The Carlyle Group's Management Hosts Tax Structure Conference (Transcript)

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The Carlyle Group (NASDAQ:CG)

Tax Structure Conference

April 09, 2013 10:00 am ET


Daniel F. Harris - Managing Director and Head of Public Market Investor Relations

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

Lauren Dillard - Managing Director

Donald D'Anna


Noah Gunn

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

M. Patrick Davitt - Autonomous Research LLP

Matthew Kelley - Morgan Stanley, Research Division


Good day, ladies and gentlemen, and welcome to the Carlyle Group Tax Structure Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Daniel Harris, Head of Investor Relations. You may begin.

Daniel F. Harris

Thanks, Ashley. Good morning, and thanks for joining our call this morning. I'm Dan Harris. I'm Head of Public Market and Investor Relations at Carlyle. With me on the call today are our Chief Operating -- Chief Financial Officer, Adena Friedman; Head of Tax and Equity Management, Lauren Dillard; and Principal on our Tax Group, Don D'Anna.

The genesis of this call is a reflection of multiple inquiries and requests we've received to provide more information on how taxes are calculated on our income, as well as taxes impacting unitholders. We felt a public forum to describe our structure and tax process, along with an opportunity to answer questions specifically on tax matters, would be a useful topic for investors and analysts. Our primary goal today is to provide additional detail to help you accurately apply difficult tax concepts to estimate after-tax earnings

Today's call will begin with a roughly 30-minute presentation and then we'll open the calls up for questions and answers. The presentation, which we're going to discuss today, is available on the Investor Relations portion of our website. And if you can't find it, please contact Investor Relations at Carlyle and we will send you a copy. This call is being webcast and a replay will be available on our website, immediately following the conclusion of today's call.

We will refer to certain non-GAAP financial measures in today's remarks, including Distributable Earnings and Economic Net Income. These measures should not considered in isolation from or as a substitute for measures prepared in accordance with Generally Accepted Accounting Principles.

In addition, please note that any forward-looking statements provided today do not guarantee future performance, and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our annual report on Form 10-K as filed with the SEC on March 14, and such factors may be updated from time to time in our SEC filings. Carlyle assumes no obligation to update any forward-looking statements.

With that, let me turn it over to our Chief Financial Officer, Adena Friedman.

Adena T. Friedman

Thanks, Dan. Thank you all very much for joining today, and we're hoping that this is going to be a productive education session on the taxes that we pay as a firm. We're not here to spend time talking about the tax laws or changes in those, but yet, we're going to look at the tax laws that exist today and understand how that then flows through our organization.

So there are 3 topics that we're going to cover. One is just an overview of our legal structure because the legal structure itself is what determines the taxes that we pay. The second is what are those types of taxes that we pay as an organization. And then the third, we'll spend a brief discussion on how we calculate taxes on Economic Net Income.

If we turn to the next Slide, our focus today is on the taxes that we pay in connection with Distributable Earnings. And the reason for that is because Distributable Earnings is a good proxy for cash earnings associated with Carlyle and therefore, the taxes that we calculate specifically to Distributable Earnings, are the cash taxes that we pay, the current cash taxes that we pay as an organization. So we really want to focus the discussion today on that.

We will touch on the effective tax rate that we calculate associated with Economic Net Income. We won't be focusing on the GAAP of tax rate that we calculate, although it is very similar to the way that we calculate taxes for Economic Net Income. But if you have any questions as we go through, we're happy to answer questions on other elements, but we really are here to focus on the tax laws as they exist today.

If we start by looking at just Carlyle's tax responsibility -- cash tax responsibilities, our goal in the structure that we have is to keep the tax issues as simple as possible for the unitholders. And obviously, we have always have strict focus on compliance. We have really spent a lot of time and really, Lauren and Don in particular, in structuring our overall entity, corporate and partnership entities, to make sure that we have simple tax structure for the unitholders. And that is, I think, something that distinguishes us. But I also think it's important for you to understand then how we have done that and what kind of income flows through the different structures.

So there are many variables that all affect both the timing and the amount of the cash tax payments that we make. First of all, we do pay some taxes at the statutory level -- at the company level, so they're statutory taxes, things associated with being a multinational organization, having offices in multiple locations makes it so that we have tax obligations in foreign jurisdictions and we have tax obligations in specific states. And that is something that we pay associated with all of the income that we generate.

