Carlyle Group's (CG) CEO David Rubenstein on Q1 2016 Results - Earnings Call Transcript

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The Carlyle Group (NASDAQ:CG)

Q1 2016 Earnings Conference Call

April 27, 2016 08:30 AM ET

Executives

Daniel Harris - Head of IR

David Rubenstein - Co-CEO

Bill Conway - Co-CEO

Curtis Buser - CFO

Analysts

Ken Worthington - JPMorgan

Michael Cyprys - Morgan Stanley

Patrick Davitt - Autonomous

Craig Siegenthaler - Credit Suisse

Michael Kim - Sandler O'Neil

Michael Carrier - Bank of America Merrill Lynch

Gerald E. O'Hara - Jefferies

Ann Dai - KBW

Operator

Good day, ladies and gentlemen and welcome to The Carlyle Group First Quarter 2016 Earnings Call.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference, Mr. Daniel Harris, Head of Investor Relations. Sir, you may begin.

Daniel Harris

Thank you, Lauren. Good morning and welcome to Carlyle’s first quarter 2016 earnings call. In the room with me on the call today are our Co-Chief Executive Officers, David Rubenstein and Bill Conway; and our Chief Financial Officer, Curt Buser.

Earlier this morning, we issued a press release and detailed earnings presentation with our first quarter results, a copy of which is available on the Investor Relations portion of our website. Following our remarks, we will hold a question-and-answer session for analysts and institutional investors. To ensure participation by all those on the call, please limit yourself to one question and return to the queue for any follow-up. Please contact Investor Relations following this call with additional questions. This call is being webcast and a replay will be available on our website.

We will refer to certain non-GAAP financial measures during today’s call. These measures should not be considered in isolation from or as a substitute for, measures prepared in accordance with Generally Accepted Accounting Principles. We have provided reconciliation of these measures to GAAP in our earnings release.

Any forward-looking statements made today do not guarantee future performance and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the Risk Factors section of our Annual Report on Form 10-K, that could cause actual results to differ materially from those indicated. Carlyle assumes no obligation to update any forward-looking statements at any time.

And with that, let me turn it over to our Co-Chief Executive Officer, David Rubenstein.

David Rubenstein

Thank you, Dan. Good morning and thank you for joining our call today. Despite the challenging market backdrop in the first quarter we deployed a significant amount of capital, produced a reasonable amount of distributable earnings and positioned ourselves for strong performance in the coming quarters. In fact our performance and outlook today remains largely consistent with our comments from last quarter with one notable change.

In last quarter’s call we highlighted uncertainty in financial markets, prospects for volatility and risk tilted to the downside. Today due in large part to recent pronouncements from the Federal Reserve equity, credit and commodity markets have strengthened and the risk is instead far more balanced.

Turning now to the numbers, we continue to invest actively in the first quarter deploying a total of $3.9 billion. This brings our total deployed capital to almost $8 billion in the last six months and over $11 billion in the last 12 months. We believe that we have deployed capital at the right time in the right companies and strategies positioning us well for future earnings.

We realized proceeds for our fund investors of approximately $3.2 billion a little lighter than recent periods owing largely to a few closings which slipped into the first few days in April. For example in early April we exit our remaining stake in RAC, the British Equivalent of AAA for more than EUR700 million an [indiscernible] all-in of 3.77 times.

We raised a gross amount of $2.2 billion in the first quarter, however approximately half of our previously disclosed hedged fund redemptions were returned to investors during the first quarter and those outflows countered a majority of our gross inflows. I will discuss fund raising in more detail in a moment, but we continue to see strong investor interest in our funds and we’re excited about the strategies that we have in the market.

Pre-tax distributable earnings for the quarter were $129 million consisting of $51 million in fee related earnings and $70 million in net realized performance fees. On a trailing 12 months basis pre-tax DE has been $904 million and we have generated $2.65 in post-tax DE per unit. Our distribution per common unit this quarter will be $0.26. Overall carry fund depreciation increased by 1% in the quarter with solid appreciation for many of our largest buyout and real estate funds and negative performance in certain energy and GMS carry funds.

Our fifth U.S. buyout fund and largest cash carrying and producing fund Carlyle Partners V appreciative by 4% and we saw real strength across our U.S. real estate platform with Carlyle Reality V and VI appreciating by 10% and 6% respectively.

Our natural resources and legacy energy segments were down 2% to 3% for the quarter a somewhat modest decline given challenging energy markets. Our GMS carry funds were down 12% largely driven by the effect of energy prices on credits in that sector.

Turning now to some additional color on our fund raising. We held a final close of our second power fund in April a $1.5 billion fund that closed above our target and was approximately 3 times a size of our first fund. We held a final close on metropolitan’s secondary fund at $550 million exceeding the fund’s $450 million target.

