state and
local taxes, unincorporated business taxes and estate,
inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property now or in
the future, even if our common unitholders do not reside in any
of those jurisdictions. Our common unitholders may also be
required to file state and local income tax returns and pay
state and local income taxes in some or all of these
jurisdictions. Further, common unitholders may be subject to
penalties for failure to comply with those requirements. It is
the responsibility of each common unitholder to file all
U.S. federal, state and local tax returns that may be
required of such common unitholder. Our counsel has not rendered
an opinion on the state or local tax consequences of an
investment in our common units.
We may
not be able to furnish to each unitholder specific tax
information within 90 days after the close of each calendar
year, which means that holders of common units who are U.S.
taxpayers should anticipate the need to file annually a request
for an extension of the due date of their income tax return. In
addition, it is possible that common unitholders may be required
to file amended income tax returns.
As a publicly traded partnership, our operating results,
including distributions of income, dividends, gains, losses or
deductions and adjustments to carrying basis, will be reported
on
Schedule K-1
and distributed to each unitholder annually. Although we
currently intend to distribute
Schedule K-1s
on or around 90 days after the end of our fiscal year, it
may require longer than 90 days after the end of our fiscal
year to obtain the requisite information from all lower-tier
entities so that K-1s may be prepared for us. For this reason,
holders of common units who are U.S. taxpayers should
anticipate that they may need to file annually with the IRS (and
certain states) a request for an extension past April 15 or the
otherwise applicable due date of their income tax return for the
taxable year. See Material U.S. Federal Tax
Considerations Administrative Matters
Information Returns.
In addition, it is possible that a common unitholder will be
required to file amended income tax returns as a result of
adjustments to items on the corresponding income tax returns of
the partnership. Any obligation for a common unitholder to file
amended income tax returns for that or any other reason,
including any costs incurred in the preparation or filing of
such returns, are the responsibility of each common unitholder.
We may
hold or acquire certain investments through an entity classified
as a PFIC or CFC for U.S. federal income tax
purposes.
Certain of our investments may be in foreign corporations or may
be acquired through a foreign subsidiary that would be
classified as a corporation for U.S. federal income tax
purposes. Such an entity may be a PFIC or a CFC for U.S. federal
income tax purposes. U.S. holders of common units
indirectly owning an interest in a PFIC or a CFC may experience
adverse U.S. tax consequences. See Material
U.S. Federal Tax Considerations Consequences to
U.S. Holders of Common
Units Passive Foreign Investment Companies and
Consequences to U.S. Holders of Common Units
Controlled Foreign Companies for additional information
regarding such consequences.
79
Changes
in U.S. tax law could adversely affect our ability to raise
funds from certain foreign investors.
Under the U.S. Foreign Account Tax Compliance Act
(FATCA), following the expiration of an initial
phase in-period, a broadly defined class of foreign financial
institutions are required to comply with a complicated and
expansive reporting regime or be subject to certain
U.S. withholding taxes. The reporting obligations imposed
under FATCA require foreign financial institutions to enter into
agreements with the IRS to obtain and disclose information about
certain account holders and investors to the IRS. Additionally,
certain
non-U.S. entities
that are not foreign financial institutions are required to
provide certain certifications or other information regarding
their U.S. beneficial ownership or be subject to certain
U.S. withholding taxes. Although administrative guidance
and proposed regulations have been issued, regulations
implementing FATCA have not yet been finalized and it is
difficult to determine at this time what impact any such
guidance may have. Thus, some foreign investors may hesitate to
invest in U.S. funds until there is more certainty around
FATCA implementation. In addition, the administrative and
economic costs of compliance with FATCA may discourage some
foreign investors from investing in U.S. funds, which could
adversely affect our ability to raise funds from these investors.
80
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements, 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. These
factors should not be construed as exhaustive and should be read
in conjunction with the other cautionary statements that are
included in this prospectus. 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.
MARKET
AND INDUSTRY DATA
This prospectus includes market and industry data and forecasts
that we have derived from independent consultant reports,
publicly available information, various industry publications,
other published industry sources and our internal data and
estimates. Independent consultant reports, industry publications
and other published industry sources generally indicate that the
information contained therein was obtained from sources believed
to be reliable.
Our internal data and estimates are based upon information
obtained from trade and business organizations and other
contacts in the markets in which we operate and our
managements understanding of industry conditions.
81
ORGANIZATIONAL
STRUCTURE
Our
Current Organizational Structure
Our business is currently 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 are under the
common ownership and control of the partners of our firm (who we
refer to as our senior Carlyle professionals) and
two strategic investors that own 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).
In addition, certain individuals engaged in our businesses own
interests in the general partners of our existing carry funds.
Certain of these individuals will contribute a portion of these
interests to Carlyle Holdings as part of the reorganization. We
refer to these individuals, together with the owners of the
Parent Entities prior to this offering, collectively as our
existing owners.
The diagram below depicts our current organizational structure.
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(1)
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Certain individuals engaged in our
business own interests directly in selected subsidiaries of the
Parent Entities.
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Our
Organizational Structure Following this Offering
Following the reorganization and this offering, The Carlyle
Group L.P. will be a holding partnership and, through
wholly-owned subsidiaries, will hold equity interests in three
Carlyle Holdings partnerships (which we refer to collectively as
Carlyle Holdings), which in turn will own the four
Parent Entities. The Carlyle Group L.P. was formed as a Delaware
limited partnership on July 18, 2011. The Carlyle Group
L.P. has not engaged in any other business or other activities
except in connection with the Reorganization and the Offering
Transactions described below. Through its wholly-owned
subsidiaries, The Carlyle Group L.P. will be the sole general
partner of each of the Carlyle Holdings partnerships.
Accordingly, The Carlyle Group L.P. will operate and control all
of the business and affairs of Carlyle Holdings and will
consolidate the financial results of the Carlyle Holdings
partnerships and its consolidated subsidiaries, and the
ownership interest of the limited partners of the Carlyle
Holdings partnerships will be reflected as a non-controlling
interest in The Carlyle Group L.P.s consolidated financial
statements. At the time of this offering, our existing owners
will be the only limited partners of the Carlyle Holdings
partnerships.
The diagram below (which omits certain wholly-owned intermediate
holding companies) depicts our organizational structure
immediately following this offering. As discussed in greater
detail below
82
and in this section, The Carlyle Group L.P. will hold, through
wholly-owned subsidiaries, a number of Carlyle Holdings
partnership units that is equal to the number of common units
that The Carlyle Group L.P. has issued and will benefit from the
income of Carlyle Holdings to the extent of its equity interests
in the Carlyle Holdings partnerships. While the holders of
common units of The Carlyle Group L.P. will be entitled to all
of the economic rights in The Carlyle Group L.P. immediately
following this offering, our existing owners will, like the
wholly-owned subsidiaries of The Carlyle Group L.P., hold
Carlyle Holdings partnership units that entitle them to economic
rights in Carlyle Holdings to the extent of their equity
interests in the Carlyle Holdings partnerships. Public investors
will not directly hold equity interests in the Carlyle Holdings
partnerships.
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(1)
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The Carlyle Group L.P. common
unitholders will have only limited voting rights and will have
no right to remove our general partner or, except in limited
circumstances, elect the directors of our general partner. TCG
Carlyle Global Partners L.L.C., an entity wholly-owned by our
senior Carlyle professionals, will hold a special voting unit in
The Carlyle Group L.P. that will entitle it, on those few
matters that may be submitted for a vote of The Carlyle Group
L.P. common unitholders, to participate in the vote on the same
basis as the common unitholders and provide it with a number of
votes that is equal to the aggregate number of vested and
unvested partnership units in Carlyle Holdings held by the
limited partners of Carlyle Holdings on the relevant record
date. See Material Provisions of The Carlyle Group L.P.
