The Carlyle Group's Management Presents at Citigroup US Financial Services Conference (Transcript)

| About: The Carlyle (CG)

The Carlyle Group (NASDAQ:CG)

Citigroup US Financial Services Conference

March 06, 2013 2:05 pm ET


Adena T. Friedman - Chief Financial Officer, Member of Management Committee, and Member of Operations Committee


William R. Katz - Citigroup Inc, Research Division

Adena T. Friedman

[indiscernible] mental note so we'll come back into the office and think about it. Great. So let's talk about -- a little bit more about Carlyle. So we are a diversified, global and scaled business that is prepared to provide our fund investors with attractive investment alternatives, options across a full range of assets. And if we turn to -- I have to -- so if we look at where we -- who we are today, we have 4 key operating segments, and I will spend some time on each of these. We are best known for our Corporate Private Equity segment, which has $53 billion in assets under management. It remains our largest business, but it also is an area that we have found very consistent success. It is fully scaled, it is global in nature, and we will spend some time diving into that business. But we also have 3 other segments, and it's important to understand the dynamics of each one.

The Real Assets segment has 25 funds with $40 billion of assets under management. It covers both real estate and energy as well as an infrastructure business, and it also has had very strong returns and has also been a very nice cash generator for our business as well.

The Global Market Strategies business is our third segment. That is a very, very interesting segment for us because it has multiple assets under it. We have -- we are the second largest CLO manager in the world, with over $16 billion of CLO assets. We also have closed-end funds, which are Distressed, Energy Mezzanine and straight Mezzanine funds, but we also have $12 billion of hedge fund assets across 3 different strategies that we'll go into a little bit more detail. But we do look at our strategies as being unique as well as scalable and ones that our LPs are particularly interested in.

And then the fourth segment is our Solutions business. That is the smallest part of our business right now. It's the least built out, but it also has the most opportunity. We started that segment through the partial acquisition of AlpInvest. We owned 60% of them. They're a private equity fund of funds and they have over $40 billion of assets under management, but it is an area where we feel that there's a real opportunity for us to grow into the future.

Overall, our business has $170 billion of assets under management and $123 billion of fee-earning assets under management. We have 113 funds and 67 fund of funds. Within the 113 funds, we have 54 of them are carry funds, 12 of them are hedge funds and the remainder are CLO vehicles. We currently have $44 billion of dry powder. $25 billion of that dry powder is in -- within our carry funds, $15 billion sits within AlpInvest, and another $4 billion sits within our energy partnership with NGP Capital Management. And then finally, we have over 200 portfolio companies and 250 real estate assets. So we are scaled, built out, and we manage a large portfolio for the benefit of our LPs.

So if you look at where we came from, as you can see here, we started as all the private equity firms have started, which is with 1 buyout fund, and we managed that buyout fund quite successfully early in our life. That gave us the opportunity, then, to expand. We have first expanded into real estate as well as into Europe buyout and into U.S. growth, and then we started expanding even further. And what we've done is built out a very full-service global platform, multi-fund structure. So each of these lines is its own economic engine. They provide -- they each have their own LP base. They each have their own profit center, and they all have the opportunity to generate either incentive fees or carry for our -- for the firm.

So we are more diversified than our peers, who are extremely global. We have a very high presence in emerging markets, and we continue to see opportunities to continue to build out this. We have a history and a culture of growth and innovation. We've been very successful in doing that over the last 25 years, and we fully expect that we will continue to be able to provide that growth and innovation into the future.

And what is it that makes us unique? How is it that we've been able to build out the platform that we have? These are the 5 traits that we believe define us as a firm. The first is that diversified multi-fund structure that I spoke about just a moment ago. It enables a multitude of income-generating engines for the firm. We also have exceptional fundraising capabilities. I will spend some time on that, but we have an over 70-person fundraising team dedicated to helping us make sure that we continue to grow our business, find new markets and invest in new strategies. We have 25 years of investing excellence. We have an operating model that generates cash for its earnings. We focus our unitholders on the view of Distributable Earnings, which is cash earnings for the business. We believe that is the best way to look at us as a business and that it will ultimately result in distributions out to the unitholders and a view into how we're able to grow our business. And then finally, we have a fully scaled global model positioned for growth.

