Good day, ladies and gentlemen, and welcome to the Carlyle Group Fourth Quarter 2012 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Daniel Harris, Head of Investor Relations. Sir, you may begin.

Thank you, Shannon. Good morning, and welcome to Carlyle's fourth quarter 2012 earnings call. My name is Dan Harris, and I'm the Head of Public Market Investor Relations at Carlyle. With me on the call today are our Co-Chief Executive Officers, Bill Conway and David Rubenstein; and our Chief Financial Officer, Adena Friedman. If you have not received or seen the earnings release, which we published this morning detailing our fourth quarter and full year results, it is available on the Investor Relations portion on our website and on Form 8-K filed with the Securities and Exchange Commission. Following our prepared remarks, we will hold a question-and-answer session for analysts and institutional unitholders. This call is being webcast, and a replay will be available on our website immediately following the conclusion of today's call. We will refer to certain non-GAAP financial measures in today's remarks, including Distributable Earnings, Economic Net Income and Fee-Related Earnings. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are included in our earnings release. Please note that any forward-looking statements provided today do not guarantee future performance, and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our registration statement on Form S-1, and such factors may be updated from time-to-time in our SEC filings. Carlyle assumes no obligation to update any forward-looking statements. With that, let me turn it over to our Co-Chief Executive Officer, David Rubenstein.

Thank you very much, Dan. We have a good deal of information that we'd like to cover today. But we'd also like, beyond the numbers, to leave you this morning with 4 overarching messages. First is that our performance in 2012 reflects the strong operation of the Carlyle engine. It continues to run as described at the time of our initial public offering. We said then that Carlyle was prepared to operate as a public company with all of the expectations and transparency this now entails. And we believe that we have shown this to be the case. The second message is that our achievements in 2012 reflect our ability to deliver the steady and attractive strength in the key metrics by which we are judged and, most importantly, the metrics we most focus on internally, distributions to our fund investors and Distributable Earnings for Carlyle. The third message is that 2012 was, in comparative terms as well as in absolute terms, an outstanding year for Carlyle. And we believe our performance last year creates a foundation for us to do even better in 2013 and beyond. And the fourth and final message is that for the entire alternative investment industry, last year was a strong year. That was not an aberration. A reflection of the industry's increasing maturation and of a general recognition by investors of the increasing attractiveness of the industry as a place in which to invest. At the latter point, we believe there's a growing view in the investment community that well-run, stable alternative investment management firms represent a solid, predictable growth and earnings story. Now let me get to the numbers and most importantly, 3 numbers we want to highlight today. The first is $18.7 billion. That is the amount of proceeds we realized in…

Thank you, David. Looking back at this time a year ago, the only thing certain about our global economy was continued uncertainty. Will the Congress allow the U.S. economy to fall off the fiscal cliff? Will Japan recover from Fukushima? Will the Eurozone fall apart? Will China crash in a hard landing? Will the central banks bail out their economies? And so on. As I rattle off these questions, I think that today we actually have answers. The U.S. averted the fiscal cliff. The Japanese people responded resiliently and are focused on jumpstarting their economy. The Eurozone crisis has generally stabilized for now. China had not only didn't experience a hard landing, but is arguably experiencing a late-year boom. And the central banks continued to promote a world awash in liquidity. So while 2012 was a year of uncertainty, the world has started 2013 with much more certainty, which has clear implications, not only for our business but also for the global economy. With that said, I will briefly focus on 3 topics: First, insight from our recent data on the global economic environment; second, highlights of our 2012 and fourth quarter activity; and third, our outlook for 2013. With respect to the economic environment, our proprietary data from over 200 portfolio of companies has been generally encouraging. The U.S. economy continues to grow, albeit slowly. We continue to see 4 drivers of the economy: the housing recovery, the energy revolution, the resilient U.S. consumer and the abundance of low cost of credit. Yet there remain risks, starting with the stalemate in Washington. But I'm more optimistic about the outlook for the United States in 2013 than I was at this time last year. Turning to the rest of the world. As I noted, we are seeing some very positive…