Partnership Agreement Withdrawal or Removal of the
General Partner, Meetings; Voting
and Election of Directors of General
Partner.
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(2)
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Certain individuals engaged in our
business will continue to own interests directly in selected
operating subsidiaries including, in certain instances, entities
that receive management fees from funds that we advise. The
Carlyle Holdings partnerships will also directly own interests
in selected operating subsidiaries. For additional information
concerning these interests see Our Organizational
Structure Following this Offering Certain
Non-controlling Interests in Operating Subsidiaries.
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The Carlyle Group L.P. intends to conduct all of its material
business activities through Carlyle Holdings. Each of the
Carlyle Holdings partnerships was formed to hold our interests
in different
83
businesses. We expect that Carlyle Holdings I L.P. will own all
of our U.S. fee-generating businesses and many of our
non-U.S. fee-generating
businesses, as well as our carried interests (and other
investment interests) that are expected to derive income that
would not be qualifying income for purposes of the
U.S. federal income tax publicly-traded partnership rules
and certain of our carried interests (and other investment
interests) that do not relate to investments in stock of
corporations or in debt, such as equity investments in entities
that are pass-through for U.S. federal income tax purposes.
We anticipate that Carlyle Holdings II L.P. will hold a
variety of assets, including our carried interests in many of
the investments by our carry funds in entities that are treated
as domestic corporations for U.S. federal income tax
purposes and in certain
non-U.S. entities.
Certain of our
non-U.S. fee-generating
businesses, as well as our non-U.S. carried interests (and other
investment interests) that are expected to derive income that
would not be qualifying income for purposes of the U.S. federal
income tax publicly-traded partnership rules and certain of our
non-U.S. carried interests (and other investment interests) that
do not relate to investments in stock of corporations or in
debt, such as equity investments in entities that are
pass-through for U.S. federal income tax purposes will be held
by Carlyle Holdings III L.P.
Accordingly, following the reorganization, subsidiaries of
Carlyle Holdings generally will be entitled to:
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all management fees payable in respect of all current and future
investment funds that we advise, as well as the fees for
transaction advisory and oversight services that may be payable
by these investment funds portfolio companies (subject to
certain third-party interests, as described below);
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all carried interest earned in respect of all current and future
carry funds that we advise (subject to certain third-party
interests, including those described below and to the allocation
to our investment professionals who work in these operations of
a portion of this carried interest as described below);
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all incentive fees (subject to certain interests in Claren Road
and ESG and, with respect to other funds earning incentive fees,
any performance-related allocations to investment
professionals); and
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all returns on investments of our own balance sheet capital that
we make following this offering (as well as on existing
investments with an aggregate value of approximately
$249.3 million as of December 31, 2011).
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Certain Non-controlling Interests in Operating
Subsidiaries. In certain cases, the entities that
receive management fees from our investment funds are owned by
Carlyle together with other persons. For example, management
fees from our energy and renewables funds are received by an
entity we own together with Riverstone, and the Claren Road, ESG
and AlpInvest management companies are partially owned by the
respective founders and managers of these businesses. We may
have similar arrangements with respect to the ownership of the
entities that advise our funds in the future. In addition, in
order to better align the interests of our senior Carlyle
professionals and the other individuals who manage our carry
funds with our own interests and with those of the investors in
these funds, such individuals are allocated directly a portion
of the carried interest in our carry funds. Prior to the
reorganization, the level of such allocations vary by fund, but
generally are at least 50% of the carried interests in the fund.
As a result of the reorganization, the allocations to these
individuals will be approximately 45% of all carried interest,
on a blended average basis, earned in respect of investments
made prior to the date of the reorganization and approximately
45% of any carried interest that we earn in respect of
investments made from and after the date of the reorganization,
in each case with the exception of the Riverstone funds, where
we will retain essentially all of the carry to which we are
entitled under our arrangements for those funds. In addition,
under our arrangements with the historical owners and management
team of AlpInvest, such persons are allocated all carried
interest in respect of the historical investments and
commitments to our fund of funds vehicles that existed as of
December 31, 2010, 85% of the carried interest in respect
of commitments from the historical owners of AlpInvest for the
period between 2011 and 2020 and 60% of the carried interest in
respect of all other commitments (including all
84
future commitments from third parties). See
Business Structure and Operation of Our
Investment Funds Incentive Arrangements/Fee
Structure.
The Carlyle Group L.P. has formed wholly-owned subsidiaries to
serve as the general partners of the Carlyle Holdings
partnerships: Carlyle Holdings I GP Inc., Carlyle
Holdings II GP L.L.C. and Carlyle Holdings III GP L.P.
We refer to Carlyle Holdings I GP Inc., Carlyle Holdings II
GP L.L.C. and Carlyle Holdings III GP L.P. collectively as
the Carlyle Holdings General Partners. Carlyle
Holdings I GP Inc. is a newly-formed Delaware corporation that
is a domestic corporation for U.S. federal income tax
purposes; Carlyle Holdings II GP L.L.C. is a newly-formed
Delaware limited liability company that is a disregarded entity
and not an association taxable as a corporation for
U.S. federal income tax purposes; and Carlyle
Holdings III GP L.P. is a newly-formed Québec
société en commandite that is a foreign
corporation for U.S. federal income tax purposes. Carlyle
Holdings I GP Inc. and Carlyle Holdings III GP L.P. will serve
as the general partners of Carlyle Holdings I L.P. and Carlyle
Holdings III L.P., respectively, either directly or indirectly
through wholly-owned subsidiaries that are disregarded for
federal income tax purposes. See Material
U.S. Federal Tax Considerations Taxation of our
Partnership and the Carlyle Holdings Partnerships for more
information about the tax treatment of The Carlyle Group L.P.
and Carlyle Holdings.
Each of the Carlyle Holdings partnerships will have an identical
number of partnership units outstanding, and we use the terms
Carlyle Holdings partnership unit or
partnership unit in/of Carlyle Holdings to refer
collectively to a partnership unit in each of the Carlyle
Holdings partnerships. The Carlyle Group L.P. will hold, through
wholly-owned subsidiaries, a number of Carlyle Holdings
partnership units equal to the number of common units that The
Carlyle Group L.P. has issued. The Carlyle Holdings partnership
units that will be held by The Carlyle Group L.P.s
wholly-owned subsidiaries will be economically identical in all
respects to the Carlyle Holdings partnership units that will be
held by our existing owners. Accordingly, the income of Carlyle
Holdings will benefit The Carlyle Group L.P. to the extent of
its equity interest in Carlyle Holdings.
The Carlyle Group L.P. is managed and operated by our general
partner, Carlyle Group Management L.L.C., to whom we refer as
our general partner, which is in turn wholly-owned
by our senior Carlyle professionals. Our general partner will
not have any business activities other than managing and
operating us. We will reimburse our general partner and its
affiliates for all costs incurred in managing and operating us,
and our partnership agreement provides that our general partner
will determine the expenses that are allocable to us. Although
there are no ceilings on the expenses for which we will
reimburse our general partner and its affiliates, the expenses
to which they may be entitled to reimbursement from us, such as
director fees, are not expected to be material.