So I'm going to start with the cash-rich earnings stream. So in 2012, we generated $688 million of Distributable Earnings and $736 million of Economic Net Income. So how did we do that? We do it for 4 key activities. The first is fundraising. So we obviously have to be able to raise the fund. We have, as I said, a 70-person fundraising team. We have over 1,500 investors in 75 countries. Over the period of our life, we've accumulatively raised $131 billion. And over just in 2008 to 2012, we raised $46 billion.

In 2012 alone, we raised $14 billion, and this is an area that we are -- we have a well-oiled machine.

The next, though, is once we have the money, we have to find investment opportunities, and we do have a global platform of investment professionals. We have 650 investment professionals around the world. In 2012, we invested $8 billion. But over the last several years, our average is -- we average around $9 billion of equity invested each year. In 2012 alone, we did invest across 32 different funds throughout the year, and that's just in our carry funds.

In terms of carry fund appreciation, so once we own the investment, we have to find a way to add value. We are not passive investors; we're active investors. In many cases, we sit on the boards of the company. We may control the company. We provide a lot of advice into the company, and that should make it so that we are able to make these companies better. And I will spend a little time on that as well. But in 2012, our carry funds appreciated 14%.

And then the last piece is realized proceeds. So once we make the investment, we add value to it, we have to be able to exit. We have a fund structure that -- our investment thesis, we do not go after the largest deals, we tend to go after deals that will give us multiple exit opportunities. And in 2012, we actually provided $18.7 billion back to our LPs from our portfolio, and that is on top of $18 billion that we were able to distribute the year before. So if we're able to distribute that capital back to our LPs, it's obvious that they're going to want to make an investment back into our funds going forward.

So what does that mean for the unitholders? Well, the way that we like to look at it, and it's not a -- there's -- I would say that the correlation between distributions and distributable earnings is imperfect, but it is -- there is one. For discerning back to our LPs with gains on these distributions, then we will be able to generate realized carry. And if we generate realized carry, that factors into our Distributable Earnings.

So in terms of 2012, we distributed $18.7 billion back to our LPs, which generated $502 million in realized performance fees. That realized performance fees contributed to our Distributable Earnings of $668 million, and then we were able to translate that into a post-tax -- pro forma post-tax per unit Distributable Earnings of $1.83, of which we distributed -- on a pro forma basis, we would have distributed $1.46 had we been public all year. We went public in May, and so we had a partial year. And in that period, we distributed $1.12 of the income that we generated from May through December. So we have a very high distribution model, and we are very, very clear that we are aligned with our unitholders. If we are able to distribute cash to you, that then makes it so that the partners also are able to realize that same cash. We are a unitholder just like the external unitholders. So we are aligned, and we do feel that we have a high distribution model.

So how have we done that? In terms of the fundraising, we have a broad base of investors across the world. They have a very loyal investor base. 10% -- or 10% of our capital comes from investors in 20 or more of our funds, and 90% of our capital comes from investors that are at least in 2 funds. So we have a very, very loyal client base. It's broad-based. It's very eclectic. It's worldwide. About half of our investors are inside the United States and half of the investors are outside the United States. We do believe that fundraising is one of our core strengths. And if you look at the overall trends in fundraising, fundraising has been -- has gone through a real cycle. Certainly, the credit crisis created a need for LPs to retrench, and they are being slow in kind of loosening up the purse strings and providing capital back into the industry. We are seeing, though, some real signs of pickup, partly because of the fact that we have been distributing back to the LPs and they have cash to redeploy, partly because the equity markets have improved, so that what we call the denominator factor has been alleviated, and we are seeing the average fund size increase. And we also are seeing a really interesting phenomenon, which is the top 5 firms, all of which are public, are getting an increased share of wallet over time.