We held our first close of more than $675 million on our next generation distressed investing fund importantly our first close was only slightly less than the size of the entire predecessor fund so we’re confident about our prospects of raising a much larger fund. We continue to make good progress on a variety of existing and new strategies in our global markets business. We did not close any new issued CLOs in the first quarter, but in April we have closed one for about $400 million and we’ll likely close at least one and possibly two more in the quarter.

And we are working toward our first closes of our new Core Plus real estate fund, our global infrastructure fund, our fifth generation Asian growth fund, a China real estate fund and several other funds. We continue to see increased interest in large managed accounts from our most significant LPs. And finally even though our first quarter fund raising was lighter than normal and several closings slipped into the second quarter we continue to feel good about the prospect of achieving gross new fund raising commitments of approximately $15 billion for the year.

The fund raising environment remains favorable for alternative investment firms and investors continue to respond positively to our offerings. In some notwithstanding a somewhat slower first quarter on certain metrics our position remained solid and we are excited about a number of market opportunities. Deployment is up and our pipeline has accelerated since the middle of the first quarter.

Our net accrued carry position remains strong at $1.3 billion. Our public portfolio remains healthy at $15 billion. We continue to launch new products we have $43 billion in carry fund dry powder and $57 billion in dry powder overall. And we are hitting our fund raising hard caps on virtually all the products we have in the market.

With that, let me now turn it over to Bill.

Bill Conway

Thank you, David. Last quarter I spoke of the three CCC, Credit China and Crude they were creating an uncertain investment environment and increasing financial market volatility. Many of these fundamentals remain the same. China’s growth after spectacular performance over the past 35 years has definitely slowed partly due to demographics. Crude oil prices, which have rebounded some are still than half what they were two years ago. And overall credit markets while stronger today than earlier this year remained under some pressure due in part to the negative weight in volume of energy credits.

However, our fund heads report that our portfolios are slightly stronger than they were three months ago despite continuing difficulties in growing revenue particularly in the United States. Much of the improved backdrop drives from the approach taken by the Federal Reserve, which signal that rates will not rise as quickly as one might have guess several months ago. That and other factors has contributed to a modest weakening of the dollar, increases in dollar invoice commodity prices like crude oil, improved credit markets and the stronger near-term outlook for China whose currency has manage to depreciate on a trade weighted basis without further declines against the dollar.

In any event, public markets notably the S&P 500 have more than recovered after dropping as much as 11% earlier in the year. We did not do any significant block trades during the last quarter. However, as markets recovered in April we sold the $300 million position in NXP and a block of our shares in Spanish testing company Applus.

As David mentioned, our investment pace has been very strong in the last six months. In the first quarter we closed 13 new corporate private equity investments, 9 new real estate deals and several distressed and credit investments. These include their Veritas Holdings a global supplier of information management software, four transactions in Europe Hankin Moore in the Netherlands, Tom Data [ph] in Italy, Cyberglass [ph] in France and Test Plant Limited in the UK.

We closed more than $500 million in energy and real estate investments, most of which was follow on capital and we consummated two healthcare related assets in China, one a hospital and another a medical device company, as well as a Japanese bean sprout producer.

Last quarter I mentioned that we had more than $4 billion in transactions and process that it yet to close. In the first quarter we closed an approximately $3 billion of these transactions and we remain confident that we will continue to find attractive opportunities to deploy our $43 billion of carry fund dry powder.

Looking forward, we believe that the energy sector is particularly compelling. Across the entire capital structure, opportunities for investments are increasing and improving. We have teams totaling 65 investment professionals working to invest our available committed capital for energy of about $12 billion now.

On the exit front, we closed on three transactions in the U.S. Worldstrides, Western Water Holdings and Landmark Aviation. A deal that generated over three times our money and over $1 billion in distributions for our fund investors. We closed on Ta Chong Bank in Taiwan and 7 Days Hotels in China. We closed on B&B Hotels in Europe and we sold more than $800 million in real estate and energy investments.

Early in the second quarter, in addition to the block trades in NXP and Applus, which I mentioned earlier we closed the sale of our remaining position in the RAC a CEP3 transaction, which in total including prior distributions resulting in gains for our investors of over EUR1 billion.

Fundamentally with few exceptions we are in the long-term investing business. Despite quarterly market gyrations and shifting short-term investor sentiment, our job is simple to find great investment opportunities on behalf of our fund investors and aggressively pursue those ideas with our management teams and investment professionals. We take a long view of value creation and continue to see significant opportunities in front of us in almost every geography and asset class. Our investing pipeline is in good share due to strong capital fund raising over the past few years, our funds have ample dry power and we are ready to put it to work.

With that, let me turn it over to Curt.