Unlike the holders of common stock in a corporation, our common
unitholders will have only limited voting rights and will have
no right to remove our general partner or, except in the limited
circumstances described below, elect the directors of our
general partner. In addition, TCG Carlyle Global Partners
L.L.C., an entity wholly-owned by our senior Carlyle
professionals, will hold a special voting unit that provides it
with a number of votes on any matter that may be submitted for a
vote of our common unitholders that is equal to the aggregate
number of vested and unvested Carlyle Holdings partnership units
held by the limited partners of Carlyle Holdings. We refer to
our common units (other than those held by any person whom our
general partner may from time to time with such persons
consent designate as a non-voting common unitholder) and our
special voting units as voting units. Our common
unitholders voting rights will be further restricted by
the provision in our partnership agreement stating that any
common units held by a person that beneficially owns 20% or more
of any class of The Carlyle Group L.P. common units then
outstanding (other than our general partner and its affiliates,
or a direct or subsequently approved transferee of our general
partner or its affiliates) cannot be voted on any matter.
In general, our common unitholders will have no right to elect
the directors of our general partner. However, when our Senior
Carlyle professionals and other
then-current
or former Carlyle personnel hold less than 10% of the limited
partner voting power, our common unitholders will have the right
to vote in the election of the directors of our general partner.
This voting power condition
85
will be measured on January 31 of each year, and will be
triggered if the total voting power held by holders of the
special voting units in The Carlyle Group L.P. (including voting
units held by our general partner and its affiliates) in their
capacity as such, or otherwise held by then-current or former
Carlyle personnel (treating voting units deliverable to such
persons pursuant to outstanding equity awards as being held by
them), collectively, constitutes less than 10% of the voting
power of the outstanding voting units of The Carlyle Group L.P.
See Material Provisions of The Carlyle Group L.P.
Partnership Agreement Election of Directors of
General Partner. Unless and until the foregoing voting
power condition is satisfied, our general partners board
of directors will be elected in accordance with its limited
liability company agreement, which provides that directors may
be appointed and removed by members of our general partner
holding a majority in interest of the voting power of the
members, which voting power is allocated to each member ratably
according to his or her aggregate ownership of our common units
and partnership units. See Material Provisions of The
Carlyle Group L.P. Partnership Agreement Election of
Directors of General Partner.
Reorganization
Restructuring of Certain Third Party
Interests. Certain existing and former owners of
the Parent Entities (including CalPERS and former and current
senior Carlyle professionals) have beneficial interests in
investments in or alongside our funds that were funded by such
persons indirectly through the Parent Entities. In order to
minimize the extent of
third-party
ownership interests in firm assets, prior to the completion of
the offering we will (i) distribute a portion of these
interests (approximately $118.5 million as of
December 31, 2011) to the beneficial owners so that
they are held directly by such persons and are no longer
consolidated in our financial statements and
(ii) restructure the remainder of these interests
(approximately $84.8 million as of December 31,
2011) so that they are reflected as non-controlling
interests in our financial statements. In addition, prior to the
offering the Parent Entities will restructure ownership of
certain carried interest rights allocated to retired senior
Carlyle professionals so that such carried interest rights will
be reflected as non-controlling interests in our financial
statements. Such restructured carried interest rights accounted
for approximately $42.3 million of our performance fee
revenue for the year ended December 31, 2011. See
Unaudited Pro Forma Financial Information.
Distribution of Earnings. Prior to the date of
the offering the Parent Entities will also make to their owners
a cash distribution of previously undistributed earnings
totaling $ . This distribution will
permit the existing owners to realize, in part, the earnings
accumulated by our business during the period of their ownership
prior to this offering.
Contribution of the Parent Entities and Other Interests to
Carlyle Holdings. Prior to the completion of this
offering:
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our senior Carlyle professionals, Mubadala and CalPERS will
contribute all of their interests in:
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TC Group, L.L.C. to Carlyle Holdings I L.P.;
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TC Group Investment Holdings, L.P. and TC Group Cayman
Investment Holdings, L.P. to Carlyle Holdings II
L.P.; and
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TC Group Cayman, L.P. to Carlyle Holdings III L.P.; and
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our senior Carlyle professionals and other individuals engaged
in our business will contribute to the Carlyle Holdings
partnerships a portion of the equity interests they own in the
general partners of our existing carry funds.
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In consideration of these contributions our existing owners will
receive an aggregate
of Carlyle
Holdings partnership units.
Under the terms of the partnership agreements of the Carlyle
Holdings partnerships, all of the Carlyle Holdings partnership
units received by our existing owners in the reorganization will
be subject to restrictions on transfer and, with the exception
of Mubadala and CalPERS, minimum retained ownership
requirements. All of the Carlyle Holdings partnership units
received by our founders, CalPERS and Mubadala as part of the
Reorganization will be fully vested as of the date of issuance.
All of the Carlyle Holdings partnership units received by our
other existing owners in exchange for their
86
interests in carried interest owned at the fund level relating
to investments made by our carry funds prior to the date of
Reorganization will be fully vested as of the date of issuance.
Of the remaining Carlyle Holdings partnership units received as
part of the Reorganization by our other existing
owners, % will be fully vested as
of the date of issuance and % will
not be vested and, with specified exceptions, will be subject to
forfeiture if the employee ceases to be employed by us prior to
vesting. Holders of our Carlyle Holdings partnership units
(other than Mubadala and CalPERS), including our founders and
our other senior Carlyle professionals, will be prohibited from
transferring or exchanging any such units until the fifth
anniversary of this offering without our consent. See
Management Vesting; Minimum Retained Ownership
Requirements and Transfer Restrictions. The Carlyle
Holdings partnership units held by Mubadala and CalPERS will be
subject to transfer restrictions as described below under
Common Units Eligible For Future Sale
Lock-Up
Arrangements.
We refer to the above-described restructuring and purchase of
third-party interests, distribution of earnings and contribution
of the Parent Entities and other interests to Carlyle Holdings,
collectively, as the Reorganization.
Exchange
Agreement; Tax Receivable Agreement
At the time of this offering, we will enter into an exchange
agreement with limited partners of the Carlyle Holdings
partnerships so that these holders, subject to the vesting and
minimum retained ownership requirements and transfer
restrictions set forth in the partnership agreements of the
Carlyle Holdings partnerships, will have the right on a
quarterly basis, from and after the first anniversary date of
the closing of this offering (subject to the terms of the
exchange agreement), to exchange their Carlyle Holdings
partnership units for The Carlyle Group L.P. common units on a
one-for-one
basis, subject to customary conversion rate adjustments for
splits, unit distributions and reclassifications. In addition,
subject to certain requirements, CalPERS will generally be
permitted to exchange Carlyle Holdings partnership units for
common units from and after the closing of this offering. Any
common units received by CalPERS in any such exchange during the
lock-up period described in Common Units Eligible For
Future Sale Lock-Up Arrangements would be
subject to the restrictions described in such section. A Carlyle
Holdings limited partner must exchange one partnership unit in
each of the three Carlyle Holdings partnerships to effect an
exchange for a common unit. As the number of Carlyle Holdings
partnership units held by the limited partners of the Carlyle
Holdings partnerships declines, the number of votes to which TCG
Carlyle Global Partners L.L.C. is entitled as a result of its
ownership of the special voting unit will be correspondingly
reduced. See Certain Relationships and Related Person
Transactions Exchange Agreement.
Future exchanges of Carlyle Holdings partnership units are
expected to 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
our 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 our
subsidiaries, including Carlyle Holdings I GP Inc., which we
refer 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. We will enter into a tax receivable
agreement with our existing owners whereby the corporate
taxpayers will agree to pay to our existing owners 85% of the
amount of cash tax savings, if any, in U.S. federal, state
and local income tax that it realizes as a result of these
increases in tax basis and, in limited cases, transfers or prior
increases in tax basis. See Certain Relationships and
Related Person Transactions Tax Receivable
Agreement.
