The Carlyle Group (NASDAQ:CG)
Q2 2016 Earnings Conference Call
July 27, 2016 08:30 am ET
Daniel Harris - MD, Head of IR
David Rubenstein - Founder, Co-CEO
Bill Conway - Founder, Co-CEO
Curt Buser - CFO
Ken Worthington - JP Morgan
Bill Katz - Citigroup
Craig Siegenthaler - Credit Suisse
Michael Cyprys - Morgan Stanley
Gerald O'Hara - Jeffries
Alex Blostein - Goldman Sachs
Robert Lee - KBW
Good day, ladies and gentlemen and welcome to The Carlyle Group Second Quarter 2016 Earnings Conference 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, please go ahead sir.
Thank you, Christie [ph]. Good morning and welcome to Carlyle's second 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 second 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-ups. 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.
With that, let me turn it over to our Co-Chief Executive Officer, David Rubenstein.
Good morning and thank you for joining our call today. The second quarter was a strong quarter for Carlyle, as we generated $0.84 per unit and after tax distributable earnings and we are declaring a $0.63 per unit distribution. Our results continue a long-term trend of producing solid cash earnings for our unitholders, deploying a significant amount of capital and attracting large amounts of new capital into our funds.
In short, the second quarter highlighted many of the strengths that we speak about every quarter and we believe it also highlights the durability of our business model over many quarters and over many years. Before providing additional color on our strong quarterly metrics I want to highlight the backdrop into which our various funds continue to operate and to deliver outperformance for our investors and ultimately distributions for our unitholders.
Equity markets remained in a period of low appreciation with the S&P 500 up a modest 2% in the first half of 2016 and appreciating in an annualized rate of just over 3% the past two years. Even with that relatively low appreciation level US equity markets nonetheless outperformed broader global ended equity indices which were flat to down over the past two years.
Further, more than $10 trillion of global sovereign bonds are carrying negative interest rates. Equivalent to roughly a third of all global sovereign debt and the US tenure treasury yesterday it was only at 1.55%. Thus all types of investors are finding it challenging to meet their return objectives. In this context, Carlyle's performance stands out and is a major reason that our fund investors continue to entrust more and more capital to us.
The United Kingdom is about to leave the European Union created additional market uncertainty and complexity, especially in the UK were more broadly throughout the EU. Curt will provide incremental context around our exposure to the UK, but broadly we feel confident that for Carlyle the impact of BREXIT will be modest assuming it does not leave to broader negative impact on global growth.
Moving onto our quarter's results. Distributable earnings for the second quarter were $288 million since the first quarter of 2011 our pretax distributable earnings have averaged over $210 million per quarter and we've now had six quarterly instances with distributable earnings over $250 million. Thus this quarter does not represent a peak or an outlier but rather a confirmation that our platform can regularly generate healthy cash earnings for our unitholders across extended periods.
Over the last 12 months we have distributed a $1.74 per unit or about a 10% trailing yield on our recent unit price. And our first half of 2016 distribution of $0.89 puts us in a good position for a solid 2016. Today, three of our segments corporate private equity, real assets and investment solutions are performing well. The other global market strategies is underperforming our expectations and we are therefore reviewing various options to improve performance and to grow our credit business.
We realized proceeds for our fund investors of approximately $5.3 billion in the quarter. We closed several sales across our European platform including RAC and European buyout, [indiscernible] and European Technology and the White Tower real asset in European real estate. We also completed secondary sales in Axalta, Booz Allen, CommScope, Coresite, NXP and Applus+.
Over the past 12 months, we have realized more than $16 billion in realized proceeds for our carry fund investors, similar to levels over each of the past five years. We invest in a solid $2.9 billion of equity during the second quarter. Over the past year, we have deployed $12.7 billion in our carry funds into attractive investments were about 35% higher than our average annual deployment over the past five years.
Our carry funds appreciated by healthy 5% of the quarter aided by a strong recovery in natural resource equities and underlying commodities. Specifically NGP's X and XI funds together appreciated 19% and we saw solid appreciation in our international energy fund. We also saw continued strength in our real estate funds which appreciated 8% in the quarter and are up 28% over the past year. Corporate private equity carry funds were up 4% in the quarter as a result of gains and several announced M&A transactions which help drive 5% appreciation in our private holdings.
Notably our latest vintage US buyout fund Carlyle Partners VI appreciated 15% and we saw strength in our new Asia buyout fund among others. Because of Carlyle strong relative appreciation, we anticipate that future fund raising efforts will be positively impacted.
Other than our US real estate funds most of the appreciation this quarter was in funds not yet in carry. Although this meant somewhat lower accrued performance fees in the quarter despite the good appreciation across the platform, the overall result obviously better positions a number of funds to contribute carry in the future.
Moving onto fund raising, we continue to be successful on attracting capital [ph] for the funds that we have in the market and we are in good position to reload even more during our next major fund raising period which should began after the first half of next year and will accelerate thereafter. At that point, we would expect that fee earning assets under management will grow to reflect that fund raising.