In terms of the -- because we're a flow-through partnership though, so we are structured as a publicly traded partnership, I'll go through that in more detail. But as a result of that, we do have certain income that flows up through our partnership and is provided to the unitholders pretax and then the tax is then subjected at the unitholder level. We have certain income that will -- taxable income will vary from quarter-to-quarter and year-to-year because of the fact that our cash earnings are dependent upon having certain exit events or cash-generating events within our funds. And so how much we pay is determined obviously in how much cash we generate up through our partnership structure, and that's -- and up through our corporate structures. So that's going to be important to understand.

The incentive fees from our hedged funds tend to be taxable in the fourth quarter because, of course, that's when we realize our incentive income for the year and therefore we -- and we have a tax event that occurs in the fourth quarter associated with that income. And then lastly, the taxation, and this is something Lauren is going to go into a lot of detail on, the taxation is dependent upon where the income comes from. So the income will flow up through certain segments and therefore, through certain silos. And she's going to walk you through that in a lot of detail so that you can -- it really will hopefully help you with your modeling. The goal is to make it so that investors and analysts can effectively and efficiently calculate and estimate taxes associated -- cash taxes associated with our business.

So we're going to start with a structure chart. Hopefully, a lot of you have seen this before, but it's not necessarily the most intuitive thing. So I'm going to walk you through it a little bit. Carlyle is structured as a publicly traded partnership. We've been a partnership for over 25 years, and as a public company, we chose to maintain that partnership structure just as our peers did. Therefore, at the top of the chart, you'll see Carlyle Group LP, which is our publicly traded partnership. The income associated with our public unit flows up through that publicly traded partnership before being distributed to the public unitholders. Currently, 14% of our units are public units, with the remaining 86% as private units, primarily owned by inside partners. Therefore, 14% of our income flows to that publicly traded partnership. And that's going to be important, as Don is going to walk you through an example later.

Now, as we examine this structure further, you can see that there are 3 entities or what we call 3 silos that sit under The Carlyle Group LP. Those silos will be the focus of our discussion today. We'll go through, in detail, the nature of the income that flows for each of those silos in a few minutes, but I'd like to start with a general overview of the silo structure. The first silo or silo 1 is structured as a corporate entity and therefore, any income that flows up through there, is therefore subject to U.S. federal and state taxes.

The second silo is a partnership, of course, another triangle. So it's structured as a partnership and therefore, all income that flows up through that silo goes up to the Carlyle Group LP on a pretax basis and has been subject to tax at the unitholder level.

And then the third silo is essentially a foreign corporate entity. So various specific foreign earnings that we generate will flow up through that corporate entity and will be subject to foreign corporate taxes and statutory taxes, but is not taxable in the United States. And so that's also important to understand. So those are the 3 silos.

So going to the next Slide, why did we do it this way? Well, it is a tax-efficient structure for the unitholders, but the reason we have the corporate blockers, because that's the most important, is why don't we have just everything flow up as partnership income is really the big question. We have corporate blockers in place really for 2 reasons. One is because there's certain income that doesn't qualify for a partnership structure. So we have to make sure that income is flowing up through a corporate entity on the way out the door to the partnership. And that income is essentially, kind of think about it as normal fee income. That and other income that Lauren will go through. But really, there is certain income that's what we call non-qualifying income for a partnership and that income needs to go through a corporate blocker.

The second reason for us to do this is to simplify the taxes that the public unitholders have to pay in connection with owning our units. And that really will drive a lot of -- some of the decisions we made in terms of what income is flowing up through the silo 1. We did a great job, I have to say, and I'll really turn it over to Lauren and Don on this, that we were able to get our K-1s out to all of our unitholders on March 26 and that was -- we opened the portal for all of our unitholders to get them and then we sent them out on March 29. So they're getting their K-1s in a very reasonable period of time. Part of the reason for our ability to do that is because of the income that's flowing up through the corporate blocker. We basically shield our public unitholders -- we at least attempt to shield our public unitholders from state tax obligations, from effectively connected income so that they have a very simple K-1 that they have to accept as a partner in our partnership.

So I'm going to turn it over to Lauren, and she's going to start to walk through what income flows up through each of the silos.