Offering
Transactions
We estimate that the net proceeds to The Carlyle Group L.P. from
this offering, after deducting estimated underwriting discounts,
will be approximately
$ ,
or $
if the underwriters exercise in full their option to purchase
additional common units. The Carlyle Group L.P. intends to use
all of these proceeds to purchase newly issued Carlyle Holdings
partnership units
87
from Carlyle Holdings. See Use of Proceeds.
Accordingly, The Carlyle Group L.P. will hold, through the
Carlyle Holdings general partners, a number of Carlyle Holdings
partnership units equal to the aggregate number of common units
that The Carlyle Group L.P. has issued in connection with this
offering from Carlyle Holdings.
At the time of this offering, we intend to grant to our
employees
deferred restricted common units
and
phantom deferred restricted common units. Additional common
units and Carlyle Holdings partnership units will be available
for future grant under our Equity Incentive Plan, which plan
provides for automatic annual increases in the number of units
available for future issuance. See Management
IPO Date Equity Awards.
We refer to the above described transactions as the
Offering Transactions.
As a result, assuming an initial public offering price of
$ per common unit, immediately
following the Offering Transactions:
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The Carlyle Group L.P., through its wholly-owned subsidiaries,
will
hold partnership
units in Carlyle Holdings
(or
partnership units if the underwriters exercise in full their
option to purchase additional common units) and will, through
its wholly-owned subsidiaries, be the sole general partner of
each of the Carlyle Holdings partnerships and, through Carlyle
Holdings and its subsidiaries, operate the Contributed
Businesses;
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our existing owners will
hold
vested partnership units
and unvested
partnership units in Carlyle Holdings, and more specifically:
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our founders, CalPERS and Mubadala will
hold
vested partnership units; and
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our other existing owners will
hold
vested partnership units
and
unvested partnership units;
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investors in this offering will
hold
common units
(or common
units if the underwriters exercise in full their option to
purchase additional common units); and
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on those few matters that may be submitted for a vote of the
limited partners of The Carlyle Group L.P., such as the approval
of amendments to the limited partnership agreement of The
Carlyle Group L.P. that the limited partnership agreement does
not authorize our general partner to approve without the consent
of the limited partners and the approval of certain mergers or
sales of all or substantially all of our assets:
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investors in this offering will collectively
have % of the voting power of The
Carlyle Group L.P. limited partners
(or % if the underwriters exercise
in full their option to purchase additional common
units) and
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our existing owners will collectively
have % of the voting power of The
Carlyle Group L.P. limited partners
(or % if the underwriters exercise
in full their option to purchase additional common units).
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These percentages correspond with the percentages of the Carlyle
Holdings partnership units that will be held by The Carlyle
Group L.P. through its wholly-owned subsidiaries, on the one
hand, and by our existing owners, on the other hand.
See Pricing Sensitivity Analysis to see how some of
the information presented above would be affected by an initial
public offering price per common unit at the low-, mid- and
high-points of the price range indicated on the front cover of
this prospectus.
Holding
Partnership Structure
As discussed in Material U.S. Federal Tax
Considerations, The Carlyle Group L.P. will be treated as
a partnership and not as a corporation for U.S. federal
income tax purposes. An entity that is treated as a partnership
for U.S. federal income tax purposes is not a taxable
entity and incurs no U.S. federal income tax liability.
Instead, each partner is required to take into account its
allocable share of items of income, gain, loss and deduction of
the partnership in computing its U.S. federal income tax
liability, regardless of whether or not cash distributions are
made. Investors in this
88
offering will become partners in The Carlyle Group L.P.
Distributions of cash by a partnership to a partner are
generally not taxable unless the amount of cash distributed to a
partner is in excess of the partners adjusted basis in its
partnership interest. However, our partnership agreement does
not restrict our ability to take actions that may result in our
being treated as an entity taxable as a corporation for
U.S. federal (and applicable state) income tax purposes.
See Material U.S. Federal Tax Considerations
for a summary discussing certain U.S. federal income tax
considerations related to the purchase, ownership and
disposition of our common units as of the date of this
prospectus.
We believe that the Carlyle Holdings partnerships will also be
treated as partnerships and not as corporations for
U.S. federal income tax purposes. Accordingly, the holders
of partnership units in Carlyle Holdings, including The Carlyle
Group L.P.s wholly-owned subsidiaries, will incur
U.S. federal, state and local income taxes on their
proportionate share of any net taxable income of Carlyle
Holdings. Net profits and net losses of Carlyle Holdings
generally will be allocated to its partners (including The
Carlyle Group L.P.s wholly-owned subsidiaries) pro rata in
accordance with the percentages of their respective partnership
interests. Because The Carlyle Group L.P. will indirectly
own % of the total partnership
units in Carlyle Holdings (or % if
the underwriters exercise in full their option to purchase
additional common units), The Carlyle Group L.P. will indirectly
be allocated % of the net profits
and net losses of Carlyle Holdings
(or % if the underwriters exercise
in full their option to purchase additional common units). The
remaining net profits and net losses will be allocated to the
limited partners of Carlyle Holdings. These percentages are
subject to change, including upon an exchange of Carlyle
Holdings partnership units for The Carlyle Group L.P. common
units and upon issuance of additional The Carlyle Group L.P.
common units to the public. The Carlyle Group L.P. will hold,
through wholly-owned subsidiaries, a number of Carlyle Holdings
partnership units equal to the number of common units that The
Carlyle Group L.P. has issued.
After this offering, we intend to cause Carlyle Holdings to make
distributions to its partners, including The Carlyle Group
L.P.s wholly-owned subsidiaries, in order to fund any
distributions The Carlyle Group L.P. may declare on the common
units. If Carlyle Holdings makes such distributions, the limited
partners of Carlyle Holdings will be entitled to receive
equivalent distributions pro rata based on their partnership
interests in Carlyle Holdings. Because Carlyle Holdings I GP
Inc. must pay taxes and make payments under the tax receivable
agreement, the amounts ultimately distributed by The Carlyle
Group L.P. to common unitholders are expected to be less, on a
per unit basis, than the amounts distributed by the Carlyle
Holdings partnerships to the limited partners of Carlyle
Holdings in respect of their Carlyle Holdings partnership units.
The partnership agreements of the Carlyle Holdings partnerships
will provide for cash distributions, which we refer to as
tax distributions, to the partners of such
partnerships if the
wholly-owned
subsidiaries of The Carlyle Group L.P. which are the general
partners of the Carlyle Holdings partnerships determine that the
taxable income of the relevant partnership will give rise to
taxable income for its partners. Generally, these tax
distributions will be computed based on our estimate of the net
taxable income of the relevant partnership allocable to a
partner multiplied by an assumed tax rate equal to the highest
effective marginal combined U.S. federal, state and local
income tax rate prescribed for an individual or corporate
resident in New York, New York (taking into account the
non-deductibility of certain expenses and the character of our
income). If we had effected the Reorganization on
January 1, 2011, the assumed effective tax rate for 2011
would have been approximately 46%. The Carlyle Holdings
partnerships will make tax distributions only to the extent
distributions from such partnerships for the relevant year were
otherwise insufficient to cover such tax liabilities. The
Carlyle Group L.P. is not required to distribute to its common
unitholders any of the cash that its wholly-owned subsidiaries
may receive as a result of tax distributions by the Carlyle
Holdings partnerships.
89
USE OF
PROCEEDS
We estimate that the net proceeds to The Carlyle Group L.P. from
this offering, after deducting estimated underwriting discounts,
will be approximately
$ ,
or $
if the underwriters exercise in full their option to purchase
additional common units.