So once we have the money, we have invested it quite successfully. We have invested $86 billion into our carry funds. So this is just our carry funds. With the $86 billion, we've been able to generate $61 billion of gains for our LPs, and we've distributed back to them $87 billion. So we now have a $60 billion portfolio and $25 billion of dry powder to invest for the future.

We will look at that $60 billion in a little more detail. But right now, if you look at how well we've invested it over time, we actually are invested in 9 key industries -- actually, really, 8 key industries, with the ninth as "other." And we believe that we have a real expertise in these industries. We have sector specialists that focus just on these industries, and they may sit within U.S. buyout, but they help every fund make investments in these particular industries. This is an area that Carlyle has a real advantage in.

So -- And I actually will spend a little more time on our investment philosophy and approach in just a few minutes. But when we look at what we've been able to do what once we have made those investments and added value to them, we have been able to really recover in terms of the distribution. The overall industry is starting to kind of really come back in terms of the ability to distribute cash back to the LPs. That's on the left. And on the right, you can see that Carlyle's heavily correlated with that overall trend, with the last 2 years as being just the beginning of a very active harvesting cycle for our business. And if you think about how -- what -- if you really think through it, we raised a lot of money in 2006 through 2008. We have invested it over the last 8 or 9 -- 8 to 6 -- 6 to 8 years, and then now, it's ready for harvesting. So we are entering into harvesting cycle at the same time that we're now reloading our funds for the next generation. And if we look at what that means in terms of the composition of our portfolio, we have $60 billion of carry funds on capital on the ground today, of which about 50% of it is in deals that were done in 2008 or earlier and, therefore, are ready for harvesting. And the other half is in newer deals that are -- we're now in the process of adding value to. Additionally, within that $60 billion, about $14 billion is in public companies that are also in that much more near-term harvesting mode. And then lastly, we -- in addition to the $60 billion of carry fund capital, we have $12 billion in our hedge funds, which generate a nice annual income stream from incentive fees, assuming that they perform for their LPs.

So diving a little deeper into the investment philosophy and approach for Carlyle. Because Carlyle's private equity business is -- has been so successful, we do get a lot of questions about, well, how do we do it? How do we generate returns north of 30% in the realized -- in our realized and partially realized deals over such a long period of time? Well, we have a lot of things going on within our investment group. So the first thing is that within Corporate Private Equity, we have 250 investment professionals out of a total of 650. They are everywhere. They are all over the world. We -- about 1/3 of them sit within the United States, and the rest are elsewhere. We have offices throughout Europe, we have offices throughout Asia, we have an office in -- or 2 offices in Africa, and we have offices in Latin America. They are locals to their country. They can sort deals more successfully than someone that we plant there. We do have an investment committee structure, though, that allows them to come back to the core of our business, looking at the investment professionals that are at the top of their fund. So people like Bill Conway, David Rubenstein, Glenn Youngkin, as well as Greg Summe, they form the basis of an investment committee. So even though they are locals on the ground, they are better at sourcing deals, they're better at managing the companies that they source, and they're better at adding value into those companies than someone who would be transplanted there. They do come back to a central structure for approvals of deals so that we have a very good structure around making sure that we're looking at things holistically and in a consistent way in terms of making investments.

We also -- once we own a company, and even as we're [indiscernible] them, we do have 25 operating executives that support us, former CEOs or operating specialists such as supply chain specialists or other COO type of individuals who can help us look at how do we make these companies better. They serve on the boards of the companies once we buy them, and they really work on the value creation.

And then lastly, with our 150 active Corporate Private Equity portfolio companies, we get a lot of data. We have a lot of data coming off of those companies that can help us look at macroeconomic trends and can help inform us as to what might be happening within an industry or within a particularly economy, and that can then help us look at how we make the next investment decision.

So a lot of people ask about, what is the source of value creation? Is it financial engineering through the use of leverage, or is it actual improvement in the companies? And what we can show you definitively is, across our portfolio, U.S., Europe and Asia, the vast majority of the value that we've created is through making these companies better companies. That can be for growing the business, globalizing the business, bolt-on acquisitions or operating efficiencies, but we do focus on improving good companies and making them even better.