Curtis Buser

Thank you, Bill. I am going to make three general comments before discussing specific segment results. First, we continue to focus on managing our cost structure while pursuing new growth initiatives. First quarter cash compensation expense of $162 million was down 6% from a year ago and I expect cash compensation will remain below 2015 levels for the balance of the year.

Even with a lower level of cash compensation over the past year we have launched or expanded strategies in infrastructure, core plus real estate and long dated private equity among others which when fully raised could add more than $10 billion in additional assets under management.

General and administrative expenses fluctuate based on a number of factors, but primarily due to the amount of external fund raising cost and professional fee. This quarter G&A expenses were $74 million or a little lower than our recent quarterly average expense of $78 margin.

Second, despite financial market volatility during the first quarter we generated a reasonable level of cash earnings and second quarter performance fees are off to a good start. Fee related earnings were strong at $51 million, while realize net performance fees of $70 million were lower than recent prior periods primarily owing to two factors.

First, we took reduce carry in our U.S. buyout funds at about half the rate we would normally take. And second real estate had a slower quarter of exit activity. That said, a single quarter does not make a trend. Our largest carry generating funds remain solidly in carry and our carry fund portfolio has a substantial inventory right for monetization. Finally, with the exits that Bill has mentioned realization of performance fees in the second quarter is off to a good start.

Third, fee revenues remain flat, but may decrease in the short-term. Total fee revenues this quarter increased to $303 million from $287 million in the fourth quarter of last year and we were affectively flat with the first quarter of last year. As I said at year end our 2015 catch-up management fees reflected strong fund raising and as a result we had catch-up management fees of $23 million in the first quarter last year compared to only $5 million in the first quarter of this year.

Higher transaction fee offset the lower catch-up management fees this quarter. But transaction fees are not likely to remain at this level for the balance of the year. Accordingly, my expectation for quarterly fee related earnings in 2016 remained unchanged at about $43 million on average, including the outperformance to that average in the first quarter.

Now let’s turn to a review of our business segments. Corporate private equity produce distributable earnings of $105 million, down $194 million in the first quarter of 2015, reflecting an approximate $100 million decrease in realized net performance fees as compared to a year ago. Fee related earnings in corporate private equity was $32 million this quarter, up $10 million from $22 million in the first quarter of 2015, reflecting higher fee revenue.

Total expenses in corporate private equity included within fee related earnings were roughly flat with a year ago. Net realized performance fees were lower than recent quarters as we did not sell any material positions in our public portfolio during the quarter. And as I noted earlier, carry generated from one of our U.S. buyout funds was taken at a reduced rate of about 10% rather than the typical 20% rate. This U.S. buyout fund has performed very well and remains comfortably in carry.

However, this fund has some remaining investments marked below cost, while carry is calculated on the entire fund carry is realized deal-by-deal. The modeled straight line average carry realization rate on this fund is somewhat below 20% of which remaining portfolio based on our projections. We have decided to be prudent and reduce the carry realization rate to 10% for most of this year until we have all the reserve for the identified risk in the portfolio and then resume taking carry at a 20% level. It is important to note that this does not change the total amount of carry that we are otherwise entitled to, but rather it simply changes the glide path for carry realization on this fund.

Now turning to global market strategies, distributable earnings in GMS was $1 million in the quarter, GMS is an important part of our long-term growth strategy, but near-term investments in new credit products in carry funds are delaying the acceleration of profitability for this segment.

Specifically, we are adding investment professionals to our credit business within our BDC. We are fund raising larger follow on funds, for distressed and energy mezzanine carry fund platforms and we are exploring how to best grow our CLO business. Forthcoming U.S. gross retention rules are increasing capital pressure especially on smaller issuers of CLO, thereby creating opportunity for us to further grow.

These investments in GMS’s future are impacting current segment profitability, for example fund raising cost in the first quarter of $5 million offset the higher fee revenue, activating fees are second energy mezzanine fund. In addition hedged fund assets under management and related fee revenues continue to decline. Hedged fund AUM declined to $6.3 billion from $8.3 billion at year end and we expect further hedged fund AUM one-off of approximately $1 billion to $2 billion over the balance of this year as redeemed assets are sold and returned to investors.

Moving to real assets, real assets produced distributable earnings of $20 million with only $1 million from realized net performance fees, reflecting lower exit activity in the quarter. While a slower first quarter exit pace is normal for our U.S. real estate business we expect exit activity to increase over the balance of 2016. Fee related earnings were $16 million as compared to $19 million a year ago reflecting a decrease in catch-up management fees of $7 million offset by higher management fees and activating fees on NGPs fund 11.

In Investment Solutions our financial results started to improve with our registration to wind down DGAM. Distributable earnings were $4 million in the quarter with over $3 million in fee related earnings. Fee revenues and fee earning assets under management in this segment may face additional headwinds in the short-term reflecting the wind down of DGAM and the run off at AlpInvest of commitments from its former owners of approximately $10 billion over the next five years. However earnings will likely improve with AlpInvest adding new higher yielding assets under management and from the elimination of loss at DGAM.