The Carlyle Group L.P. intends to use all of these proceeds to
purchase newly issued Carlyle Holdings partnership units from
Carlyle Holdings, as described under Organizational
Structure Offering Transactions. We intend to
cause Carlyle Holdings to use approximately
$ of
these proceeds to repay the outstanding indebtedness under the
revolving credit facility of our existing senior secured credit
facility, approximately
$ to
repay indebtedness under a loan agreement we entered into in
connection with the acquisition of Claren Road and the remainder
for general corporate purposes, including general operational
needs, growth initiatives, acquisitions and strategic
investments and to fund capital commitments to, and other
investments in and alongside of, our investment funds. We
anticipate that the acquisitions we may pursue will be those
that would broaden our platform where we believe we can provide
investors with differentiated products to meet their needs.
Carlyle Holdings will also bear or reimburse The Carlyle Group
L.P. for all of the expenses of this offering, which we estimate
will be approximately
$ .
Outstanding borrowings under our revolving credit facility were
$310.9 million as of December 31, 2011 and
$ million as of ,
2012. Our revolving credit facility matures on September 30,
2016 and currently bears interest at a rate equal to, at our
option, 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%. Borrowings under our revolving
credit facility have been used to fund the redemption of the
subordinated notes payable to Mubadala, portions of the
consideration and/or related transaction expenses in connection
with our recent acquisitions, and for other general corporate
purposes. For additional information, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Recent
Transactions and Notes 3, 9 and 15 to the combined
and consolidated financial statements included elsewhere in this
prospectus. Affiliates of some of the underwriters are lenders
under the revolving credit facility and will receive proceeds to
the extent their currently outstanding loans under that facility
are repaid as described above. See Underwriting. The
Claren Road loan matures on December 31, 2015 and bears
interest at an adjustable annual rate, currently 6.0%.
See Pricing Sensitivity Analysis to see how the
information presented above would be affected by an initial
public offering price per common unit at the low-, mid- and
high-points of the price range indicated on the front cover of
this prospectus.
90
CASH
DISTRIBUTION POLICY
Our general partner currently intends to cause The Carlyle Group
L.P. to make quarterly distributions to our common unitholders
of its share of distributions from Carlyle Holdings, net of
taxes and amounts payable under the tax receivable agreement as
described below. We currently anticipate that we will cause
Carlyle Holdings to make quarterly distributions to its
partners, including The Carlyle Group L.P.s wholly owned
subsidiaries, that will enable The Carlyle Group L.P. to pay a
quarterly distribution of $ per
common unit. In addition, we currently anticipate that we will
cause Carlyle Holdings to make annual distributions to its
partners, including The Carlyle Group L.P.s wholly owned
subsidiaries, in an amount that, taken together with the other
above-described quarterly distributions, represents
substantially all of our Distributable Earnings in excess of the
amount determined by our general partner to be necessary or
appropriate to provide for the conduct of our business, to make
appropriate investments in our business and our funds or to
comply with applicable law or any of our financing agreements.
We anticipate that the aggregate amount of our distributions for
most years will be less than our Distributable Earnings for that
year due to these funding requirements.
Notwithstanding the foregoing, the declaration and payment of
any distributions will be at the sole discretion of our general
partner, which may change our distribution policy at any time.
Our general partner will take into account:
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general economic and business conditions;
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our strategic plans and prospects;
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our business and investment opportunities;
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our financial condition and operating results, including our
cash position, our net income and our realizations on
investments made by our investment funds;
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working capital requirements and anticipated cash needs;
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contractual restrictions and obligations, including payment
obligations pursuant to the tax receivable agreement and
restrictions pursuant to our credit facility;
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legal, tax and regulatory restrictions;
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other constraints on the payment of distributions by us to our
common unitholders or by our subsidiaries to us; and
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such other factors as our general partner may deem relevant.
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Because The Carlyle Group L.P. will be a holding partnership and
will have no material assets other than its ownership of
partnership units in Carlyle Holdings held through wholly-owned
subsidiaries, we will fund distributions by The Carlyle Group
L.P., if any, in three steps:
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first, we will cause Carlyle Holdings to make distributions to
its partners, including The Carlyle Group L.P.s
wholly-owned subsidiaries. If Carlyle Holdings makes such
distributions, the limited partners of Carlyle Holdings will be
entitled to receive equivalent distributions pro rata based on
their partnership interests in Carlyle Holdings;
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second, we will cause The Carlyle Group L.P.s wholly-owned
subsidiaries to distribute to The Carlyle Group L.P. their share
of such distributions, net of taxes and amounts payable under
the tax receivable agreement by such wholly-owned
subsidiaries; and
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third, The Carlyle Group L.P. will distribute its net share of
such distributions to our common unitholders on a pro rata basis.
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Because our wholly-owned subsidiaries must pay taxes and make
payments under the tax receivable agreement, the amounts
ultimately distributed by us to our common unitholders are
expected to be less, on a per unit basis, than the amounts
distributed by the Carlyle Holdings
91
partnerships to the limited partners of the Carlyle Holdings
partnerships in respect of their Carlyle Holdings partnership
units.
In addition, the partnership agreements of the Carlyle Holdings
partnerships will provide for cash distributions, which we refer
to as tax distributions, to the partners of such
partnerships if the wholly-owned subsidiaries of The Carlyle
Group L.P. which are the general partners of the Carlyle
Holdings partnerships determine that the taxable income of the
relevant partnership will give rise to taxable income for its
partners. Generally, these tax distributions will be computed
based on our estimate of the net taxable income of the relevant
partnership allocable to a partner multiplied by an assumed tax
rate equal to the highest effective marginal combined
U.S. federal, state and local income tax rate prescribed
for an individual or corporate resident in New York, New York
(taking into account the non-deductibility of certain expenses
and the character of our income). The Carlyle Holdings
partnerships will make tax distributions only to the extent
distributions from such partnerships for the relevant year were
otherwise insufficient to cover such tax liabilities. The
Carlyle Group L.P. is not required to distribute to its common
unitholders any of the cash that its wholly-owned subsidiaries
may receive as a result of tax distributions by the Carlyle
Holdings partnerships.
Under the Delaware Limited Partnership Act, we may not make a
distribution to a partner if after the distribution all our
liabilities, other than liabilities to partners on account of
their partnership interests and liabilities for which the
recourse of creditors is limited to specific property of the
partnership, would exceed the fair value of our assets. If we
were to make such an impermissible distribution, any limited
partner who received a distribution and knew at the time of the
distribution that the distribution was in violation of the
Delaware Limited Partnership Act would be liable to us for the
amount of the distribution for three years. In addition, the
terms of our credit facility provide certain limits on our
ability to make distributions. See Managements
Discussion and Analysis of Financial Condition and Results of
Operation Liquidity and Capital Resources.
In addition, Carlyle Holdings cash flow from operations
may be insufficient to enable it to make required minimum tax
distributions to its partners, in which case Carlyle Holdings
may have to borrow funds or sell assets, and thus our liquidity
and financial condition could be materially adversely affected.
Furthermore, by paying cash distributions rather than investing
that cash in our businesses, we might risk slowing the pace of
our growth, or not having a sufficient amount of cash to fund
our operations, new investments or unanticipated capital
expenditures, should the need arise.