Lauren Dillard

Thank you, Adena. So as Adena mentioned, in summarizing our key objectives, our business mandate for simplified tax reporting and the general structure in order to qualify the PTP, where the income lives in our silos is very important. And as you start thinking about the company's tax obligations, frankly, where we realize taxable income, whether it's in a segment, in a fund and sometimes a specific investment in a fund, greatly impacts the corporate taxes that we might have to pay. So if I had one takeaway from this slide before I get into all the details, it would be just that. Keeping in mind where the segments are within our structure and even sometimes investments within each segment, realizing or generating our taxable income really drives our tax obligations. Quarter-over-quarter, if we have a realization from an exit in silo 1 or silo 2, our tax profile at the company level will be very, very different.

So what we've outlined on this slide is really our segments, and where currently the assets within those segments reside in our corporate structure. And I would pause and say, as I have to, this is our current fund platform and our current segments today. Future fund strategies change and if we change a strategy in a new fund, it could very well be owned by a different silo. So what we're really covering today is the current state of our funds. Again, with a backdrop that future ownership could look different, but we would evaluate where the future strategy should be with the backdrop of qualifying as a PTP and providing this simple tax reporting.

So if I start with the Corporate Private Equity segment, we do have 2 key types of earnings, one being our management fee earnings; and the other being our performance fees, or our realized carried interest. Management fees, as Adena mentioned, are in silo 1. This is actually within Corporate Private Equity annual fee, as in real assets and GMS. The reason for this is fairly simple. Management fees are not qualifying income for PTP purposes, so you'll note that you'll see fee incomes actually across all 3 segments.

So let's spend a little time on the carried interest within CPE. Most of our assets within our Corporate Private Equity fund today are in corporate form, meaning we hold corporate stock. Generally speaking, these funds, these investments in these funds are held in our second silo. This means that the income from disposition to these assets or the realized taxable income retains the underlying character and flows directly through to our unitholders without ,a company-level tax. However, I want to stay in the CPE segment. You'll note that we do hold some CPE assets in silo 1. Why is that? Well, some of our CPE funds are actually investing in partnerships. So the underlying investment itself is actually a partnership, which means it's generating flow-through income. We have a few of these in financial services like Avalon, a few in our U.S. buyout funds, Landmark, a few in our equity opportunities fund, Service King, all within this segment.

So why is it in silo 1? Really for the same governing principles that we already covered. In many cases, these investments generate income that wouldn't be qualifying PTP income. That's the first reason. They likely have state filings. And in some cases, they have effectively connected income. So we go back to kind of our core principles in managing our PTP status and this business mandate for the simplified tax reporting to our unitholders. So all pass-through investments are held in silo 1. This does mean that there's a corporate level tax on the corresponding realized income from these investments. There's also -- the corporate entity handles the state filing obligations.

If you move to the real asset column, which is the next platform, the next segment, you'll actually notice very consistent structuring. Again, the management fee earnings are in silo 1 and many of our investments within this segment are held via partnerships or pass-through investments. So they are all in subsidiaries of silo 1 as well. Again, same concept, managing PTP status, reducing state obligations. As with the CPE segment though, we do have some corporate investments within the funds in this segment, such as energy or our infrastructure fund that are held in a corporate form, Cube Canner[ph], I could mention lots of corporate investments.

So you will note again, the corporate form investments are in silo 2. Again, passing directly up to our unitholders. Staying in the real asset platform, we do have 2 fund families in Asia real estate and Europe real estate that are entirely foreign investments. So these platforms generate entirely foreign income and they are held in silo 3. As Adena mentioned, there's a corporate entity in silo 3, but that corporate entity is not required to pay U.S. tax.

So moving into the GMS platform, pretty consistent here. Currently, virtually, actually all of the existing funds within this segment are in silo 1. I would definitely note in the context of this segment, as the strategies change here within the segments and even as we have new funds within the same fund family, we very well could evaluate, putting future funds, into silo 2. But currently, virtually all of the earnings are in silo 1. So what this means is as you think about generating income from one of our GMS carry funds or our hedge funds, it would be subject to the corporate level tax for the public structure.

Lastly, we have our solutions business, and currently, this our investment in AlpInvest which was an acquisition with foreign activity. You'll note the fees in the carry are held in silo 3 with the foreign operations. As Adena mentioned, we'll get into statutory taxes. There could be statutory, and our statutory tax is paid as part of the platform. But again, the corporate entity within the public structure does not actually have U.S. tax obligations. So as I move away from this slide, I just want to make sure that the key takeaway here, as you're thinking about our company tax obligations, is that which investments within each segment generates realized income in any quarter can and will impact our tax obligation. So as you think about our future realized income, keep that in mind as you think about our corresponding tax obligation at our company level.