And then in terms of how we look at investments, we look for deals that can provide us, on average, a 2 to 4x return. So they have very low tails. We have -- as you can see, this chart essentially provides you a view into all of the realized and partially realized deals, and we looked at how much of the gain or loss sits within these deals. And so for deals that have generated less than a 1x return, in total, we have lost approximately $2 billion. So for investments that have generated more than a 10x return, we've made about $2 billion. But the vast majority of our gains have come from deals that are in the 2x to 4x our money type deals, and that is what we search for. We also do not generally do the biggest deal, so that the exit opportunities we have are much more flexible. We can sell to corporate, we can IPO the deal, we also have the ability to look at dividends throughout owning the deal. So we have a lot more flexibility in terms of the exit opportunities because of the way that we structure our portfolio.

So we are the clear leaders in the Corporate Private Equity business, and we continue to find opportunities for expansion into new markets with growth in our successor funds as well as new strategies in new geographies. But it is not our only business, and so I do want to spend a couple of minutes looking at the other segments that we have.

The first one is Global Market Strategies, which is our fastest-growing segment. And we have the ability to grow that through targeted acquisitions as well as de novo fund launches. We also have our Real Assets business, which is real estate, energy and infrastructure, and we have our Solutions business, which really is in the early stages of growth.

So turning to Global Market Strategies. In 2012, Global Market Strategies generated $168 million in Distributable Earnings. It has grown very fast for us through a combination of new fund launches such as the Energy Mezzanine fund as well as bolt-on acquisitions that we've done primarily in the hedge funds. The hedge funds -- all of the hedge funds we have, we own 55% of. We have 3 strategies within our hedge funds, within the $12 billion of hedge fund capital. The first is a long/short credit fund, which is Claren Road, a partnership with Claren Road. The second is the emerging markets equity, and that's through a partnership with ESG. And the third is in commodities, through a partnership with Vermillion.

What do we look for when we look at hedge fund partnership? The first is, we are not seeking to own 100% of them, because we want to make sure that the teams themselves continue to have significant skin in the game going forward. The second is, we look for a cultural fit. Are these individuals the type of people that will fit within the Carlyle culture and the Carlyle family, and are they going to have a similar investment thesis as one that we would have in terms of risk appetite and level of innovation? The third is, do their strategies meet the needs of our LPs? Are our LPs actually looking for these types of strategies in order to round out their portfolio? And also, what size are the funds? We're not looking for the largest funds, because we actually want to use our fundraising capabilities to help drive growth within these strategies.

And then I think that the last thing is we do structure the deals to create incentives going forward. So we generally take pay on the way in, and we have earn-out structures that pay for performance along the way. It also helps with retention of the deals -- deal team. So we feel very good about the way we structure these hedge fund partnerships, and we have very good leadership at the top of the segment, really, of overseeing the overall strategies.

We have our carry funds, which are Distressed and Energy Mezzanine and Mezzanine -- straight Mezzanine, and we also have our structured credit. We own about 40 CLOs -- or we own or manage 40 CLOs. We launched 2 CLOs just this year, and so that's a very active part of our business.

Looking at energy in the Real Assets space, we did spend a lot of time in 2012 reengineering and repositioning Carlyle in the energy space. The largest thing we did was take a 47.5% interest in NGP Energy Capital Management. We own essentially an equity interest in them, but we are getting 47.5% of the management fees of -- not net of expenses, but straight from the top, and we have that going forward. We also have the opportunity to increase that to 55% in the next few years. We also have an option to buy into the carry on their current fund and all future funds that we get to exercise as we see how the fund develops. And so this is an E&P business. It's a North American E&P business. It's well established. It established itself over 20 years ago. It has the exact same realized and partially realized IRR as our Corporate Private Equity business of 31%. And it is a leader in the E&P space. We believe in the energy revolution within this country, and we think this is going to be a real growth engine for us going forward.