Our historical cash distributions include compensatory payments
to our senior Carlyle professionals, which we have historically
accounted for as distributions from equity rather than as
employee compensation, and also include distributions in respect
of co-investments made by the owners of the Parent Entities
indirectly through the Parent Entities. Distributions related to
co-investments are allocable solely to the individuals that
funded those co-investments and would not be distributable to
our common unitholders. Additionally, the 2010 Mubadala
investment was a non-recurring transaction that resulted in a
distribution to the existing owners of the Parent Entities in
2010. Cash distributions, net of compensatory payments,
distributions related to co-investments and distributions
related to the Mubadala investment, represent distributions
sourced from the income of the Parent Entities, such as the net
income of management fee-earning subsidiaries and the Parent
Entities share of the income of the fund general partners
(which includes carried interest not allocated to investment
professionals at the fund level). The following table presents
our historical cash distributions, including and excluding
compensatory payments, distributions related
92
to co-investments and the distribution in 2010 related to the
Mubadala investment, and our historical Distributable Earnings
(amounts in millions):
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Year Ended December 31,
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2011
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2010
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2009
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Cash distributions to the owners of the Parent Entities
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$
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1,498.4
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$
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787.8
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$
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215.6
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Compensatory payments
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(740.5
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(258.7
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(179.1
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)
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Distributions related to co-investments
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(76.0
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)
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(24.8
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)
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(9.5
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)
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Distribution related to 2010 Mubadala investment
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(398.5
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Cash distributions, net of compensatory payments, distributions
related to
co-investments
and distributions related to the Mubadala investment
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$
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681.9
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$
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105.8
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$
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27.0
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Distributable Earnings
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$
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864.4
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$
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342.5
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$
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165.3
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Performance fees are included in Distributable Earnings in the
period in which the realization event occurs; any distribution
from the Parent Entities sourced from the related cash proceeds
may occur in a subsequent period.
During the full years of 2011 and 2010, cash distributions by
the Parent Entities, net of compensatory payments, distributions
in respect of co-investments and distributions related to the
Mubadala investment, to our named executive officers were
$134,014,191 and $20,320,428 to Mr. Conway, $134,014,121
and $20,320,432 to Mr. DAniello, $134,014,125 and
$20,320,481 to Mr. Rubenstein, $9,834,638 and $1,478,772 to
Mr. Youngkin, $81,930 and $0 to Ms. Friedman and
$272,492 and $68,351 to Mr. Ferguson. See
Management Executive Compensation and
Certain Relationships and Related Person
Transactions Investments In and Alongside Carlyle
Funds for a discussion of compensatory payments and
distributions in respect of co-investments, respectively, to our
named executive officers.
93
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of December 31, 2011:
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|
|
|
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on a historical basis; and
|
|
|
|
on a pro forma basis for The Carlyle Group L.P. giving effect to
the transactions described under Unaudited Pro Forma
Financial Information, including the repayment of
indebtedness with a portion of the proceeds from this offering
as described in Use of Proceeds.
|
You should read this table together with the information
contained in this prospectus, including Organizational
Structure, Use of Proceeds, Unaudited
Pro Forma Financial Information, Selected Historical
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our historical financial statements and related notes
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(Dollars in millions)
|
|
|
Cash and cash equivalents
|
|
$
|
509.6
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
860.9
|
|
|
$
|
|
|
Subordinated loan payable to Mubadala
|
|
|
262.5
|
|
|
|
|
|
Loans payable of Consolidated Funds
|
|
|
9,689.9
|
|
|
|
|
|
Redeemable non-controlling interests in consolidated entities
|
|
|
1,923.4
|
|
|
|
|
|
Members equity
|
|
|
873.1
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(55.8
|
)
|
|
|
|
|
Equity appropriated for Consolidated Funds
|
|
|
853.7
|
|
|
|
|
|
Non-controlling interests in consolidated entities
|
|
|
7,496.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
21,903.9
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See Pricing Sensitivity Analysis to see how the
information presented above would be affected by an initial
public offering price per common unit at the low-, mid- and
high-points of the price range indicated on the front cover of
this prospectus or if the underwriters option to purchase
additional common units is exercised in full.
94
DILUTION
If you invest in our common units, your interest will be diluted
to the extent of the difference between the initial public
offering price per common unit of our common units and the pro
forma net tangible book value per common unit of our common
units after this offering. Dilution results from the fact that
the per common unit offering price of the common units is
substantially in excess of the pro forma net tangible book value
per common unit attributable to our existing owners.
Our pro forma net tangible book value as of December 31,
2011 was approximately $ , or
$ per common unit. Pro forma net
tangible book value represents the amount of total tangible
assets less total liabilities, after giving effect to the
Reorganization, and pro forma net tangible book value per common
unit represents pro forma net tangible book value divided by the
number of common units outstanding, after giving effect to the
Reorganization and treating as outstanding common units issuable
upon exchange of outstanding partnership units in Carlyle
Holdings (other than those held by The Carlyle Group L.P.s
wholly-owned subsidiaries) on a
one-for-one
basis.
After giving effect to the transactions described under
Unaudited Pro Forma Financial Information, including
the repayment of indebtedness with a portion of the proceeds
from this offering as described in Use of Proceeds,
our adjusted pro forma net tangible book value as of
December 31, 2011 would have been
$ , or
$ per common unit. This represents
an immediate increase in net tangible book value of
$ per common unit to our existing
owners and an immediate dilution in net tangible book value of
$ per common unit to investors in
this offering.
The following table illustrates this dilution on a per common
unit basis assuming the underwriters do not exercise their
option to purchase additional common units:
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|
|
|
|
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|
|
Assumed initial public offering price per common unit
|
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|
|
|
|
$
|
|
|
Pro forma net tangible book value per common unit as of
December 31, 2011
|
|
$
|
|
|
|
|
|
|
Increase in pro forma net tangible book value per common unit
attributable to investors in this offering
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted pro forma net tangible book value per common unit after
the offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Dilution in adjusted pro forma net tangible book value per
common unit to investors in this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See Pricing Sensitivity Analysis to see how some of
the information presented above would be affected by an initial
public offering price per common unit at the low-, mid- and
high-points of the price range indicated on the front cover of
this prospectus or if the underwriters exercise in full their
option to purchase additional common units.
Because our existing owners do not own any of our common units,
in order to present more meaningfully the dilutive impact on the
investors in this offering we have calculated dilution in pro
forma net tangible book value per common unit to investors in
this offering by dividing pro forma net tangible book value by a
number of common units that includes common units issuable upon
exchange of outstanding partnership units in Carlyle Holdings
(other than those held by The Carlyle Group L.P.s
wholly-owned subsidiaries) on a
one-for-one
basis.
The following table summarizes, on the same pro forma basis as
of December 31, 2011, the total number of common units
purchased from us, the total cash consideration paid to us and
the average price per common unit paid by our existing owners
and by new investors purchasing common units in this offering,
assuming that all of the holders of partnership units in Carlyle
Holdings (other than
95
The Carlyle Group L.P.s wholly-owned subsidiaries)
exchanged their Carlyle Holdings partnership units for our
common units on a
one-for-one
basis.
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units
|
|
|
Total
|
|
|
Average
|
|
|
|
Purchased
|
|
|
Consideration
|
|
|
Price per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Common Unit
|
|
|
|
(Dollars in millions)
|
|
|
Existing equityholders
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
Investors in this offering
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
SELECTED
HISTORICAL FINANCIAL DATA
The following selected historical combined financial and other
data of Carlyle Group, which comprises 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, which are under common ownership
and control by our individual senior Carlyle professionals,
CalPERS and entities affiliated with Mubadala, should be read
together with Organizational Structure,
Unaudited Pro Forma Financial Information,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the historical
financial statements and related notes included elsewhere in
this prospectus. Carlyle Group is considered our predecessor for
accounting purposes, and its combined financial statements will
be our historical financial statements following this offering.