Moving into Slide 9, this is actually a very high-level discussion around the expected income in the hands of the unitholders. So as with any partnership, earnings are taxed in the hands of the partners, which in our case are our common unitholders, and it's based on their jurisdiction and their entity type and the tax status of those entities as partners. But what we're actually reporting to them, we're reporting on our publicly traded partnership, Schedule K-1s, as Adena mentioned. So we have some interest income that's reported on the shareholder loan, actually, that the publicly-traded partnership has. And then to the extent we make distributions from our corporate entity, to the extent we have earnings, that's reported as dividends. So there's definitely dividends on our reporting.

If you move into silo 2, all of the income, as mentioned, flows directly through to all of our unitholders and it retains the underlying character. So if we have a underlying investment in one of our funds held in our Corporate Private Equity funds in silo 2, that pays a dividend and that is a carry-generating fund and we're able to take an allocation of that dividend, then that dividend will pass all the way up and be reported out to our unitholders. The same would be if we dispose of a capital asset, some of our capital stock. We would recognize the capital gain, again, if there was a carried fund, we would allocate the capital gain all the way out. It would be reported on the Schedule K-1 to the unitholders.

And lastly, in silo 3, for the most part, any proceeds that we pay out of that corporate entity would be in the form of a non-qualified dividend. There's some exceptions, but that's pretty much the reporting there. So again, all of these income items are reported on the partnership tax return at the publicly-traded partnership and reported to our unitholders. As Adena mentioned, we reported our Schedule K-1s with the 2012 information a few weeks ago and you can access those on our public website. So moving away from the unitholders and back quickly to Slide 11, which is the type of taxes we pay, we've pretty much covered that, but just to summarize, we do have 2 primary types of income taxes, and the first, Adena mentioned, are our statutory taxes. These are the taxes due in the locations of our operating platforms and again, consistent with what you'd see in any multinational operation. And again, there are states here where we have offices and activity, New York, D.C., 2 examples.

So we refer to the all of these entity-level taxes as statutory taxes. And these are applied to the activities in the location. The second type of tax is one I've already referred to quite a bit, which is the corporate level tax, where the public share of the earnings in silo 1. Here, it's a corporate tax rate. So you can see in the 38%, we've included a federal rate, plus a blended state rate for our state activity. I should note that the state rate could change as we have different activity in different states in the quarter, but it wouldn't move much. And I think it's important, as we move into an example to pause here and make sure that we go back to that original org chart on Page 6 or 7 and note that the corporate tax is only applied to the earnings earned by the public structure where there is a corporate entity.

So if the public or the publicly-traded partnership owns 14% of our units outstanding, then 14% of our earnings or our realized taxable income would flow to the corporate entity and be subject to the tax. If you go back to Slide 6 or 7, as Adena mentioned, the remaining is actually allocated directly to our unitholders. They own directly below the corporate level tax. Of course, that means that they have to remit their taxes directly and it means they have, of course, very complicated tax filings, including all the state filings.

So to summarize it kind of as simply as you can, as you think through estimating the corporate taxes, you would take the estimated taxable income in silo 1. You would multiply that times the percentage of the units held by the public, in our case, 14% currently, times an estimated corporate tax rate.

With that, I'm going to turn it over to Don, who's actually going through a very specific example of this.

Donald D'Anna

Thank you, Lauren. So on Slide 12, I'll walk through an example of cash taxes based on a hypothetical $200 million of pretax Distributable Earnings. As you can see on the top of the slide, we have broken out the $200 million of Distributable Earnings across our 3 silos, the silo 1, 2 and 3 each show a different amount of Distributable Earnings. In silo 1, you'll see we have $50 million of Distributable Earnings, multiplied by a 20% statutory tax rate to arrive at statutory taxes of $10 million.

The 20% rate is actually a blended foreign state and local rate and it varies by activity from period to period. In silo 3, you'll see we have $10 million of distributable earnings multiplied by a statutory rate of 25%, giving us a statutory tax of $3 million. The statutory taxes in silo 2 are not relevant for this discussion. So in total, we have statutory taxes of $10 million in silo 1 and $3 million in silo 3, so $13 million across the firm.