We raised a net $3.6 billion of new capital in the second quarter. On a gross basis, we raised $5 billion in new commitments offset by approximately $1.4 billion in outflows across our hedge fund commodities and fund of hedge funds platforms all of which we had anticipated. We have raised over $7 billion in gross new commitments in the first half of 2016 and we should be able to generate approximately $15 billion in gross commitments throughout the year.
Turning to some additional color on our fund raising in the quarter. We held a second close in our new distressed debt investment fund in late June bringing commitments to over $1 billion, a level which is already more than 30% higher than the predecessor fund and there is still significant runway in front of this fund.
We raised over $1.3 billion across three CLOs in the second quarter. Once again, loan markets remain volatile but we continue to capitalize on our leadership position and our strong track record in the strategy. We held our first close in our new core plus real estate fund and we see this fund as being an area of real growth for us over the next several years. We raised over $200 million in the quarter and final close on our second Power fund which closed at $1.5 billion. And we raised over $1.7 billion for our latest AlpInvest Secondaries Fund and associated strategies.
We've also added several new fund heads for certain new and ongoing funds. Pete Taylor who recently had a successful 15-year history in infrastructure investing has joined us a Co-Head of a new Global Infrastructure Opportunities team, which has already commenced fund raising and Brian Schreiber, who spent 20 years at AIG and most recently was Deputy CIO at AIG will also join us late this summer as our new Co-Head of our FIG [ph] team. This is in addition to several new initiatives we are pursuing in different parts of our business.
Carlyle continues to opportunistically attract leading investment professionals to our platform to partner with long time Carlyle professionals to manage investor capital. Lastly, we also continue to see increased interest in large strategic relationship for many significant LPs and in fact this quarter we signed one of our largest ever strategic relationship from a large institutional investors.
As you can see, we had an active and highly successful second quarter and remain optimistic there is more to come. With that, let me now turn it over to Bill.
Thank you, David. In prior quarters I have spoken about specific investments and completed exits. This quarter while our activity remained high on announced and completed exits as well as new investments. I would like to focus on the broader outlook for Carlyle over the near and longer term.
In the near term, we continue to see opportunities to realized asset sales out of many of our carry funds. As David mentioned, our realizations were approximately $5.3 billion in the quarter. Off this amount, about $2.5 billion resulted from secondary or blocked transactions on eight investments. And while the IPO market has generally been dormant we've built a pipeline of five companies currently in the IPO process in markets around the world and in June, Solasto Corporation, a company in our Japan buyout fund went public on the Tokyo Stock Exchange.
As of quarter-end, we owned investments in more than 250 companies both public and private in our carry funds and over 350 assets in a real estate and energy funds. Given the size and diversity of our portfolio, we have the capacity to continue to exit at a reasonable pace but of course we will naturally be more active in some quarters than others.
More recently and not closed in the second quarter, we have announced sales of several portfolio companies including Vogue, a producer of hair care products, Centennial Resource, an energy producer in the Permian Basin and Sagem Comm, a European manufacturer of TV set-top boxes. We are regularly asked if our recent realization activity represents a peak for our funds. The answer is no. For the past five years we have been operating at a robust exit pace ranging from $15 billion to $20 billion per year since 2011.
Our firm structure with funds in various geographies pursuing different strategies enables us to consistently monetize positions. We are not reliant upon one geography, one exit strategy or one market to drive results. Another question we commonly hear is, whether we are changing our investment process or our underwriting approach.
With regard to our investment process there is been no change. We continue to follow our long-term strategy of utilizing deep industry expertise to design a specific value creation plan for each investment and working to achieve that plan. Our nearly 30-year experience to a variety of economic and investment environments tells us that our approach has delivered superior outcomes through various cycles.
Over that period of time, on our private equity like funds, we have targeted and generated 20% plus growth returns. Our recent performance has benefitted from today's high multiples and asset prices by selling investments made in past years and with what we believe to be attractive prices. Earning such returns on new investments in the present market environment will be much more difficult than in the past.
Two of our large investments in the quarter were an ION Investment Group, a producer of mission critical software for the financial industry and NEP Group, which provides mobile broadcasting in those incredible huge displays one would see in a rock concert or sporting event. Both of these investments are in high quality business with stable earnings and cash flows and they're both minority stakes in which we have structured the majority of our investment as preferred equity or structured securities to limit our downside risk.
Turning to real assets, in the second quarter we invested almost $1.4 billion in this segment which includes energy, power and real estate. This quarter we saw a partial recovery in energy prices with crude oil up 29% and natural gas prices up 38% after six consecutive quarters of decline. Of the $1.4 billion invested in real assets. NGP invested over $450 million in a wide variety of new and follow-on investments.
Our Power Fund made the largest single investment in the real asset segment over $350 million in Nautilus Generation, a diversified portfolio of 11 power generation plants along the East Coast of the United States. Our Power Funds now have investments in 28 power facilities aggregating 5,800 megawatts of generating capacity.