Thank you, Bill. Carlyle continued to show strength in its core business and its operating metrics. Carlyle posted a strong quarter with $188 million in pretax Distributable Earnings or $0.49 per common unit on a post-tax basis and pretax Economic Net Income of $182 million or $0.47 per common unit on a post-tax basis. For the full year, Carlyle produced Distributable Earnings of $688 million and Economic Net Income of $736 million. Before reviewing the detailed financial performance, I would like to drill down on the relationship between realized proceeds and Distributable Earnings. To help explain the year-over-year differences in Distributable Earnings, it is important to examine the nature of the proceeds that we realized, as well as the carry characteristics of the funds that generated the realized proceeds. In 2012, 78% of the realized proceeds were from sale activities versus 88% in 2011. Throughout 2012, because of the strong performance of our portfolio and the attractive capital markets, some of our younger portfolio of companies issued meaningful dividends, which improved the underlying performance of our funds that were not carry-generating events. On a related point in 2012, we had more distribution activity coming from our younger funds. And therefore, 58% of the proceeds in 2012 were produced by funds actively realizing performance fees versus 64% in 2011. Overall, our 2012 realized proceeds better positioned our funds to generate and distribute significant amounts of cash carry in future periods. Specifically, after having generated $869 million in total realized performance fees in 2012, with $502 million net to the firm, our total accrued performance fees, net of giveback obligations, grew to $2.1 billion at the end of 2012. Now turning to our results for the year and starting with our year-end distribution to unitholders. Carlyle declared a quarterly distribution of $0.85…

Thank you, Adena. Let me very succinctly summarize what we've been trying to communicate this morning. In any standard, Carlyle had a highly successful 2012, as well as a notably successful start as a public company. And our approach has never been one of patting ourselves in the back or sitting on our laurels. We always believe that we can improve. And we believe this general perspective of ours is especially warranted in 2013. And we believe a number of factors are likely to coalesce to our benefit and to our fund investors' and unitholders' benefit this year: one, our many well-performing investments already in the ground, a fair number of which should be a ripe for some type of exit during the year; two, the considerably high level of dry powder now available to us to make new investments in whichever parts of the globe seem most appealing; three, the growing appeal of alternative investments to the institutional and individual investment community; four, our well-recognized ability to raise new equity capital and to do so on attractive terms and an attractive pace; five, the widely recognized and growing value of the Carlyle brand around the world; and six, the generally more favorable macroeconomic and investment environments likely to be present in most of the areas in which we invest or in which we exit investments. For these reasons, we are very much looking forward to 2013 and are now happy to answer your questions.

[Operator Instructions] Our first question is from Howard Chen of Credit Suisse.

Bill, from listening to your commentary, it sounds like we could see that balance between 57% invested in the U.S. and 43% outside the U.S. shift a bit in 2013 and we could see you put more money out internationally. Is that a fair characterization? And if so, could you give us a sense of flavor for what you're seeing in the competitive landscape for assets internationally?

Sure, Howard. I would say that I do -- the U.S. is a great place to invest. There's no question about that. And I talked about in my remarks the reasons why. And the fact that in 2012, we've done more than 1/2 of our investments in the United States. And that's where we started. I'd also say that our investment professionals are roughly evenly divided around the world between the United States and outside the United States. But I think as I look at the activity now, our funds in the United States, of course, finished 2012 very strong with the deals I mentioned that we've done, Hamilton Sundstrand and Landmark, Getty, et cetera. But I think that the deal flow is very good outside the United States right now. Maybe there's a little more uncertainty, maybe some other people have withdrawn a little bit from those markets as the problems of the last few years surfaced. But I'm hopeful that not that the United States will shrink in any way in terms of activity, but the relative share outside United States might grow a bit. I might also tell you that I think the United States fund has the capability, of course, to invest a little bit outside the United States as well. Under its terms, it can put up to 20% of its money outside the United States. It's never come close to that. But some of its big winners in the United States fund have actually been in countries outside the United States done by the U.S. buyout fund.

Great. And a bit on the competitive landscape for putting money in the ground outside the U.S., I know you source a lot of deals proprietarily.

Sure. The competitive landscape is -- it's obviously a competitive world all over. Remember, when David was talking about our fundraising, Howard, one of the big things that people have to understand is the money has the be invested somewhere. This world is awash in liquidity. Interest rates are very low. I talked to you about the 35 companies or so that had refinanced or are refinancing in our portfolio around the world. So people have to invest the money somewhere. And they've begun to see that private equity is a pretty good place to invest, particularly with the top firms, which I'd like to think we are. So it's competitive everywhere. I would say that China has become more competitive. I would say Europe and Japan are less competitive. I would say that the other parts of the world are not nearly as competitive as us. So I think the Carlyle brand helps us. I think the fact that we have a tendency to all work together, these 650 investment professionals around the world, can sometimes make us a lot stronger. In addition, remember many companies today, we may think of them as American company or a European company or an Asian company, but they're really a global company. It's fine to say that Coca-Cola is an American company. But is it really? So I think that it's competitive everywhere. I like our positioning. When we build these teams around the world, it's not some person and an assistant sitting in an office somewhere. It is usually a big, deep team that's supported by the rest of the Carlyle network.