With that let me turn it back to David for some closing comments.

David Rubenstein

Thank you, Kurt. Despite the volatility in financial markets in the first quarter we had a strong quarter in terms of investment activity and a relatively solid quarter on many other metrics. Our second quarter is off to a strong start and we are well positioned to perform well for the remainder of the year and beyond. With that let us now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ken Worthington from JP Morgan. Your line is now open.

Ken Worthington

Hi, good morning. In terms of energy broadly to what extent was Carlyle able to take advantage of the brief, but call it sharp correction energy values in 1Q? We didn’t really see too much on the energy mezz side of the existing fund or the new fund and in terms of the energy mezz how does the fund raising outlook continue to look it didn’t look like there was a big close this quarter, but I think expectations are still pretty far above where the fund asset levels are currently? Thank you.

Bill Conway

Ken this is Bill I’ll take the first half and David will take the second half regarding fund raising. I would say that the sharp upward move was late in the quarter relatively brief still from a relatively low level. I think that we were not able to take much advantage of that movement. We still think that energy prices eventually will go up. This move was -- that’s the most people are beginning to realize that prices are going to be a lot lower for longer and earlier I think a lot of hope was driving decision making that people hope that the market will start to come back, they could hang on, and then they would benefit from that. There is now becoming far greater realization that that is not what’s going to happen. So I think we’ve got a great pool of dry powder and we’re getting ready to put it to word.

David Rubenstein

On fund raising let me put it in context that first energy mezz fund was $1.4 billion. We now have closed in about $2.8 billion, which something that’s just about ready to go. So it’s about $2.8 billion we expect will be over $3 billion when this fund is completed. So that’s a pretty big increase from previous fund, I was just with the fund head in China last week and meeting with a large investor that will come into the fund. I think our investors like the fund for this reason. Some people see it as an energy play, they think energy is coming back but they like the current yield. This is the fund that provides a quarterly yield that’s pretty high maybe as high as 9%.

And so I think the fund raising is in pretty good shape for this. And how much higher above $3 billion it will go I don’t know, but that fund will more than double the previous size funds. So I’m feeling pretty good about the fund raising prospects for that.

Ken Worthington

Great thank you.

Operator

And our next question comes from Michael Cyprys from Morgan Stanley. Your line is now open.

Michael Cyprys

Hi, good morning. Just wondering if you could update us on a year out progress of building out the longer dated Global Partners investment funds, how much have been raised? The types of deals you’ve executed or you’re contemplating.

David Rubenstein

Hey, that fund has closed on about a little more than $2 billion so far. And well I shouldn’t say more than $2 billion but more than $3 billion so far. One investor putting about $2 billion and then on top of that we’ve raised more than $1 billion more. So we about a $3.2 billion I think is where we are now. We’ve closed on two transactions we have two more that are in the works.

And we feel that we have a pretty good pipeline, we’ve added a number of investment professionals to it and we’re pretty comfortable that we’ll raise some additional capital for it though we don’t need to raise additional capital. We’re pretty comfortable with that at $3.2 billion or so that we have now that would be a good amount, but we will probably raise some additional amount of money. And we had a good deal flow right now. And I think we’ll probably by the end of this quarter I suspect we’ll have four deals that are completed.

Michael Cyprys

Great. Could you just elaborate a little bit more on the deals that you’ve executed already and then also talk to some of the broader strategy. And then what sort of metrics or types of companies you’re thinking about within the strategy?

Bill Conway

This is Bill, there are couple -- the two deals that have been closed so far. The first deal was the purchase of a large portfolio of corporate jet planes and parts, leased and owned from a larger owner thereof. It was a great deal for us because we are able to use our aerospace expertise that we build over the last 25 years and we’re actually able to go through the portfolio plane-by-plane, lessee-by-lessee, owner, and some of these were leases, some of them are short-term and long-term some is outright ownership. And it was a great one Carlyle effort when we put together the people in U.S. buyout and the people in CGP to raise that to make that investment.

Second investment was in a company that we call Content Partners what it is was the purchase of the residuals on a number of TV shows and movies things like CSI for example, where we have bought the residuals and or parts of the residuals in connection with those properties. And both of these deals have the advantage of being very long-term assets. You own these residuals you own them for a long, long time they payout on reruns and rearing and everything that goes on.

And the same thing on the portfolio for corporate jet partners, which we’ve calculated the return such that if we don’t do any more leases we’re going to earn a very satisfactory return on that portfolio, but we’ve now built a platform where we can continue to buy additional corporate jets if we were able to find great opportunities to do that.

Michael Cyprys

Great, thanks so much.

Operator

And our next question comes from Patrick Davitt from Autonomous. Your line is now open.