Our real estate funds invested more than $400 million in a wide variety of assets primarily in the United States. Our most recently fully invested US real estate fund CRP VI already has a 23% net IRR. As of quarter end, we had $59 billion of remaining fair value in our carry funds in the ground with more than 34% of that over four years old. We have invested over $41 billion since the beginning of 2012 and we have substantial $40 billion in carry fund dry powder.
To put our ability to generate great returns of the context I would like to share with you a few briefcase studies. First, three years ago we purchased a Performance Coatings Business of DuPont. This is a complicated carve out where we recruited outstanding CEO, who both managed cost and invested strategically. Today that investment now a public company called Axalta is valued at over four times our initial investment including previous set distributions.
Second, just over two years ago we purchased a minority stake and partnered with the Founder and CEO of Vogue, a specialty hair care products company and the first investment in Carlyle Partners VI. During our ownership our sales grew 92% and market share grew significantly and CEO did a great job. We closed the sales of the company to Johnson & Johnson earlier in third quarter for more than three and half times our investment.
Finally, another investment that we fully exited during the second quarter is in Applus+ services, a testing, inspection and certification business. Headquartered in Spain which we invested in through Europe II and Europe III buyout funds beginning in late 2007 just as the financial crisis was beginning. At times the investment was marked below cost, it took us nine years much longer than we originally anticipated and significant changes but with persistence and the strength of our strategy, we were able to exit our final block of shares in the company at a total return about two times cost for our investors.
Unfortunately, not all of our investments and transactions work out as well as these three deals. Sometimes you underestimate the risks with a competition or overestimate your abilities with the strength of your management teams. For example, in Carlyle Partners V off the 23 deals which we invested they will probably be two or three that despite all our efforts lose money.
In total, that fund is currently marked at about two times at almost two times cost. Longer term, we believe there will be investment opportunities for us in the strategies where we have ample levels of capital. Investing and generating returns is not easy. In fact, it's our most challenging job. Certainly you do not earn returns of 20% or more without taking what you think are intelligent risks, hiring and training skilled investment professionals and management teams, operating in reasonable markets and undoubtedly benefitting from some good fortune.
Our carry fund platform the backbone of our business is growing across every segment. Our basic strategy is to grow our existing fund groups, which we are doing successfully and selectively add new funds, where we think we will have the skills to be successful. Larger funds and new funds should lead to more deployment which should yield higher performance fees relative to recent levels and we expect our new realized performance fees will become more diversified across our platform overtime.
In sum, we had an excellent quarter with respect to realizations, fund raising, appreciation and capital deployment. While any firm of our size and complexity who have challenges somewhere in their business as we do. We expect to be able to continue to deliver attractive returns to our LPs in this environment and in turn help to production of cash for our unitholders.
With that, let me turn it over Curt Buser.
Thank you, Bill. I'm going to make three general comments before discussing specific segment results. First, we said this would be a good quarter and it was. Distributable earnings were $280 million in the quarter reflecting continued generation of net realized performance fees of $233 million and fee related earnings of $45 million. I'm very pleased with our results for the first half of this year especially given the market environment.
Second, we delivered on the two most important performance measures for our future growth fund performance and investment pace. We had strong performance across our carry fund portfolio with 5% appreciation in the quarter reflecting the same in both our public and private portfolios. Even with strong appreciation, our realized carry exceeded the new carry accrual generated in the quarter resulted in a modest decrease in our net accrued performance fees to a still substantial $1.2 billion.
The lower unrealized carry generated in the quarter is due impart to much of the appreciation of our carry fund portfolio accruing funds that are not yet in carry. The good news is that the significant appreciation in early or mid-stage funds such as Carlyle Partners VI, Carlyle Asia Partners IV and NGP Fund XI is akin to an investment in future earnings.
This quarter's appreciation also reflects careful consideration given to BREXIT in our valuation process, which automatically factors in the effect of foreign exchange but also reflects judgments on broader macro dynamics. Other than for a handful investments and the impact of foreign exchange the valuation impact of BREXIT was nominal in the quarter.
For context, only 13 companies out of more than 250 in our corporate private equity and real assets carry fund portfolio and four real estate investments are denominated in British Pounds. Together only accounting for about 3.5% of our remaining fair value. These metrics only reflect our carry fund portfolios and also don't fully factor in investments that are not denominated in pounds but then we still have operating exposure to the UK.
However it's simply too early to tell how the uncertainty associated with BREXIT will affect the broader British, European or global economy. We invested $2.9 billion in the quarter for a total of $12.7 billion over the last 12 months. This quarter reflected no single large buyout transaction. In corporate private equity for example, we made six new investments with an average check size of about $150 million. The diversity of the Carlyle platform is fairly reflected in the diversity of our investments this quarter.
If we are successful in deploying larger amounts of capital while maintaining superior performance returns, we will be in a good position deliver earnings growth for our unitholders. Third, we continue to focus on managing our cost structure. The second quarter cash compensation expense of $147 million was down 7% from a year ago and first out, cash compensation expense was also down 7%. About half of this reduction reflects lower internal fund raising compensation.