Great. And then shifting years, David, Adena, you both noted that the 25 funds that the firm has in carry today, the solid performance of some of the younger funds. I'm curious, how do you think about the qualitative and quantitative thought process behind when to turn on fund carry? And then hopefully you could comment specifically on CP V, given fair value just continues to appreciate on that big fund.

Sure. I think we'll actually have Bill answer that question. Bill?

Sure. Howard, I don't know about your business, but it probably isn't all science, it's a little bit of art. The same is true with ours. When we're thinking about when we start distributing carry, we always balance a number of factors. How far along is the fund in its investment period? How high is the fund above the hurdle rate? And what is our perception about the level of callback risk? And we built our business for 26 years kind of earning the trust of our investors. And they and we really hate clawbacks. And they've been pretty miniscule over the history of Carlyle. I think our distributions have been $50 billion, $60 billion, $70 billion, and clawbacks have been miniscule compared to that. So we take all those factors into account. Let me maybe turn to CP V as an example, as I can. And although generally, we don't like to give a lot of information about any of our particular funds, CP V is our biggest fund. So let me roughly lay it out for you. It's a $13 billion fund. We've invested about $11 billion of that $13 billion. We've already distributed, as David said, in 2012, $2.6 billion. And in the fourth quarter alone, we distributed $1.6 billion. And the remaining fair market value of that fund is over $10 billion. So we have obviously an enormous profit built into that fund so far. And Adena reported that the accrued carry-on -- or David did, on the accrued carry alone on the CP V was in excess of $800 million. So what I would say is, taking into account -- and by the way, I'm able to see -- we're able to see the performance of the deals that we've done. We're able to see…

Understood. And then finally, again for you, Bill, on the realization outlook. Just given this market that we live in today, do you see that balance between strategic sales, bringing your companies public and other forms of exit pivoting or shifting at all?

For the last couple of years, we've had about 20 IPOs. As I look at the pipeline today, it's between 5 and 10 or something like that around the world. So I don't know that it's any less for that. I have been stunned still that the strategic players have not become more aggressive. Now we're beginning to see a little bit of activity in that regard. But I say to myself they can borrow money at 0. They can buy earning assets. No matter what their PE is, these acquisitions are going to be accretive. And yet they have not been that active. And that means one, for example, it's a good thing and a bad thing in a way for us. It's a good thing in that they don't compete against us for deals. We buy Hamilton Sundstrand, and I'm wondering, "Where are the strategic players?" And of course, some were there but not perhaps as aggressive as I thought they'd be. On the other hand, they have not been aggressive acquirers of assets that we own. Also in the current environment, a big source of distributions has been the dividends and recaps that we've done. And they've been pretty well known. I mentioned them in my remarks. And I think for a while that's likely to continue as well.

Our next question is from Ken Worthington of JPMorgan.

First, maybe for David on fundraising. You mentioned in your comments the tipping point for investors. So I'd love for you to further flesh out those comments. And also you're in the market for your big buyout funds. Does it seem like the tipping comment applies proportionately across the carry funds relative to your maybe fundraising targets? Or is there disproportional interest again relative to the fund size in certain areas? Then lastly, how fragile is this enthusiasm? Is this something that economic or macroeconomic conditions seems better today? But if things start to deteriorate somewhat, do your investors that you're targeting, do they kind of go back into a period of inactivity or much more conservativeness relatively easily? Or once they're kind of back, they're in it for the, I don't know, intermediate haul?

Well, on the last question first, it's always difficult to say what motivates investors and how long that motivation will continue. Typically, you see trends that kind of take hold and they go into effect for 6 months, 9 months a year or so. And they don't really change overnight depending on headlines, because many people who are making these investments are making commitments for essentially 10 years, 5-year investment periods very often and 5-year exit periods, so you have 10-year commitments. So generally, people making these commitments are not as worried about ongoing headlines or things that might change the stock market any given week or so. And so I don't think it's quite that fragile. I do think that as there is generally now perceived to be a shift among global investors a little bit away from fixed income and a little bit more towards equities, in part because low interest rates are giving people such low returns, I think this is a trend that is going to go on for quite some time. The alternative investment world is benefiting from it because we are perceived as doing even better than the public equities. And therefore, as people move more into equities, they're probably moving proportionately more into alternative equities than they had been before. So I don't think it's that fragile. Across the board, we see a pickup, not only as I was mentioning in my remarks, among the institutional investors but high net worth individual investors who really feel that they have no great alternative now because their bank deposits are essentially yielding nothing, the public market returns or mutual funds haven't done that well. I think this trend is one that's going to go on for a while. I can't say how long it will…