The second part of the calculation, as Lauren mentioned earlier, is a calculation of the corporate tax amount on the Distributable Earnings, and this only applies to silo 1. The corporate taxes are not relevant in silos 2 or 3. So in silo 1, we start with $50 million of Distributable Earnings, but then we multiply that by the 14% public ownership percentage to arrive at $7 million of pretax Distributable Earnings allocable to the public. The $7 million is further reduced by $2 million of interest expense deductions that arise inside the silo 1 corporate blocker to arrive at taxable income of $5 million inside the blocker.

We have an effective tax rate of 38% for federal and state purposes that's applied to the blocker, giving us corporate taxes of $2 million in silo 1 that's attributable to the public. So when we think about how to calculate aftertax Distributable Earnings allocable to the public, there are 2 steps for this as well, and this is on the bottom half of Slide 12.

So we start with $200 million of pretax Distributable Earnings, we subtract $13 million of overall statutory taxes that we calculated above, giving us $187 million. We multiply this by the public ownership percentage of 14%. It gives us $26 million. And then we subtract from the $26 million the $2 million of corporate taxes that we calculated above. This gives us $24 million of aftertax Distributable Earnings that are allocable to the public. And if we take this $24 million and spread it across the $43 million, approximately, of public units that are outstanding, we get $0.56 per unit of aftertax Distributable Earnings.

So with that as a base case, we can turn to Slide 13 and think about how would we handle an additional $50 million of incremental carry income if it were to arise in any of the 3 silos that we have. So the base case is the top row, as we just walked

through, showing $2 million of the public share of corporate taxes in total. The row right beneath it shows an additional $50 million of silo 1 income, and an example of this would be an additional $50 million of incentive fees in our hedge funds that might arise in silo 1. If we take the $50 million and multiply by the public share of 14%, we get an incremental carry income allocable to the public of $7 million. This would flow up to our silo 1 corporate blocker and be taxed at 38%, which would generate additional public corporate tax of $3 million. And you can see how in the base case we have corporate taxes of $2 million, an additional $50 million of carry income in silo 1 would increase that from $2 million to $5 million. This would not happen in silos 2 or 3, however, because the additional $50 million of carry income would not go to a corporate blocker that's subject to tax.

So lastly, we're going to cover the effective tax rate on Economic Net Income and just spend a brief amount of time on this. Economic Net Income is a measurement of the firm's fee and carry activity. This is an industry metric, it's not U.S. GAAP. However, we use a methodology that's very similar to U.S. GAAP in calculating the tax provision under an Economic Net Income basis. One difference from U.S. GAAP is the ENI approach assumes that the public owns 100% of the firm. So any Economic Net Income that we're generating in silo 1 will flow up to our corporate blocker and all of that will be subject to tax in the corporate blocker when we're calculating the tax provision from an ENI perspective. For this reason, ENI taxes will often be higher than the U.S. GAAP taxes.

Another difference between ENI and U.S. GAAP or Distributable Earnings, I should say, is under an ENI basis, both current and deferred taxes are considered. So ENI is more of an accrual concept, while tax expense calculated in our Distributable Earnings are more of a cash basis concept. It's therefore possible for taxes on ENI to be negative and show a actual tax benefit rather than a tax provision or a tax expense. This would arise if, for example, we have negative ENI in a particular period and for that reason, it's a more volatile metric than taxes under Distributable Earnings.

And with that, I'll turn it back to Adena.

Adena T. Friedman

Thanks, Don. So we hope that this has provided an education for you to help you understand how to estimate and model out the cash taxes that we owe as an organization. We also want to make sure that you understand how it flows through Distributable Earnings, to take Distributable Earnings from a pretax basis to a posttax basis per unit and then therefore, that would deform the basis on which we calculate the distributions that we make to our unitholders. If you have further questions -- well, first of all, we're going to open it up for questions, so we do hope that you have some questions on the call today. But once the call is over, if you continue to have questions or you want further clarification, please don't hesitate to give Dan Harris a call and he can get any of us on the phone to help. And then the last thing we just thought we'd let you all know about is that we will be announcing our Q1 earnings on May 9, just so you can start to put that on the calendar. So with that, we'll go ahead and open it up to questions.

Question-and-Answer Session


[Operator Instructions] Our first question is from Michael Carrier of Bank of America.