We also took that position -- took an interest in the Vermillion hedge fund, which is really a commodities-oriented hedge fund. Again, an area of play into the energy space. We also bought a company called Cogentrix into the infrastructure fund. So it was actually a fund investment in a company called Cogentrix, which owns power plants throughout the United States. And we also launched the Energy Mezz fund, and our next area of focus is going to be in international energy.

So the last segment I'll mention is our solutions business. We did just hire someone to run this business. Jacques Chappuis, hoping I pronounced it right, is coming from Morgan Stanley. He has led a very similar business for Morgan Stanley for several years, and we are really focused on building out this part of the business because this is what the LPs are looking for. The LPs are asking us for answers. They're asking us to help them, advise them, give them access to investments around the world. We, obviously, have a lot of opportunity for them to invest into Carlyle, but they are looking for overall customized solutions. And so we want to make sure that we are creating a partnership with the LPs where they feel comfortable that they trust to us to come to them for investment advice and investment expertise, whether it's into a Carlyle fund or elsewhere in the world, but we want to be there to be their partner. And this is what the Solutions business is all about. It is leveraging our relationships and building new ones to make sure that we can provide and satisfy their needs as investors. And obviously, if we are successful in doing that overall, it will accrue to the benefit of Carlyle in the long run.

So that is a new area for us. It's an area to watch into the future, and we believe that this is a real area of growth for us.

And then looking -- just summing it all up, we have a great foundation within our business. We have $123 billion of Fee-Earning Assets Under Management. That's more than 3x we had in 2006, and we continue to see real growth opportunities going forward.

We have 650 investment professionals around the world and $44 billion to deploy over the coming years. We have a 74-person investor relations team, which is really our fundraising group, and 1,500 investors that we have relationships with where we can go and continue to find new opportunities for them.

And then lastly, we currently have $72 billion of assets into the ground -- in the ground at work for us that give us near-term realization opportunities and harvesting opportunities that will generate current income. So we believe that we are positioned for growth, but we also have a great, great story in terms of the income-generating machine that we'll accrue to the benefit of the unitholders.

So with that, I'm going to turn it over to Bill.

Question-and-Answer Session

William R. Katz - Citigroup Inc, Research Division

Great. What a stylish presentation, and chock full of great trust, so thank you for a really tremendous, best-in-class disclosure. So really appreciate that. A lot of ways to go, and probably don't have as much time to maybe cover all the questions, but the first one is, and you're really covering this slide, so I just wanted to maybe get your thoughts on -- David mentioned that, I think, in a recent conference, and I think again on the quarterly earnings, about the interest in tapping into the retail business. And so I'm wondering if maybe you could spend a minute or 2, just sort of talk about what you're doing there and where you see the greatest opportunity to grow?

Adena T. Friedman

Sure. So retail, of course, is a huge market, and it is an area -- if you look at the composition of our fund investors today, we do have a lot of high net worth individuals in our funds, and most of this comes from -- through feeder funds. So we have increased the feeder fund network that we're using to tap the high net worth individuals, and that is one of the highest growing areas of our new customers coming in the door. However, still, high net worth is a small market compared to the overall mass affluent, and we are doing a couple of things to help us position ourselves for growth into the retail -- the broader retail business. The first thing is that the Solutions head will be looking at retail as a major area of growth for us. What can we do to position us as an overall asset manager to be helpful to them, to be relevant to them? That's first, and that's a long-term goal for us. In the short run, though, we also have partnered with a firm called Central Park Group. They have registered a RIC, a registered investment corporation, and they will be allowing qualified investors to come in to Carlyle funds through that vehicle and still have 1099. Essentially, they're not going to be direct fund investors. They're coming through, essentially, a RIC vehicle that can -- that allows -- gives them access to our network of funds but doesn't give them the K-1 issue. So we do believe that, that will become a much more appealing way for mass affluent but qualified investors to invest in our funds. So we have a lot going on in that area.

William R. Katz - Citigroup Inc, Research Division

Just one tactical question on that one. How do you handle the redemption pressures of the RIC, which is an LP structure, if you will?