Meanwhile equity based compensation is up only $2 million for the first half of 2016 or about 3%. General and administrative expenses were $79 million this quarter roughly in line with our recent quarterly average expense of $78 million but well below the $94 million incurred a year ago as fund raising cost in the quarter were lower than a year ago.
Now let's turn to a review of our business segments. I want to start [indiscernible] global market strategies. And this is the business segment where our performance did not meet our or our investors’ expectations. Distributable earnings in GMS with $7 million in the quarter, up from $4 million a year ago, but fee-related earnings remained disappointing at about $1 million although somewhat better than the loss of $2 million a year ago.
We had expected GMS to be a larger contributor to distributable earnings and fee-related earnings at this point than it is. But the Claren Road Asset Management and Vermillion Hedge Funds and associated commodities products continue to generate losses within the segment and we are continuing to invest in new products and strategies as we should.
We are conducting a review of this business segment and currently anticipate greater operating losses from some of the hedge fund and associated commodities products than we previously expected. That said, our CLO business remained strong and well positioned and our energy mezzanine and distressed strategies are growing fast.
However, we now expect the GMS will operate at an FRE loss for the balance of the year. If that occurs, it will cause us to fall short of our quarterly fee related earnings guidance of approximately $43 million for the balance of this year.
Now as David mentioned, our other three segments are operating well or showing signs of improvement from prior periods. Let me start with corporate private equity, which had a great quarter with distributable earnings of $235 million. A year ago corporate private equity had it's better quarter ever with $345 million in distributable earnings. Fee related earnings and corporate private equity were $23 million in this quarter down $15 million from $38 million in the second quarter of 2015 reflecting $27 million in lower fee revenues offset impart by lower compensation in G&A expenses.
The lower fee revenues in the current quarter reflect to fall off in catch-up management fees from $20 million a year ago to none in the current quarter. Net realized performance fees of $195 million were lower than the year ago, when CPE realized proceeds of $4.5 billion was compared to $4 billion in the current quarter. Also as I noted last quarter, contributing to the lower net realized performance fees as the carry rate we are using for Carlyle Partners V, one of our US five [ph] funds whereby we realized carry had 10% rather than the traditional 20%, which we were taking a year ago. We expect this fund to increase its carry rates to about 15% onto next major realization and going forward the rate of which we realize carry will of course depend on the performance and its remaining investments.
Moving onto real assets. Real assets produced distributable earnings of $39 million with higher fee related earnings and higher realized performance fees than a year ago. Fee related earnings were $15 million as compared to $12 million a year ago reflecting higher revenues from activating fees on NGP Fund XI and our second Power Fund. Our real estate funds drove realized carry in the quarter for the segment.
Appreciation and our real estate funds remain strong and valuations also rebounded across natural resources. Unrealized carry exceeded our realizations in the segment resulting in higher net accrued performance fees for real assets. The net realized investment loss in the quarter for this segment reflects the loss from Urbplan, which is our consolidated real estate investment in Brazil that we have previously discussed.
In investment solutions, our financing results showed continued improvement. Distributable earnings were $7 million in the quarter with $6 million in fee related earnings as compared to breakeven a year ago. Improved results are generally tracking as we expected upon the implementation of the profitability initiatives we commenced at the beginning of the year including the wind down of DGAM, while fund returns in many of the investment solutions products remained strong.
One final comment on our unit repurchase program that we want in the middle of the first quarter. We purchased approximately 1.9 million units in the second quarter for a total price of about $30 million and for the first six months of the year we repurchased about 2.3 million units for a total of $36 million.
With that, let me turn it back to David for some closing comments.
Thank you, Curt. As we've tried to convey this morning by most metrics Carlyle had a strong quarter. While there are certainly challenges ahead of us, we are confident that Carlyle is well positioned for continued global growth and profitability. Now we are pleased to take your questions.
[Operator Instructions] our first question is from the line of Ken Worthington of JP Morgan. Your line is open.
In terms of the restructurings, can you update us on what you're doing in the solutions business and how this is anticipated to impact FRE and DE in coming quarters and as you think about the changes needed to right side GMS. I know you said this is under review but even from higher level, how might the business return to positive FRE? Thanks.
Ken, it's Curt. Good morning and thanks for the question. So with respect to solutions, at the beginning of the year, we looked at really kind of the whole operation there. One of the things we chose to do was to get out of the hedge funds business as well as some of the liquid alt products that we had and so we commenced the process of winding down DGAM and that has gone well. And you can see the results really in the improvement and fee related earnings.
I think that we're doing in the solutions business as we've been actively fund raising especially in the secondary space that's gone really well this quarter, with what I really like about that is we're replacing also lower yielding AUM that's been burning off in that space with higher yielding AUM and that's going to continue to show improvements in the future. The other thing I would say long-term in solutions remember we didn't buy the embedded carry when we bought AlpInvest.