We derived the selected historical combined and consolidated
statements of operations data of Carlyle Group for each of the
years ended December 31, 2011, 2010 and 2009 and the
selected historical combined and consolidated balance sheet data
as of December 31, 2011 and 2010 from our audited combined
and consolidated financial statements which are included
elsewhere in this prospectus. We derived the selected historical
condensed combined and consolidated statements of operations
data of Carlyle Group for the years ended December 31, 2008
and 2007 and the selected condensed combined and consolidated
balance sheet data as of December 31, 2009, 2008 and 2007
from our audited combined and consolidated financial statements
which are not included in this prospectus. The combined and
consolidated financial statements of Carlyle Group have been
prepared on substantially the same basis for all historical
periods presented; however, the consolidated funds are not the
same entities in all periods shown due to changes in
U.S. GAAP, changes in fund terms and the creation and
termination of funds.
Net income (loss) is determined in accordance with
U.S. GAAP for partnerships and is not comparable to net
income of a corporation. All distributions and compensation for
services rendered by Carlyles individual partners have
been reflected as distributions from equity rather than
compensation expense in the historical combined and consolidated
financial statements.
The selected historical combined and consolidated financial data
is not indicative of the expected future operating results of
The Carlyle Group L.P. following the Reorganization and the
Offering Transactions. Prior to this offering, we will complete
a series of transactions pursuant to which our business will be
reorganized into a holding partnership structure as described in
Organizational Structure whereby, among other
things, the Parent Entities will distribute to our existing
owners certain investments and equity interests that will not be
contributed to Carlyle Holdings. See Organizational
Structure and Unaudited Pro Forma Financial
Information.
The summary unaudited pro forma consolidated statement of
operations data for the year ended December 31, 2011
presents our consolidated results of operations giving pro forma
effect to the Reorganization and Offering Transactions described
under Organizational Structure, and the other
transactions described in Unaudited Pro Forma Financial
Information, as if such transactions had occurred on
January 1, 2011. The summary unaudited pro forma
consolidated balance sheet data as of December 31, 2011
presents our consolidated financial position giving pro forma
effect to the Reorganization and Offering Transactions described
under Organizational Structure, and the other
transactions described in Unaudited Pro Forma Financial
Information, as if such transactions had occurred on
December 31, 2011. The pro forma adjustments are based on
available information and upon assumptions that our management
believes are reasonable in order to reflect, on a pro forma
basis, the impact of these transactions on the historical
combined and consolidated financial information of Carlyle
Group. The unaudited condensed consolidated pro forma financial
information is included for informational purposes only and does
not purport to reflect the results of operations or financial
position of Carlyle Group that would have occurred had the
transactions described above occurred on the dates indicated or
had we operated as a public company during the periods presented
or for any future period or date. The unaudited condensed
consolidated pro
97
forma financial information should not be relied upon as being
indicative of our results of operations or financial position
had the transactions described under Organizational
Structure and the use of the estimated net proceeds from
this offering as described under Use of Proceeds
occurred on the dates assumed. The unaudited pro forma
consolidated financial information also does not project our
results of operations or financial position for any future
period or date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma(2)
for
|
|
|
|
|
|
|
the Year
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund management fees
|
|
$
|
|
|
|
$
|
915.5
|
|
|
$
|
770.3
|
|
|
$
|
788.1
|
|
|
$
|
811.4
|
|
|
$
|
668.9
|
|
Performance fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
|
|
|
|
1,307.4
|
|
|
|
266.4
|
|
|
|
11.1
|
|
|
|
59.3
|
|
|
|
1,013.1
|
|
Unrealized
|
|
|
|
|
|
|
(185.8
|
)
|
|
|
1,215.6
|
|
|
|
485.6
|
|
|
|
(944.0
|
)
|
|
|
376.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total performance fees
|
|
|
|
|
|
|
1,121.6
|
|
|
|
1,482.0
|
|
|
|
496.7
|
|
|
|
(884.7
|
)
|
|
|
1,389.8
|
|
Investment income (loss)
|
|
|
|
|
|
|
78.4
|
|
|
|
72.6
|
|
|
|
5.0
|
|
|
|
(104.9
|
)
|
|
|
75.6
|
|
Interest and other income
|
|
|
|
|
|
|
15.8
|
|
|
|
21.4
|
|
|
|
27.3
|
|
|
|
38.2
|
|
|
|
36.3
|
|
Interest and other income of Consolidated Funds
|
|
|
|
|
|
|
714.0
|
|
|
|
452.6
|
|
|
|
0.7
|
|
|
|
18.7
|
|
|
|
51.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
|
|
|
|
2,845.3
|
|
|
|
2,798.9
|
|
|
|
1,317.8
|
|
|
|
(121.3
|
)
|
|
|
2,222.5
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
477.9
|
|
|
|
429.0
|
|
|
|
348.4
|
|
|
|
97.4
|
|
|
|
775.5
|
|
General, administrative and other expenses
|
|
|
|
|
|
|
323.5
|
|
|
|
177.2
|
|
|
|
236.6
|
|
|
|
245.1
|
|
|
|
234.3
|
|
Interest
|
|
|
|
|
|
|
60.6
|
|
|
|
17.8
|
|
|
|
30.6
|
|
|
|
46.1
|
|
|
|
15.9
|
|
Interest and other expenses of Consolidated Funds
|
|
|
|
|
|
|
453.1
|
|
|
|
233.3
|
|
|
|
0.7
|
|
|
|
6.8
|
|
|
|
38.8
|
|
Other non-operating expenses
|
|
|
|
|
|
|
32.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) from early extinguishment of debt, net of related
expenses
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
(10.7
|
)
|
|
|
|
|
|
|
|
|
Equity issued for affiliate debt financing
|
|
|
|
|
|
|
|
|
|
|
214.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on CCC liquidation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
|
|
|
|
1,347.1
|
|
|
|
1,073.8
|
|
|
|
605.6
|
|
|
|
542.4
|
|
|
|
1,064.5
|
|
Other Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses) of Consolidated Funds
|
|
|
|
|
|
|
(323.3
|
)
|
|
|
(245.4
|
)
|
|
|
(33.8
|
)
|
|
|
162.5
|
|
|
|
300.4
|
|
Gain on business acquisition
|
|
|
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
|
|
|
|
1,182.8
|
|
|
|
1,479.7
|
|
|
|
678.4
|
|
|
|
(501.2
|
)
|
|
|
1,458.4
|
|
Provision for income taxes
|
|
|
|
|
|
|
28.5
|
|
|
|
20.3
|
|
|
|
14.8
|
|
|
|
12.5
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
1,154.3
|
|
|
|
1,459.4
|
|
|
|
663.6
|
|
|
|
(513.7
|
)
|
|
|
1,443.2
|
|
Net income (loss) attributable to non-controlling interests in
consolidated entities
|
|
|
|
|
|
|
(202.6
|
)
|
|
|
(66.2
|
)
|
|
|
(30.5
|
)
|
|
|
94.5
|
|
|
|
182.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Carlyle Group (or The Carlyle
Group L.P. for pro forma)
|
|
$
|
|
|
|
$
|
1,356.9
|
|
|
$
|
1,525.6
|
|
|
$
|
694.1
|
|
|
$
|
(608.2
|
)
|
|
$
|
1,260.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
509.6
|
|
|
$
|
616.9
|
|
|
$
|
488.1
|
|
|
$
|
680.8
|
|
|
$
|
1,115.0
|
|
Investments and accrued performance fees
|
|
$
|
|
|
|
$
|
2,644.0
|
|
|
$
|
2,594.3
|
|
|
$
|
1,279.2
|
|
|
$
|
702.4
|
|
|
$
|
2,150.6
|
|
Investments of Consolidated
Funds(1)
|
|
$
|
|
|
|
$
|
19,507.3
|
|
|
$
|
11,864.6
|
|
|
$
|
163.9
|
|
|
$
|
187.0
|
|
|
$
|
1,629.3
|
|
Total assets
|
|
$
|
|
|
|
$
|
24,651.7
|
|
|
$
|
17,062.8
|
|
|
$
|
2,509.6
|
|
|
$
|
2,095.8
|
|
|
$
|
5,788.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
|
|
|
$
|
860.9
|
|
|
$
|
597.5
|
|
|
$
|
412.2
|
|
|
$
|
765.5
|
|
|
$
|
691.4
|
|
Subordinated loan payable to Mubadala
|
|
$
|
|
|
|
$
|
262.5
|
|
|
$
|
494.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Loans payable of Consolidated Funds
|
|
$
|
|
|
|
$
|
9,689.9
|
|
|
$
|
10,433.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,007.3
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
13,561.1
|
|
|
$
|
14,170.2
|
|