And then Bill, I think David mentioned in his comments the carry fund returns for the year were about 14%, mentioning it was off a high base. That kind of trails the S&P this year, very modestly, but trails nonetheless. And the U.S. market has kind of lagged global markets. We would expect carry funds to generate equity market-beating returns. So do you think the 14% return is below maybe the targeted 20% because the marks are conservative or the valuations are conservative? Again, your targets tend to be 20% IRRs, and this is just 1 year. But maybe what are your thoughts on the 14% returns?

First of all, 14% was the change in the valuation, which is different than the return. And in fact, depending upon leverage and other factors that go on, you could actually have the return be different than the valuation increase. I think though, Ken, that remember the 14% followed on top of 16% the year before and 34% year-over-year. I think everybody either says their valuations are conservative or their accountants tell them, "You can't use the word conservative." Our valuations are -- they're not conservative. And I don't know what the other firms do in terms of their valuation thing. In the corporate private equity world, the valuations are actually up about 16% for the year, so a little bit better than that 14%. And of course, it's pretty impossible to predict how much they might be up or down this year. So I was satisfied with the performance. Obviously, I want it to be better. I don't see what would have been different about it perhaps. We do have a big public equity portfolio. It's currently about $14 billion, and we're obviously harvesting out of that from time-to-time. As I mentioned in my remarks, we sold a block of Nielsen just recently.

If you add up those 3 numbers that Bill mentioned, 36%, 16% and 14% for the 3 years, it's about 22% or so over the 3-year average, which is not a bad number, but more importantly, many of the deals we did last year, we have to carry these at cost. And so there's no real appreciation of considerable amount of dollars that you invest in that year. So the fact that we did some large buyouts and those large equity checks really are carried at cost kind of weighs down that number a little bit. So it's a little bit of apples and oranges.

Particularly with the $3.3 billion invested in the fourth quarter alone. It turns out although David says you can't carry the cost, actually under the accounting rules, many of them are carried below cost.

Our next question is from Bill Katz of Citigroup.

One of your competitors recently changed their distribution policy, rather than having some of the year-end true-up they moved to more of a quarterly payout. So just curious on your thoughts on your distribution payout methodology.

I can take that. I think that we feel comfortable, Bill, with the idea of a fixed distribution for the first 3 quarters and a true-up distribution at year end. We obviously always reserve the right to make a change in that, but we are going into 2013 with the same policy. And I think based on the way that we manage our cash through the year and fund investments we're making with our cash, we feel more comfortable giving out a very good fixed yield throughout the year, and then looking at our year and looking back over the year and determining what our true-up is going to be.

Okay. And then can we just talk about the fourth quarter? I know it's kind of looking backward. But given your prior disclosure of your performance, it's just a little surprising to see the sequential decline in the performance fees. And I think, Adena, you may have addressed a little bit in your prepared remarks. But can you just talk about some of nuances here between those funds that are in carry, those that are not? And maybe is there a way to think about allocations or any 1 or 2 funds that might be shifting out to more of a carry load from a modeling prospective?

Well, I think that it is always good to go back to some of those stats, that the most important is that we do have 25 funds in carry, which means that they are in a carry position. In 2012, we had 11 funds actively generating realized carry as we exited the year. In any given period, we could have around 10 to 12 funds realizing carry. It obviously depends on whether there's actually exit activities and opportunities within that fund and also where the fund is in its life, as Bill mentioned a few minutes ago. And as Bill mentioned also, we are in a position now with CP V, which is our largest fund, to be able to generate carry this year if exit opportunities present themselves. So that will obviously be beneficial to the firm because we're still harvesting out of IV. We'll be harvesting out of V, and then we'll have additional funds all the time that have opportunities for exit that will generate carry. So I would say, Bill, it's not a science in order to be able to look at our realized proceeds and determine what Distributable Earnings will come off of that. But as we look at exit -- if you look at the exit set, we do announce -- you can look back on the funds that they're in and determine whether that will be, in fact, a carry-generating event. And we'll continue to try to give some information and insight into that each quarter.