And so you look forward our participation in their performance fees is going to increase over time. I think it's going to be a near-term phenomenon for a couple years out that will start to really matter and of course in any kind of business the performance isn't exactly linear every quarter, but the trends thus far have been good.
Turning to GMS, there what I would say is, we've quite frankly just because I said just a minute ago we've been disappointed with kind of where we've been but the broader piece of this business is still doing well. There is many components to it, first the CLO business remains very strong and we're continuing to grow that. Second, the carry fund platform both in terms of our [indiscernible] business as well as the energy mezzanine business those funds are much larger than they were in the past and we're very pleased with that.
Third, the BDC continues to grow it's our middle market credit business and we're very happy with that. Some of the hedge funds as well as the commodities business, they quite frankly you know the losses they've been greater than we anticipated and we're thinking through kind of what the next steps are there. But overall this is an area where we're looking to how do we balance continued investment for growth with actual current term profitability, so that's going to be the analysis that we're continuing to undertake.
Okay, great and thank you very much.
Thank you. Our next question is from Bill Katz of Citigroup. Your line is open.
Bill, I think you mentioned in your prepared remarks that [indiscernible] difficult in corporate private equity, I just wanted to sort of view to rate returns, I was wondering, if that's sort of generic comment or specific to Carlyle but maybe you can talk a little bit, how you still see Carlyle in overall basis, as you look out over the next couple of years?
Okay, thanks Bill. I would say that right now that it is tough to earn returns of 20% or more than private equity business, my comments will kind of concentrate on that part of the business as oppose to energy and natural resources and real estate. In the private equity side, and frankly across all asset classes you have the risk-free rate that has been driven down near zero all over the world, by the central banks, compounded by a continued reduction in the risk premium. So you have very low base rate and you have very low risk premium.
We have continued to earn I would say over the years significantly more than what the curve between risk and return might say, we should earn. We got a good team and good markets and good strategies that really helped us there. But to let's imagine that we have exceeded that line by some number of basis points a 1,000 or 500 or some huge number over a long period of time with a big drop downward in the risk-free rate and the drop in risk premium, to out earn that rate by enough to get us to 20% will be very difficult today now.
The line moves all the time between risk and return, what we will not do Bill is take undue risk in an effort to achieve that 20% or some other magic number kind of rate of return. We know the part of the risk fact we're good at, we're comfortable operating in and to move outside of that is not something that we would do at least not on purpose and hopefully we wouldn't do at all.
I'd say if you look around the world, it isn't unique to the United States that these returns are under pressure on new deals that we're constantly outbid around the world by other private equity firms and strategies. Few years ago, the strategies were not really very much competitors with Carlyle and the other private equity firms for assets. They were licking their wounds after the global financial crisis and I would say now, that they are much more in a mode of competing with us for products. Go ahead, David.
I would just say the flip side of that is investor expectations. Over the last year and half more so than any time over the last 30 years I have noticed that investors are willing to accept lower rate of return from all private equity firms because they recognize that the opportunity to get private equity returns from almost any other asset class is just not there and as low interest rates continue for quite some time much longer than people have anticipated, people are now making investments in private equity and other alternatives willing to take lower rates of returns than the kinds of we've averaged over our history. And so, yes we're under pressure to get good rates return, but investors are actually willing to put a fair amount of money into private equity across the board not just with us even though the rates of return may come down because it's just so difficult now with low interest rates and low equity market appreciation to get these kinds of returns anywhere else.
Let me add final comments, despite our struggles to earn the types of returns we want to earn. I'd say that we still invested $12.7 billion over the last 12 months which was a lot of money that have put to work and I'd say, if there's been one trend Bill, it's that, we probably tried to move up in quality and optimum [ph] capital structure and the types of deals, we've done. In my prepared remarks I talked about ION Technology and any P [ph] group where we had a, we moved kind of structured securities to get us a lot more downside protection we think.
So it's tough to do, you have to evolve in our business we're not changing risk that we're willing to take, but in the current environment which who knows how long it will last, maybe it's as I said maybe there is time to sow and time to reap and right now is pretty good time to reap. Frankly.
Okay, thank you for that perspective.
Thank you. Our next question is from Craig Siegenthaler of Credit Suisse. Your line is open.
It looks like several of your larger flagship private equity funds like Carlyle Partner VI and Asia Partners IV could be close to reaching the deployment threshold maybe later this year in 2017, where we could actually start seeing the next series of these products in fund raising mode. Can you provide us an update on how you think about the fund raising cycle here?
Yes. We generally try to take our largest funds and not have them in the market exactly the same time because there is obviously duplication of resources and so forth, as they're challenged to kind of get raise three large buyout funds at the same time. But obviously the market is what it is, and when we're available and the funds need to be raised, we'll go out into the market. I expect that of those three big funds US buyout, European buyout and Asian buyout. At least one of them will be ready to go into the market certainly pre-marketing by the middle up next year and probably one of the others probably be ready by the end of next year.