|
$
|
1,796.0
|
|
|
$
|
1,733.3
|
|
|
$
|
3,429.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interests in consolidated entities
|
|
$
|
|
|
|
$
|
1,923.4
|
|
|
$
|
694.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total members equity
|
|
$
|
|
|
|
$
|
817.3
|
|
|
$
|
895.2
|
|
|
$
|
437.5
|
|
|
$
|
59.6
|
|
|
$
|
1,256.1
|
|
Equity appropriated for Consolidated Funds
|
|
$
|
|
|
|
$
|
853.7
|
|
|
$
|
938.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Non-controlling interests in consolidated entities
|
|
$
|
|
|
|
$
|
7,496.2
|
|
|
$
|
364.9
|
|
|
$
|
276.1
|
|
|
$
|
302.9
|
|
|
$
|
1,103.1
|
|
Total equity
|
|
$
|
|
|
|
$
|
9,167.2
|
|
|
$
|
2,198.6
|
|
|
$
|
713.6
|
|
|
$
|
362.5
|
|
|
$
|
2,359.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The entities comprising our
Consolidated Funds are not the same entities for all periods
presented. In February 2007, we formed a hedge fund which we
consolidated into our financial statements and included in our
Consolidated Funds prospectively from that date. In December
2007, we amended most of the co-investment entities so that the
presumption of control by the general partner had been overcome,
and therefore we ceased to consolidate those entities
prospectively from that date. In 2008, the hedge fund that we
had formed in February 2007 began an orderly liquidation and
ceased operations. Pursuant to revised consolidation guidance
that became effective January 1, 2010, we consolidated the
existing and any subsequently acquired CLOs where we hold a
controlling financial interest. The consolidation or
deconsolidation of funds generally has the effect of grossing up
or down, respectively, reported assets, liabilities, and cash
flows, and has no effect on net income attributable to Carlyle
Group or members equity.
|
|
|
|
(2)
|
|
Refer to Unaudited Pro Forma
Financial Information.
|
99
MANAGEMENTS
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the historical financial statements and related
notes included elsewhere in this prospectus and with the
discussions under Organizational Structure and
Unaudited Pro Forma Financial Information. This
discussion contains forward-looking statements that are subject
to known and unknown risks and uncertainties, including those
described under the section entitled Risk Factors,
contained elsewhere in this prospectus describing key risks
associated with our business, operations and industry. Actual
results may differ materially from those contained in our
forward-looking statements. Percentages presented in the tables
throughout our discussion and analysis of financial condition
and results of operations may reflect rounding adjustments and
consequently totals may not appear to sum.
The historical combined and consolidated financial data
discussed below reflect the historical results of operations and
financial position of Carlyle Group, which comprises TC Group,
L.L.C., TC Group Cayman L.P., TC Group Investment Holdings, L.P.
and TC Group Cayman Investment Holdings, L.P. (collectively, the
Parent Entities), as well as their controlled
subsidiaries, which are under common ownership and control by
our individual senior Carlyle professionals, entities affiliated
with Mubadala Development Company, the
Abu-Dhabi
based strategic development and investment company
(Mubadala) and California Public Employees
Retirement System (CalPERS). Senior Carlyle
professionals refer to the partners of our firm who are,
together with CalPERS and Mubadala, the owners of our Parent
Entities prior to the reorganization. Carlyle Group is
considered our predecessor for accounting purposes, and its
combined and consolidated financial statements will be our
historical financial statements following this offering.
Overview
We conduct our operations through four reportable segments:
Corporate Private Equity, Real Assets, Global Market Strategies
and Fund of Funds Solutions. We launched operations in our Fund
of Funds Solutions segment with the acquisition of a 60% equity
interest in AlpInvest on July 1, 2011.
|
|
|
|
|
Corporate Private Equity Our Corporate
Private Equity segment advises our buyout and growth capital
funds, which seek a wide variety of investments of different
sizes and growth potentials. As of December 31, 2011, our
Corporate Private Equity segment had approximately
$51 billion in AUM and approximately $38 billion in
fee-earning AUM.
|
|
|
|
Real Assets Our Real Assets segment advises
our U.S. and internationally focused real estate and
infrastructure funds, as well as our energy and renewable
resources funds. As of December 31, 2011, our Real Assets
segment had approximately $31 billion in AUM and
approximately $22 billion in fee-earning AUM.
|
|
|
|
Global Market Strategies Our Global Market
Strategies segment advises a group of funds that pursue
investment opportunities across various types of credit,
equities and alternative instruments, and (as regards to certain
macroeconomic strategies) currencies, commodities and interest
rate products and their derivatives. As of December 31,
2011, our Global Market Strategies segment had approximately
$24 billion in AUM and approximately $23 billion in
fee-earning AUM.
|
|
|
|
Fund of Funds Solutions Our Fund of Funds
Solutions segment was launched upon our acquisition of a 60%
equity interest in AlpInvest on July 1, 2011 and advises a
global private equity fund of funds program and related
co-investment and secondary activities. As of December 31,
2011, AlpInvest had approximately $41 billion in AUM and
approximately $28 billion in fee-earning AUM.
|
We earn management fees pursuant to contractual arrangements
with the investment funds that we manage and fees for
transaction advisory and oversight services provided to
portfolio companies of these funds. We also typically receive a
performance fee from an investment fund, which may be
100
either an incentive fee or 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.
Under U.S. generally accepted accounting principles, we are
required to consolidate some of the investment funds that we
advise. However, for segment reporting purposes, we present
revenues and expenses on a basis that deconsolidates these
investment funds. Accordingly, our segment revenues primarily
consist of fund management and related advisory fees,
performance fees (consisting of incentive fees and carried
interest allocations), investment income, including realized and
unrealized gains on our investments in our funds and other
trading securities, as well as interest and other income. Our
segment expenses primarily consist of compensation and benefits
expenses, including salaries, bonuses and performance payment
arrangements, and general and administrative expenses.
Trends
Affecting our Business
Our results of operations are affected by a variety of factors
including global economic and market conditions, particularly in
the United States, Europe and Asia. We believe that our
investment philosophy and broad diversity of investments across
industries, asset classes and geographies enhances the stability
of our distributable earnings and management fee streams,
reduces the volatility of our carried interest and performance
fees and decreases our exposure to a negative event associated
with any specific fund, investment or vintage. In general, a
climate of low and stable interest rates and high levels of
liquidity in the debt and equity capital markets provide a
positive environment for us to generate attractive investment
returns. We also believe that periods of volatility and
dislocation in the capital markets present us with opportunities
to invest at reduced valuations that position us for future
revenue growth and to utilize investment strategies, such as our
distressed debt strategies, which tend to benefit from such
market conditions.
In addition to these global macro-economic and market factors,
our future performance is also heavily dependent on our ability
to attract new capital and investors, generate strong returns
from our existing investments, deploy our funds capital in
appropriate and successful investments and meet evolving
inves