Patrick Davitt

Hi, good morning. Thank you. You mentioned the portfolio maybe having trouble growing revenue. Could you kind of walk us through the trends in revenue and EBITDA growth and maybe more broadly how you’re seeing economic trends both by geographic and industry vertical? Thanks.

Bill Conway

Sure well first all I would say if you look at the data, global GDP measured in dollars was down 5% or 6% in 2015 versus 2014. So that’s a part of the dollar being strong which has a lot of impact obviously on U.S. portfolio of companies, but the earnings of all the foreign businesses are worth a lot less and the revenues worth a lot less as measured in U.S. dollar. And as you know the U.S. dollar was fairly strong through 2015.

That in and of itself when you are a dollar based organization as Carlyle is although we have funds through another currencies ultimately by the time you guys look at it that’s all measured in dollar. Would lead me to say that our Q1 revenue growth in the U.S. is about flat, but there is no significant growth in revenue. Now we are an investor kind of in the micro as oppose to in the macro it’s a specific deal how is a deal doing as oppose to how is the economy doing. But in a world where in dollar terms the economy is shrinking or is roughly flat it’s very thought for us to do a lot better than that and we did.

Operator

And our next question comes from Craig Siegenthaler from Credit Suisse. Your line is now open.

Craig Siegenthaler

Good morning. Just a big picture question here, so all four businesses have seen a decline in total AUM over last year, we can see pretty clearly sort of what drove this from heavy monetizations, lower returns, redemptions. But as we look into the future, can you comment your ability to growth the overall business from current levels?

Curtis Buser

Craig, it’s Curt, hey thanks for the question. So this is a question that we routinely get and received and so just as in the past one of the things that was really good is the amount of distributions we have to our limited partners and just as you said that’s the opportunity for creating performance fee, but it also puts downward pressure on AUM.

As I have mentioned, both before and today there are just a number of inherent pressures within the portfolio so we have talked about the hedge funds and redemptions there we’ve talked about the $10 billion of commitments in AlpInvest and how that will lead off over time, but we believe be replaced with higher yielding assets under management. So more profitable AUM although may be on lower total AUM. And then also with legacy Riverstone platform that too will burn off and that’s about $5.8 billion that will run-off over the next couple of years.

So those are just natural kinds of things that we’ll run-off. We have a number of funds as David and we have talked about already that are in the market place that we are raising that will obviously up lift, but you won’t probably see the big uplift again until our big buyout funds come back from the market and quite frankly with $43 billion of dry powder and our carry funds and $57 billion of overall we’re in good shape from a fund raising perspective.

David Rubenstein

I would add that AUM is not an easy number to grow, but it can grow if you are willing to take terms that aren’t that profitable and we have been pretty consistent in saying we would like to have AUM that is profitable in the way we manage it. So we are not adding AUM just for the sake of adding AUM, I do think we will have a fair amount of profitable AUM that we will be adding because of the funds that we now have in the market and the funds we’ll have in the market next year when some of our bigger funds will come in the market.

Craig Siegenthaler

Thanks for the color.

Operator

And our next question comes from Michael Kim from Sandler O'Neil. Your line is now open.

Michael Kim

Hey, guys good morning. So last quarter you pointed to I think around $4 billion of realized proceeds that were expected to close in the first half of this year. I know you mentioned couple of block sales and the RAC sale thus far this quarter. But can you may be just give us a bit more color in terms of where you stand today including any additions to the pipeline if you will and how that might sort of shape the trajectory of realized performance fees going forward.

Bill Conway

Sure, let me take a stab at that. In terms of what has happened already of significant scale there were two kind of groups so far, first, is the block trades or position sales totaling about $400 million between NXP and Applus second was the gain on the sale of RAC the most recent payment I think was about $1 billion I think £700 million and so you can work out the mathematic of that. Those were the distribution, now distribution don’t automatically translate into distributable earnings and the like, but you know which fund those deals are in and those funds are certainly the RAC deals, it’s a fund that’s in carry.

So the balance of the quarter without predicting specifics what we might do, we do have a $15 billion or a $14.5 billion public portfolio, and I think Carlyle has a history of block trades in that portfolio, we like to get our businesses public, many of them are so big that they don’t really, aren’t suited to be sold in private markets, and when they are sold, we’re obviously able to do block trades and you can see in our release the names of some of the big positions that we have and sometimes we call it the ABCs of private equity because we have Axalta [indiscernible] and CommScope that have been huge winners for us for a long period of time, and still we have enormous gains still to come in most transactions.

Not predicting any specific one, but I expect we’ll continue to see the block sales in the public portfolio. Comes the private portfolio, we’re working on a lot of things, given the regulatory environment, the difficulty some people having getting financing, I can’t predict when or if they’ll close, but we got a pretty good portfolio, some of it’s well aged and we are preparing to sell it, but I can’t give you any other predictions between that, beyond that.