I can't say for certain because we don't know what the investment pace will be, but we do think that there is so much demand for our products in these phase these days, that if we were to have two of them in the market or even three in the market at the same time, while it will be challenging for our fund raisers a bit and for our fund heads who had to make all these presentations and schedule everything. We think we could get it done there is fair amount of demand out there for quality products now.
Now I can't say we'll be there a year and half from now but right now, we're not that concerned about it and I would say you're probably right in the suggestion that probably in the middle to latter part next year, we'll probably be out with at least one of them if not both of them.
Great, thanks for taking my question.
Thank you. Our next question is from Michael Cyprys of Morgan Stanley. Your line is open.
Just wanted to dive in a little bit on CP VI. It seemed that fund appreciated a lot in the quarter. I thought, I heard you say 15%, just wanted to make sure that was right and then just, can you just give us an update just on where the IRR is for that plan, I don't think I saw that on the fund table and how much more does it need to appreciate from here in order to cross and to carry and how should we think about the catch-up on that realized they're bit conservative once your funds definitely move into carry?
Well let me just give you a few metrics on CP VI maybe, this is Bill. We've invested in about 10 companies in the portfolio about $6 billion. So the average size of the investment is been $600 million, the biggest of those was the cost at Veritas. The fund size total is of course about double that, so we're less than 50% invested in terms of the investment phase.
It did have good appreciation in the recent quarter, but that can vary from time-to-time. The biggest source of that appreciation was in Vogue, where we had it marked to certain price where we thought it was reasonably valued. We took it together with the CEO to market and they were number of strategic buyers who were really intrigued by the growth in the business and the growth of market share in Vogue's product and we sold it for a lot more than we had it marked. So that was a big source of the growth in the recent quarter, if that's responsive.
Mike, it's Curt. Just to add on to that, I'll confirm the 15% appreciation for CP VI in the current quarter you'll see in total to market about 1.2 times cost as of June 30 and it's on the verge of being in carry but not really solidly there yet, but it was just really great performance here in the quarter.
Yes, let me just talk a minute about taking carry, if I can. The one thing that we're learned in doing our investments for the last 25 years or more is that, our investors really hate call backs. They hate we're in a situation where we might have to pay back money that we've taken in carry and so Carlyle has a belief we want that never to happen, I'd say very, very, very rarely it does happen and it's an example we try to be a little bit cautious when we're deciding how much carry to take.
Can I just follow-up there, just on that point? How do you manage that process in terms of being cautious, any sort of color around your process around is it just formulaic it hits to certain amount of IRR after certain period of time and it just goes right into carry and the catch-up start coming through just any color to flush that out, would be helpful?
Sure. Mike, it's Curt. So we go through a number of things. First, obviously the fund has to have surpass it's pref hurdle, but that's really not really where we want to be, we really want to see that, if we you know and then you have to obviously have exit at something at a gain in order to take care, so it's just some basics there. Once you're there though, you really got them say okay now are we, really going to flip back into out of accrued carry you know in the next quarter or so just by the pure running of the pref.
And you really want to have some runway with that, so you don't want to be in a place where you've got downsized. So you really kind of looking at where is fund performed, are we profitable, what's the challenges in the remaining portfolio and do we really see that if we take carry that our risk of fallback is low. It's always going to be there and you can't protect against anything but you always want to be kind of saying about telling what we generally do is, we'll try to think through the carry rate.
So early on, when we first started sometimes we'll be entitled to a big catch-up, we won't take all of that catch-up early on, we'll be more modest with where we're going. We'll generally because somewhere around 20% and then we'll think about that to try to keep that right in which we take carry kind of balance. One things you'll notice here in the current quarter on CP V we've really been kind of in a situation where we've been taking carry at a lower rate of 10%, we'll step that back up through 15% here upon the next major realization.
Everything I've just been talking about in terms of taking carry is on distributable earnings, that's the whole realized number. ENI it's just, what the mark, at the data when we report and boom that's the map and so if you sell, if you liquidate the remaining portfolio at how it's marked, that's going to be kind of comes through in terms of the accrued carry numbers that are in ENI.
Let me just add that, partnership agreements are currently precise on things like that there is one area that they're not that precise in, is the general partners ability to carry or not. It obviously is dealt within the partnership agreements but the general partner has some flexibility in deciding when do they carry or not. We try to be very conservative in this and I think over the years, we probably invested over $100 billion of equity across our funds and probably distributed back maybe that $80 billion or so, I think we've had a call back of maybe $25 million or $30 million in the entire firm's history.
$50 million, sorry, $50 million. So $50 million has been call back at about $80 billion distributed back to investors. So it's obviously we're very, very conservative in that and I would add to what Bill said, the investors aren't happy with call back but the professionals in our firm are even less happy, when we have to call back. So we are very cautious about that.
Yes, it is. And for final point, I would say is remember we've got $1.2 billion of accrued carry. So in some theoretical world, the investors owe us $1.2 billion and it is all that theoretical, they will pay it and the question is over what period of time and when.