Adena T. Friedman

Yes. So we have certain restrictions in terms of what they can do in terms of redemptions and a certain minimum hold period that they have. But then we would allow for kind of a quarterly type of redemption, and there are certain -- there are rules around that. But obviously, we want to make sure that we also have the ability -- we have a liquidity mechanism that we're building into our funds so that we can find new buyers for people if they're looking to sell. So we have we talked about that in the past. And so they'll be able to leverage that liquidity mechanism as well in addition to using just the overall secondary market.

William R. Katz - Citigroup Inc, Research Division

Okay. Second question, we use a couple of charts, one of which I've already borrowed from you guys. The market share gain, sort of seeing that going up and to the right for the bigger players, and then your ability to cross-sell into your LP base a little bit. Could you talk a little bit about maybe both dynamics in that? What's driving that LP consolidation to the bigger players? And then secondly, what's driving the cross-selling to the LP for Carlyle? Is it some of newer products? Or maybe you could talk a little about that dynamic as well?

Adena T. Friedman

Yes. So I do think they're very combined. So if you think about why, over the last 2 years, have more -- has there been more concentration of investors into the top 5 firms; at the same time, we've built out our platform. So we have a lot more options available to them today than they would have maybe 5 years -- than we would have 5 years ago. So we can be a more what I call, "full service" alternative firm for them. So that, obviously, plays into it. If we are able to offer them more options, then they can put more capital behind us. I think the second is coming out of the credit crisis, their need for due diligence is much greater than it used to be. So they are really concentrating their interest in the well-established players, the sustainable businesses, the ones that have a recognized and repeatable track record. And that is certainly -- certainly, we believe that we're the top player in that bigger -- in this particular metric. So that is definitely driving more investors our way. And the diligence -- the amount of diligence they do on firms today was much greater than it was before. And then the last thing is a lot of these LPs have very small staff, and they have a lot of assets to manage. And so coming out of the 2006 to 2008 time frame, they established relationships with potentially hundreds of GPs, and they're now realizing that the administrative burden associated with that is very high. So how do they concentrate their interest in fewer GPs but still get the breath and depth of diversification? And I think that we provide that solution.

William R. Katz - Citigroup Inc, Research Division

I'd ask you more technical questions coming off earnings. Your company had provided some disclosure, very nicely and very helpfully, in terms of the quarterly returns by segment, okay? And I think one of the reasons why the stock gave back a little bit on the other side of earnings was a bit of a disappointment on revenues relative to that disclosure, if you will. So the question I have is, if you look at the fourth quarter call, I think there's some discretionary -- discretion around management's ability to realize carry interest through the P&L. And is possibly deferring, and even if in Title II, at least that was sort of our undisclosed discussion. Can you spend another minute just elaborating on your practice to better help investors to try and get their hands around carry assumptions in the model?

Adena T. Friedman

Sure. So I think that one of the things that we'd discussed on the call was when do we take carry? So funds -- we technically have the capability to carry as soon as the fund exceeds, let's say, their preferred return, which is, generally speaking, 8% net IRR. So if you look at our fund tables and you look the fund results, if you look at a fund that's at 8% net IRR, you'd say, "Well, gosh, on the next exit, they have the capability to take carry." And that's true, technically. But we also have to manage the fact that we have callback risk. So if we take carry today on a fund that is early in its life cycle and it then goes through a downturn or basically the next deal doesn't perform as well as we think and it dips below 8%, we have to give that carry back. And we really don't want to be in a mode of giving that carry back at the end of the fund's life. So we tend to accrue a fair amount of carry before we choose to take it so that we can manage that callback risk, and that particularly was discussed regarding Carlyle Partners V, which is our largest fund, our latest U.S. buyout fund, has been in a carry position for over a year. We have been exiting, but we also are still investing. So we did a lot of investments into that fund in the latter half of last year, and so therefore, we chose not to take carry on some exits we did in the fourth quarter. And people say, "Well, gosh, how discretionary is it?" It is -- we disclose it as quite discretionary, but it's actually relatively scientific for us. We look at all of the realized deals, we look at all of the gains, we look at all the remaining portfolio, and we model out what's possible. And based on that modeling, we determine how much carry could we have taken that we haven't taken, so what I would call as a carry reserve. And on the current exit, do we have a gain? Is it an exit instead of a recap? And how does the rest of the portfolio look in terms of making sure we don't generate a hole later on in the life of the fund? And given the fact that we've done a lot of new investments in the average life of the -- life of the investments in CP V is less than 2 years, we felt that it was a little early for us to take carry on that fund. But as we come into 2013, the investments are doing well. The fund continues to have very strong performance, and we're comfortable that we can take carry this year.