Michael Kim

Got it, that’s helpful. Thanks for taking my question.

Operator

Our next question comes from Michael Carrier from Bank of America Merrill Lynch. Your line is now open.

Michael Carrier

Alright, thanks a lot. Two part of questions, first just on the real estate business, just wanted to kind of get some color on maybe the fundamentals there and what you drove the strength in the performance in the quarter? And then just based on the FRE outlooks for the year, it seems like the trends in CP, and then also in real assets are fairly favorable including the outlook I guess when we look at GMS and then IS just wanted to get your take, it sounds like an IS, you’re looking at some of the maybe businesses that the economics aren’t as good in restructuring that just wanted to get your take if there is more that can be done on that front and in those two segments to try to maybe improve the fuel related earnings overtime?

Curtis Buser

Mike this is Curtis, thanks for the question. So, with respect to the first question on the real estate business and what’s driving it. So keep in mind that this is an opportunistic portfolio built deal-by-deal, property-by-property, we’re going in and looking at pieces of properties that we think we can make a big difference to. So as we work through that and develop them and get over key risk and milestone issues the portfolio appreciates. And as you look back especially on the past year you’ll see the realizations that we had there and the carry generation that it’s created. So as even as you back test the portfolio, it’s performance has been very good.

And so feeling real good about really the way that those portfolios have been constructed and the other I’ll note is CoreSite is a big property in a number of the funds it’s a public portfolio, you can figure it out, but it has done very well and that also has helped the portfolio.

On your second question in terms of the fee related earnings outlook, so we had a great quarter this quarter, in terms of fee related earnings, but it was contributed to with our transaction fees primarily a large transaction that we did in the quarter. And we knew that as we thought about the quarter coming in, and so it was not clearly a surprise, but as we think about the balance of the year, it’s hard to say that we’re going to have transaction fees at the same level. And just as I said last year, I don’t think I’m going to have catch-up management fees at the same level.

So that revenues is not going to be maybe at the same place, we’re doing a lot of things on both investing in certain places in GMS, but also managing our cost structure. So I do think that there is opportunities for GMS to improve, clearly over where it was in the first quarter, because we have some additional investments that we’ve made and in Investment Solutions, I think we’ll see improvements there as well, really as I’ve already talked about with the wind down of DGAM and as the secondary business that AlpInvest continues to expand.

Michael Carrier

Okay, thanks a lot

Operator

And our next question comes from Gerald O'Hara from Jeffries. Your line is now open.

Gerald E. O'Hara

Great, thanks for taking my question. Couple of quarters ago you highlighted some changes within the European real estate team, I was wondering if we might be able to get an update as to how things are progressing there both in terms of kind of raising assets, but also potentially new product development, build out or just a general execution? Thank you.

David Rubenstein

Let me address that if I can. The review for everybody, we have a domestic U.S. real estate business that’s opportunities, historically it’s now going into the core plus business as well and that’s going quite well in terms of its new fund raising. We have an Asian real estate business that’s now raising a China real estate fund and that fund raising is going well.

In Europe, we are still selling off some of the legacy assets from our prior fund. We have a team that we’ve recruited and we’re adding to which is overseen by Adam Metz in the U.S. but he has well wide range of experience in international real estate as well, he is overseeing our European team. We expect to be doing something that will give the team some capital to invest, but we’re not yet prepared to announce that. But we do think that European real estate is a very attractive area and we intend to be a participant in the European real estate market.

Gerald E. O'Hara

Great, thank you.

Operator

And our next question comes from Ann Dai from KBW. Your line is now open.

Ann Dai

Hi, good morning thanks for taking my question. I just wanted to focus in on China real estate, I’m just curious what you see as the opportunity set there how big you think your fund could be within that set? And what type of assets you’re focusing on or maybe what you’re not?

Bill Conway

Well this is Bill what I’d say is David can maybe help me out a little bit here. The fund will be consistent with as big as we can make it as well as we think we can put the money to work effectively. I’d be disappointed if it doesn’t get to at least to $500 million. It’s focused a lot on the consumer, but it also was focused on logistics we’ve had a successful run with some logistic properties in China. And I think we’ll continue to play some of those angles. The Chinese economy is really changing from a being infrastructure heavy, manufacturing heavy, export driven economy to a far more consumer oriented economy and the tough transition although I think the Chinese are making reasonable progress on that.

And I think our investing mechanism continues to follow that. As you know you’ve read some stories in China about the potential real estate and the shape of that and occupancy rates and alike we think the best place to invest is consumer related businesses and businesses that support the consumer.