Great, thanks very much.
Thank you. Our next question is from Michael Carrier of Bank of America Merrill Lynch. Your line is open.
Good morning, everyone. This is Mike [indiscernible] for Mike Carrier. So performance from CP was pretty good in 2Q. I was wondering if you could talk about how the portfolio companies are doing both in terms of like revenue in EBITDA growth and I was just hoping you could expand on the opportunities in the CLO market. How much do you think you can raise on ongoing basis, maybe the contribution to your fee base and then how US risk retention rules might impact your business?
Well, there's a man who's making good use of his one question, will be my first observation. Yes, in terms of revenue growth and across the portfolio without getting too specific, I would say revenue growth is tough to come by. We have slow growth around the world. Yes, there will be some industries and business healthcare for example is a business that continued to show reasonable growth, some tech businesses show pretty good growth, but a lot of the other parts of the portfolio energy, industrial businesses, they're not really showing any growth and frankly the only way you can generate returns there is cash flow, debt pay down and margin improvement.
So and I would say that I haven't seen any improvement in revenue growth metric over time. Can't really comment right now on the EBITDA across the portfolio except we do tend to grow EBITDA more than we grow revenues just as a general rule. In terms of the CLOs we have about $20 billion CLO business around the world. I would say that CLO business it is roughly flat in size, it's grown a little bit but we tend to have a lot of CLOs that run off and they run off periodically and replace them with new CLOs. And we've been very successful last quarter we did three CLOs, average size of those CLOs is between $400 million, $500 million both in the US and Europe.
The challenge of the CLO business right now is finding enough good loans and enough high spreads to put into the CLO platforms. So even if you could can theoretically raise CLOs and we can and we do, it's tougher now to find the right assets, an earlier question talked about a formulaic approach to taking carry. In the CLO business, one of the advantages of the CLOs is they are very, very robust structures.
Throughout the entire global financial crisis, all Carlyle CLOs survived. There was no problems with any of them. One or two of them may have more of less defaults, but they made money all of them and all of them survived because of the robustness of the structure. That robust structure is generally based to make numbers up and not be too far off on a $500 million CLO to have a 100 different names in that CLO with $5 million a piece.
And so it is very, very diverse [indiscernible] you have to get in so, in order put a new CLO in place you have to be able to find and we find 50, 75, 100 issuers in order to, which make the loans. We like the business it's good for our fee related earnings there are new risk retention rules as you know in the CLO world, where people like Carlyle are sponsors of the CLOs have to retain 5% of the risk.
On a $20 billion portfolio over the course of, if we keep it at that size and hopefully we'll grow it that's a $1 billion in capital that we're going to have to come up with. I think right now, we have about $120 million off the firms balance sheet investing in the CLOs and of course my partners and I are also big investors in the CLOs as well.
We think our capitalize size track record, quality of the team, overtime and plus these risk retention rules overtime will cause to be a big profitable player in this business.
Let me just add to that if I could, that when the Great Recession happened, there was concern that CLOs might not as a business really survive and may not be all that onto enduring a business, but it turned out that they did survive and still suggested, but now what you're seeing is this, the fragmentation of the business is consolidating because of the risk retention rules and so I think a lot of people issued CLOs before we'll not have the financial strength to do in the future. So some of them are getting out of the business and then people who want to invest in these are tending to go to the bigger brand names. So I think we're one of the two biggest issuers of these and therefore I suspect there'll be a lot of consolidation in the future. It's a business we're committed to being in and we have the capital to provide the required equity capital. So I suspect there will be a growth business for us going forward as we take advantage of our strength in the market and our reputation as an issuer of CLOs.
And this business isn't going away. In 10, 20, 30 years ago banks were in the business of making loans and keeping them on their books. Today, banks are not in the business of keeping them on their books, they buy loan that they can sell, they make loans that they can sell. It's not, is it a good loan or bad loan? It's, can I sell it to somebody else. A lot of times the buyer of those loans is the CLO market. So the banks need the CLO market to be big, vibrant, open because it is a major buyer of bank loans off the bank portfolios.
CEO and CLOs doesn't stand for Carlyle, right? Collateralized no obligation but its [indiscernible] for Carlyle.
Okay, thank you.
Thank you. Our next question is from the line of Gerald O'Hara of Jeffries. Your line is open.
Just looking at the energy portfolio or I guess just returns in general, it looks like there was generally positive rebound in the quarter but also some March taking any energy mezzanine funds, so I was just sort of hoping you might be able to discuss maybe some of the differences there and have the backdrop or environment is affecting those two portfolios, thank you.
Sure the energy, yes there was a rebound in energy prices. NGP and US buyout both benefitted frankly from the sale of one of the portfolio companies Centennial, when it went public in the quarter and you've seen frankly the equity of some of the energy companies actually trade better than the debt of those portfolio companies and I would say that, we have a similar experience in our energy mezzanine fund, where we're constantly looking at what's the value of the collateral that we have and the value of those funds and we just really play straight down the middle, with regarding to evaluations. I think sometimes the collateral did not move up as fast the equity markets did.