William R. Katz - Citigroup Inc, Research Division

Okay. Last question. We're running up against time a little bit. Just the survey question about Publicly Traded Partnership tax -- carry tax. A little bit worse outcome than maybe the early ones. I don't know what happened in the 15 minutes in between the meetings. But let's just play devil's advocate for a second. Let's just say, first of all, I'd be curious of, I think, Mr. Rubenstein had said assets are relatively benign versus prior discussion on carry. So maybe an update on what you're hearing, since -- particularly since you're down at D.C., maybe you got your ear to the ground a little closer than others. And maybe let's play devil's advocate for a second. Let's just say they do go out to the Publicly Traded Partnership level, what is the strategic response to that?

Adena T. Friedman

Sure. So the first thing is, what's the real risk? And I think that we have not heard any risk around the Publicly Traded Partnership structure. So I would say that. So the first thing is that, to the extent that there's unknown that you hear about and you read about, I think it's really to just the Carried Interest Taxation risk -- taxation rate. And frankly, the relative noise around that is a lot more muted today than it was a year ago. It kind of disappeared altogether after the fiscal cliff got resolved, and it's starting to pop up again during the budget discussions. But the big things to remembers are, number one, a change in the carried interest taxation will not change our financial performance. So Carlyle's financials will not change at all. It is the tax rate at which the unitholders, yourselves, as well as the internal unitholders receive on the distributions that they receive from the carried interest that we generate -- that we distribute to you. So the extent that we have a part of our distribution is through carried interest, then the tax rate on that would go from 23% to as high as 39%. But the real issue is the fact that this just doesn't make a lot of money for the government. So we've done this work -- now that the tax, the interest rate is up at 23%, the delta is smaller. The amount of carried interest that comes out of our industry and the real estate industry, by the way, which would be equally impacted by this, is smaller. And if we look at it, it's less than -- it's far less, we think, than $10 billion of income to the government over a long period of time, over about 10 years. So it's just not a lot of money. So is it worth fighting about? And it is -- we've noticed that there are some real practical people in Congress that do understand that and will be making sure that they don't inadvertently create an issue within our industry or the real estate industry by addressing -- by changing the tax rate. But in terms of the PPP structure, we don't have any -- we don't see risk there, I would just say that right now. In terms of a worst-case scenario where it to suddenly become an issue, it would essentially result in an incentive, I would say, for firms to look at becoming a corporate. Because once you are going through that, you might as well go through and become a corporate, and therefore, provide other benefits to the unitholders.

William R. Katz - Citigroup Inc, Research Division

Great. We're way over time. I had to ask one last question, because I get it all the time and it's a great discussion point. There's a concern -- a latent concern that if carry taxation were to go up, and given the high inside ownership in many of these firms, not only your own, but in the industry at large, that compensation structures might change as an offset to a lower net yield. Could you address what the possibility might be at Carlyle?

Adena T. Friedman

Yes. We don't anticipate that as being an outcome of having higher taxes. When our founders went into this business, the carried interest tax rate was, I think, 30%. So -- and they were very happy with their income. And I think that, in terms of looking at it and going into the future, if our partners and our employees have to pay a slightly higher tax rate on the gains that they generate from their funds, I think that they'll be happy to accept that income in a slightly lower rate. We do not see a need to change our comp structure as a result of that.

William R. Katz - Citigroup Inc, Research Division

I agree. Well, we're way over time. Thank you.

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