Noah Gunn

This is actually Noah Gunn, filling in for Mike this morning. I just had a question. The example you guys laid out looks pretty consistent with what you had in your 4Q release. Just one slight difference that I notice is in the 4Q release, on the estimated current corporate income tax line, you also had a TRA mention there. So just wondering how that fits into the picture.

Adena T. Friedman

Sure, sure. So let me give a quick background on the TRA, and then I'm going to look at Lauren and Don and make sure that I -- they might want to add some details. Okay, so the TRA, when a private unitholder exchanges their units to public units, so if one of -- if we, at some point in the future, enable the partners to exchange units into public unit, it actually creates a taxable event to the unitholder because the tax basis of their units versus the price at which they exchange them creates a taxable event. But it also creates amortization within Carlyle, and that creates a tax deduction for Carlyle. So what the TRA, the tax receivable agreement, what it does is basically it's an agreement to share a portion of those tax deductions with the unitholder who's exchanging, and then to maintain a portion of those tax benefits within Carlyle. And so the reason we put that all in one line is because the amount of tax that we owe is the same. It's just a matter of are we paying it as a tax or are we paying it as part of the tax receivable agreement, but the total amount will never be higher than what our overall tax obligation is within that period. And, so we'll always write it on the same line because it's just a matter of geography, it's where we're paying it as opposed to how much it is. So I'm going -- I think that's a good brief explanation, but if you have any follow-up questions, happy to answer them.

Noah Gunn

Sure. No, I think that answers the question. Just another follow-up, when Lauren kind of highlighted, I think, some specific investments in CPE that fell under silo 1, and I know in the fourth quarter, you guys had a notable exit in Metaldyne, that was in the GMS carry fund, I think. So I guess just looking forward, are there any other investments, I guess, in real assets or GMS that you would flag as being larger that we should just take note of when there are exit events?

Adena T. Friedman

Well, I mean, in particular, with GMS, I think you can assume that all of the carry that's coming off of GMS or any exits coming out of the GMS carry funds would be considered silo 1, and so it's all taxable. So to the extent that you're trying to model out the GMS segment and just doing a general GMS segment modeling exercise and you say, I think there's going to be this much carry coming out, then you should assume there's a corporate tax applied to that carry. But we're not here to predict kind of future exits on this particular call, specific exits. With real assets, I think you can kind of assume that the majority of the assets we hold within real assets are pass-through structures. But particularly in energy, there are some corporates. And so -- and most of those corporates are sold -- most of them, not all of them. But most of them are sold as part of likely -- we basically IPO-ed them and then do secondaries and those are generally announced. And in that case, to the extent you've seen announce secondary in a corporate asset that's held in one of our Energy Funds, the Riverstone funds, then you should assume that there -- that's pass-through income to us. If you see other assets or if you're just generally modeling out real estate or other energy carry, you can assume that that's going to be taxable.


Our next question is from Robert Lee of KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Actually, 2 questions. The first one, to the extent you can, if there's any way you can maybe compare your tax structure to the extent you know how some of your peers are structured, and maybe compare and contrast it? And then I had one follow-up.

Lauren Dillard

This is Lauren. I can't speak to our peers, but I do know that we did make the business decision, our management made the business decision to both ensure we qualified as a PTP and so limit our risk there, but also ensure that had simplified reporting. That was a mandate that we basically structured for, so that we could both issue very timely K-1s, but also, again, keep the tax reporting itself to our unitholders in a simple form. So that drives a lot of the, for instance, all pass-through income being in silo 1. There very well, frankly, in all honesty, could be income in silo 1 that might be qualifying. But if it, again, generated these state requirements or had some other characteristic, it might have been the debt in silo 1 due to our business mandate. So that drove a lot of our structuring.

Adena T. Friedman

Yes. And Rob, I think that we can't say that we all have the same exact -- I don't think we all have the same decision pattern, right? I don't think we all made the same exact decisions as to how to distinguish certain income. We made a conscious choice to -- and it was really purely for the benefit of the unitholder, was to make sure that we could get the K-1s out early. And so I think that for our first year being a public company, we're frankly really proud of the fact that we were able to get it out before the end of March. And the second thing is to make it simple. And that was something that we had said when we IPO-ed, that we really would work hard to make the tax obligations on the public unitholders very simple. That helps a lot of the traditional mutual funds own these units. And we hope that it makes it so that there's a broader universe of firms and mutual funds that can own these units because of the fact that the we block that pass-through income. So I just -- I'd be -- we block certain income. I think that I can't sit there and say that all of our public peers do it exactly the same way, but I have a feeling they have similar goals. It's just a matter of how they've executed could be different.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, that's helpful. And one just quick question, just kind of curious. I guess the interest expense in silo 1, I guess at the corporate blocker, I guess I would have -- can you maybe talk about that a little bit? Just I would have thought that most of the corporate borrowing or the Carlyle borrowings would be down in Carlyle Holdings as opposed to up in the corporate blocker level. So why would there be a kind of interest deductions there?