David Rubenstein

And also in addition to the fund we’re raising, we do have some managed accounts that are significant that we’re investing in China real estate. And we’ve got a team that’s been there for quite some time. So I’d echo what Bill said that we’re pretty bullish on our ability to raise some fund for the team and we expect to be a significant investor in Chinese real estate for quite some time.

Ann Dai

Great, I appreciate the color. The other question I had was around high net worth. So in the past you’ve talked about your efforts to penetrate that market. So could you give us an update on progress in that net section?

David Rubenstein

Yeah so let me try to address that. When we talk about high net worth, I would put it in three categories. High net worth people who have their own family offices. I would say today everybody wealthy seems to have their family office in the old days everybody wanted to have their son grow up or the daughter grow up to be President of United States, now everybody wants to have their son or daughter have a family office, everybody wants a family office.

And so there are plenty of family offices out there and you take the wealth around the world everybody who seems to have a net worth of about $300 million or more has a family office. And so these people are investing very significantly as endowments are in alternative private equity. And so we are working very hard with these family offices and all of the family office conferences and so forth. And we’ve had them for a long time.

There is a second category of people who are not quite at that level, but they have I would say a net worth of $50 million to $100 million, $200 million and they tend to have their wealth managed by JP Morgan, Goldman Sachs, Bank of America. Everybody who is on this call asking questions your group is no doubt managing high net worth families. And they are probably rounding up them in $1 million to $2 million, $3 million per fund increments. And they pull them together. And that is a very large business for us in other private equity firms.

And then you have people who are I would say not quite at that level and they might have a net worth of $25 million, $50 million not that that’s not significant, it is. But they tend to have their money managed by firms that are not quite maybe JP Morgan or Goldman Sachs or their equivalent more regional firms. And they are also coming in significantly in the private equity.

And so in recent months, I’ve noticed and looking at our statistics that we our second biggest investor by category is high net worth. Historically our biggest category was public pension funds and that is still the biggest. Sovereign wealth funds are catching up to them, but in the last I’d say the first quarter of 2016 and for the last 12 months our biggest second category has really been high net worth individuals and there is three categories I mentioned, family offices, pooled by the JP Morgan, Goldman Sachs, equivalence and by the regional firms.

So we continue to see this and one other trend that I would mention is it’s not just high net worth in the Western world of the United States and I’d say Europe it is all over the world, increasingly the wealth in the emerging markets is winding its way into the family offices or the kind of other things that I mentioned. And so it’s a very important part of our fund raising operation now. Does that more than answer your question or drown you out with more information you wanted?

Ann Dai

It does, thank you. I appreciate the color and thanks for taking my questions.

Operator

Our next question comes from Glenn Schorr from Evercore ISI. Your line is now open.

Unidentified Analyst

Hi this is [indiscernible] for Glenn Schorr. I appreciate the color around the GMS marking the redemptions they have negative 12% carry fund performance after being down 9.4% prior to close kind of bigger than what I thought just kind of wanted drill down those performance numbers and what drove it? And then I know you said that the go forward redemptions just any sense of timing and or potential offsets you could look towards in that segment? And a follow-up if you can, what’s your sense or best guess of when you could turn GMS around? Thanks.

Bill Conway

Okay well first of all on the reductions in the GMS carry funds, which were down low double-digits. Most of that I would virtually all of it occurred in connection with our energy mezzanine lending business, which have given the fall in the price of crude and other related petroleum products for example let’s say some proved undeveloped reserves their value they may only be valuable when oil is above $50. So in looking at our portfolio we wanted to mark it down appropriately and we took large mark downs in that part of the portfolio. That would be the single biggest driver to what was affecting the valuations in the GMS carry funds.

In terms of I guess your question would be about growing the hedged funds, our initial job has been to stabilize the hedged funds as best we can. We have three hedged fund groups we’ve the Claren Road, which is credit hedged fund, we have emerging sovereign group which is the emerging markets fund and then we have our Vermillion funds, which are related to qualities [ph]. And I’d say that in the Claren Road funds the problems there have been pretty well publicized we see larger redemption request from the investors, we’re honoring those on a quarterly basis giving investors gradually their money back there.

The future of Claren Road will be determined by its investment performance. And to the extent it’s able to have investment performance it will grow its asset, if it does not overtime those assets will go away and investors will put their money in other places. Same would be true of the commodity funds and commodity markets have been very tough as have credit markets so far this year. And we’ve done well in the metals trades, but less so in many of the other commodity related products.

In emerging markets they have great opportunities we have a fund there that we are seeing some pretty good performance it’s been tough for actually so far this year it’s been tough performance as emerging markets have struggled and I’m hopeful that that will turn around as we go through the year I have a tremendous amount of confidence in our management of the ESG Group.

Curtis Buser

So Bill just to add on to that clarifying on the CEMOF I mark just it’s really driven by the change in view from a mark-to-market and the credit markets related to energy unless is reminded whether that fund is still essentially a one-time. So it’s still a good fund, we’ve good prospects in front of it.