And just to add Bill, I think that there is a little bit of what you'll see, if you look back on time you'll see that as energy prices came down, our energy funds and in particular natural resources. You'll see that our marks went down. This quarter, those marks rebounded back up but credit generally has lags, so if you go back in time. You'll see that energy mezz lagged where the energy funds were and it's right down deferred [ph] later in the cycle and this isn't unique to kind of energy mezz, this is general kind of trend that happens.
And so I can't predict what will happen in the future assuming again that rebound happens it wouldn't surprise if the credit markets rebound and energy as well and then you'll see recovery in that phase.
Great, thank you. Forgive the fire alarm that's going off in the background of our building at this point.
We're glad it's not here.
Is it a real fire or is it an alarm?
Let's hope for the latter. All right, thanks.
Thank you. Our next question is from Alex Blostein of Goldman Sachs. Your line is open.
Wanted to follow-up on the question around the lower returns on the private equity business that investors are obviously have to I guess except given the rates backdrop, does any of that translate into any of the signs of fee pressure on the business and I guess as you're thinking about fundraising, the other trend that we've been seeing over the last several quarters obviously now is the pressure on hedge fund businesses and I just wondered to what extent any of LP's are willing to change their allocation to say, give up some liquidity from invested in hedge fund part of the alternative spectrum and move it down to private equity spectrum? Thanks.
There is no doubt that money is moving out of the hedge fund sector right now that's historically been the case, when returns are down and maybe when returns come back up in that sector money might flow, but I think everybody would recognize that money is flowing out of hedge funds, to some extent and I think some of it is winding up in longer term kind of private equity vehicles by some investors.
In terms of fee pressure, I think that the fee pressure there's always going to be fee pressure when people think fee such as fact, that people always like lower fees, but I think there's generally been equilibrium that has now been reached. After the Great Recession, there was considerable fee pressure on transaction fees and other kinds of fees, but I think it's relatively stabilized now and I wanted to say that the general partners have been much more I would say transparent about what the fees are than they have ever been before and I think that's a good thing, we have been a leader in transparency working with the ILTA [ph] and make sure everybody knows what the fees are that are being charged.
In terms of the fee pressure, the way I think people should look at it, is that the management fees are really very dependent on the size of the fund. A large fund will probably have a lower management fee and they're relatively consistent now and they're relatively 1.2, 1.3, 1.4 range for a large funds smaller funds might be 1.5, 1.75 give it 2% for some venture type funds.
I think that the preferred return is kind of important part of the element too, we have seen preferred returns stay relatively high even though interest rates have gone low and so you could say that's kind of backdoor fee constraint at the bit, but that's what the business is. I think I don't see any real diminution in the interest in Limited Partners and having us get the 20% carry interest after some preferred return and the management fee is being repaid, but generally I think there is an equilibrium now and I think people recognized that getting into the better funds is going to require some challenge in part of some investors and therefore I think they're accepting pretty much what's been proposed by the general partners, there's always some negotiation but I don't really see any gigantic fee pressure from this point forward.
Although always people will ask for some kind of reduction and I would say one final point. A major change since the Great Recession has been this. It used to be before the Great Recession if you came in at $5 million in a fund, you paid the same fees as $500 million investor. Now the larger investors are typically getting some kind of modest discount and it used to be the case. If you came in at the last closing, you basically paid with interest charges the same fee as somebody came in at the beginning.
Now if you come in earlier, you get some modest fee discount and so there have been some discounts in terms of fee coming in earlier of size. But generally I think the basic economic construct of the private equity business is pretty well established and I don't think any undue fee pressure is likely to come forward from this point forward. Bill?
Great, thank you so much.
Thank you. Our next question is from Robert Lee of KBW. Your line is open.
I apologize upfront if you covered this earlier, I'm got on call a little bit late. I mean obviously you have your BDC business and your CLO business has been performing nicely, a lot of your peers have highlighted the direct lending business more broadly as both the secular opportunity for investment as well as raising assets and it's not as much an area obviously you have energy mezz and some other things, but you've highlights as much. Can you maybe talk about your thoughts on boarding out some of your direct lending capabilities is that part of GMS review that you're kind of going through now?
This is Bill. I think generally that the ability to originate loans is a good skill set to have, my earlier comments about the banks depending upon the CLOs the buyers of the portfolios was true, but I think that generally, we [indiscernible] lot of background noise there, but I'd say generally we'll be trying to build out. We've increased the origination capability a lot already, we need to do much, much more and that's one of the things we'll be looking at and will review at that platform.
Great, that was it. Simple enough. Thank you.
Thank you and that concludes our Q&A session for today. I would now like to turn the call back over to Mr. Daniel Harris for any further remarks.
Yes, thank you for time and attention today. If you have any follow-ups please contact investor relations. Otherwise, we'll look forward to talking to you again next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, you may all disconnect. Everyone have a great day.
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