Donald D'Anna

This is Don. That's actually a loan between the public entity. So it's the PTP loaning money to the silo 1 blocker. So it's not third-party debt. It's really debt within our structure.

Adena T. Friedman

So you're absolutely right, Rob, that the bond we've done and the term loans that we have sits in subsidiaries underneath the Carlyle Holdings unit, so during that dotted box. But then within our structure, we had some inter-silo loans. In particular, there's a loan from the PTP to the corporate, right? And that generates interest income. I mean, interest expense, sorry.


Our next question is from Patrick Davitt of Autonomous Research.

M. Patrick Davitt - Autonomous Research LLP

I just have a quick clarification that this example on Page 12. It's essentially how things are taxed before I paid my personal taxes, correct? So I'm ultimately still going to have to pay capital gains tax on the silo 2 income of $20 million.

Lauren Dillard

Yes, you're exactly right. This does not take into effect the taxes paid by the unitholders, depending on their tax status and jurisdiction. You're exactly right.

Adena T. Friedman

This only reflects what we show in our financial statements as a firm.


Our next question is from Matt Kelley of Morgan Stanley.

Matthew Kelley - Morgan Stanley, Research Division

A couple of questions. In terms of the CPE fund carry and the energy and infrastructure fund carry that hit silo 1, I was just hoping, can you guys give a general perspective on -- or a range on how much of the carry income has been in this in silo 1 in the past, so we can kind of ballpark that for go-forward purposes?

Adena T. Friedman

Okay. So in 2012, we do not have any CPE fund carry that was going through silo 1. So that was all considered silo 2. For the energy and infrastructure fund carry, I would say the vast majority of it frankly flowed through silo 1, although there were -- actually, there was one -- there are a couple of big exits that were in corporate entities like Kinder or I think that -- I don't know if they had any exits in Cobalt last year, but that's a public company. And so that would have been in silo 2. So if you think about the companies that the Energy Funds have taken public, you can assume that there's probably more of that going through silo 2. And if you look at the private exits, that's showing through silo 1.

Matthew Kelley - Morgan Stanley, Research Division

Okay, great. My second question then is, and you've touched on this briefly, when ENI is negative, can you walk us through how that kind of -- if there's a negative tax accrual, how that kind of accrual works its way through and how it can be used for future tax receipts, if you will. Like is it all accrued or is there any of it that's kind of lost to negative income?

Donald D'Anna

None of it will be lost. An example would be within silo 1, we had unrealized performance fees that dropped. So we had a pullback in the values of certain performance fees on the hedge funds, for example, and there was a reduction over any particular quarter. So that would show up as negative Economic Net Income in silo 1, and that negative amount would flow up into the silo 1 blocker and be tax effected at 38%, which would show up as a tax benefit. So it would be a tax benefit on negative ENI. That's how that would present itself.

Adena T. Friedman

It's purely accrual and there's nothing -- it doesn't really relate to the taxes they actually pay. It's in accrual basis.

Matthew Kelley - Morgan Stanley, Research Division

Okay. One final one for me is just -- just conceptually, why is GMS carry all in silo 1? Are there any exceptions that could hit silo 2?

Adena T. Friedman

That's a good question and it goes into the evaluation of future fund strategies. Currently, when we were going through the structuring at the time of our IPO, it was deemed that we had some risk for non-qualifying income due to some visibility in some of those funds. But that is squarely something that we would be very carefully evaluating as future funds come online and start to invest. And so the answer is yes, we would be definitely evaluating the potential to put funds in silo 2.


[Operator Instructions] I'm not showing any further questions in the queue. I'd like to turn the call back over to management for any further remarks.

Adena T. Friedman

Great. Well, thank you, all, very much for joining the call today. We hope this was helpful. And again, feel free to reach out to Dan if you have any follow-up questions after this call and we do appreciate your time. Thanks very much.

Donald D'Anna

Thank you.


Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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