Bill Conway

Thank you, Curt for making me sound better.

Unidentified Analyst

Thank you.

Operator

And our next question comes from Bill Katz from Citigroup. Your line is now open.

Unidentified Analyst

Hi, good morning. This is Justin [indiscernible] on the line for Bill. Just one quick question for you more industry related, seeing a lot peers moving into core and core plus private equity and our real estate products. Just trying to get understanding of what your views are on those as an asset class and if you are interested in those kind of moving forward?

David Rubenstein

Well in real estate I’d like to remind people that roughly 95% to 96% of all real estate in the world is so called core. Opportunistic is really 2% to 3% and maybe how core plus is 1% or 2% if you take all real estate. But in what a lot of the alternative firms have focused on is opportunistic and now core plus. We think that opportunistic will still be a very significant part of our business going forward and probably for next couple of years the most significant part of our real estate business will be opportunistic, which is trying to get rates of returns that are mid-teen or higher.

I’d say core plus is a lower rate of return, but probably still double-digit in some respects. And that business we are now growing in the United States and where we’ll see whether we grow it in other jurisdictions. But we do think it has a lot of demand for it we expect to have closing in this quarter on our first core plus fund and we think it will be a pretty good size fund. And basically we’ve got a very large team in U.S. real estate and they are working on both of those funds right now.

Bill Conway

Yeah and with regard to what you refer to as core private equity investing. I don’t think we necessarily think of it as core in the sense of like core real estate would be. I think it rather referring to those long dated funds that may or may not have a lower internal rate of return, which typically core real estate has a lower rate of return or expected rate of return than does opportunistic real estate. So we don’t really think of it as a core product, we think if it as a long dated funds that our funds just are designed to liquidate much quicker than the core fund, which might have a 15 or 20 year lag would have as you would call it all real estate fund.

David Rubenstein

Yeah some of them are private equity funds. Some other firms do use the phrase core private equity just not one that we have used there is nothing wrong with the phrase. But we use our main private equity business as core and so we just use that terminology I suppose in that regard.

Unidentified Analyst

Thank you.

Operator

And our next question comes from Ken Worthington from JP Morgan. Your line is now open.

Ken Worthington

Hi, thanks for the follow-up. So first on the restructuring the Investment Solutions business can you flush out the change in your strategy and maybe how the changes flow through the P&L as we look out for the remainder of the year and maybe into next year? And then maybe higher level, how do you want solutions to kind of fit into your suite of products? I think for example there were aspirations for solutions to be a big part of the platform for the retail on the high net worth business. Does that still make sense or is the focus kind of shifting more exclusively to the bigger institutional clients like the pensions and endowments? Thanks.

David Rubenstein

Well I would say that a lot of the high net worth individuals and some people use that as retail. But we would say for high net worth individuals that I referred to earlier a lot of them would like to have a cross section of various Carlyle funds including the products that are in our solutions business and we have ability to do that. And I suspect going in the future we will increasingly say to people that have large managed accounts with us that as some part of what they have will be in our solutions offerings. And so I think that’s probably how we will do it. Just make the available to people a cross section of things that they could have in Carlyle some of which will be our solution products.

Curtis Buser

Ken this is Curt. I just add on to that on the financial aspect. So DGM was the business that we are winding down on the hedge fund space and also some of the liquid [indiscernible] products, that business was not running at a profit for us. And so by winding it down we’re able to stem those losses and thereby improve profitability over the rest of the Investment Solutions. It will have -- you will see revenue decrease somewhat rather that revenue winds down and goes away. But from a FRE and DE perspective as well as E&I it will improve over the course of the year.

Ken Worthington

Okay, thank you. And then maybe for Curt, repurchase activity was modest this quarter. I know that’s a new program, my guess it maybe even got up and running very late in the quarter, but can you talk about the level of activity this quarter maybe why it wasn’t stronger given some of the price action? Thank you.

Curtis Buser

Ken you’ve got it specifically correct. I mean we launched the program after our earnings call we had to wait for our window to open. And so we had less than a month and half of activity. The other phenomenon that occurred in the quarter was just the volume of trade in our units dropped really in the middle of the quarter it dropped like about half. As you know there is limitations on how much you can buy based on average daily trading volume. And so that really kind of constraint kind of what we could do within the quarter. So we brought 400,000 units back at roughly little over $6 million, but that program remain in place and active.

Ken Worthington

Okay, great. Thank you.

Operator

And I am showing no further questions at this time. I would like to turn the call back over to Mr. Daniel Harris for closing remarks.

Daniel Harris

Thanks Lauren and thank you everyone on the call today. If you have any further questions feel free to follow-up with me at any time. We look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the program, you may all disconnect. Everyone have a great day.

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