Okay, that's helpful. David, just a quick question for you. Just coming back to your commentary on kind of tapping into the retail market that's getting into the high net worth area. Any particular growth initiatives you have to tap into that? And which product line or sets of products do you think could see the biggest lift in the near term?

Okay. Let me divide for you the individual -- or business market into -- or retail market, individual market into 4 categories very briefly. One is the there are enormous number of [indiscernible] offices these days, people who are extremely wealthy. They have $500 million of net worth or more, and they are not just United States but around the world. These people are now investing more regularly in private equity alternatives than before, and they're coming directly because they can do our $5 million, $10 million minimums. A very big influx is now coming from the so-called feeder fund market, where JPMorgan, Citi, Credit Suisse, Morgan Stanley, Goldman Sachs and others are raising for us or others these so-called feeder funds, where people can probably put in maybe $1 million of minimum towards a fund and they're rounded up. And that is probably the biggest percentage influx we're seeing, these feeder funds among the individual investors. That is a large growth business for us, and I suspect for our peers as well. A third part is something called the mass affluent market. And that is for people who are being rounded up a bit by firms that are not quite the brand name of Goldman Sachs or Morgan Stanley or Credit Suisse or JPMorgan or Citi, more regional firms. And these are people that can put in $50,000 to $100,000 or maybe $200,000 per offering, and they are rounded up as well. And they obviously accrete to less and less money, but it's still a significant factor. And we're also seeing more money coming in directly from people who want to buy -- individual investors that want to buy products that are more liquid. And we are working on some products that have more liquidity, so they could invest…

Our next question is from Michael Carrier of Bank of America Merrill Lynch.

Adena, you mentioned just on the Fee-Related Earnings, there were a couple of moving parts. You said -- you mentioned the legal benefit and then some elevated fourth quarter comp maybe on the bonus side, and then some on fundraising. Just when we look at the net impact, your margin was around 20%. If we look at those 2 issues and then when you think about the run rate going forward, do those -- and I understand things will be volatile. But do those somewhat balance each other out, and so when we start looking into 2013, you can kind of reset those items?

Yes. I think that is probably about right, Mike. I mean, we have ongoing litigation. We continue to have the ability to seek some insurance coverage for that. So it's hard to know exactly how that will play. But yes, I would agree that generally speaking, these 2 things that the payout of bonuses, the fundraising tends to be a little bit more concentrated in the fourth quarter. And then you have the insurance settlement that seems to kind of balance each other out. I think that if you look throughout 2011, after we went -- I'm sorry, 2012, after we went public, you're going to see a relatively stable run rate. And I think that you can assume that we're kind of operating in a run rate environment right now. And as I mentioned, the NGP investment will be accretive to us this year in terms of our Fee-Related Earnings by about $50 million for the year. So absent that, I think you can probably look at a relatively stable run rate.

Okay. And then just on the Real Assets segment, if we look over time, the performance has been favorable and positive. The fourth quarter, it seems like the return in that area was a bit weaker. And then the investment income, and that statement was negative. You guys mentioned some write-downs. Just wanted to get some color on what happened in the quarter, and then just anything on the outlook.

Well, I think that within the Real Assets segment, the energy funds had about 9% appreciation for the year, which was a little bit lower than their average. They got off to a great start early in the year, and then they basically had relatively flat performance. But they were distributing throughout the year. They were realizing investments and exiting. So their unrealized performance fees were becoming realized. And therefore, they were -- basically, if you don't have a dramatic increase in performance at the same time that you're realizing, then your unrealized performance fees will go negative as they convert to realized. So that really is what that trend is in the Real Assets segment for the last 3 quarters of the year, which is the energy funds and the real estate funds realizing investments against performance that was a little bit lower than they've had in prior years. I think that with the unrealized investment income, that's just an unrealized investment income associated with a particular investment that's on our balance sheet that we did write down. But I think that, that's a one-time thing.

Okay. And then last one, just on the M&A front. So you guys have been pretty active with NGP and then Vermilion. Just when you look at the outlook across segments and the strategies that you have, where investors are looking for opportunities, do you see the same level of activity going forward? Or do you feel like some of that has been built out and will be a bit more selective going forward just on the M&A front?

David, do you want to take that?

In terms of the energy specifically or...

No, I think across the board.

Yes, broader.

We feel that our platform is -- we have a broader global buyout platform than anybody else that I'm aware of, because we operate more buyout funds around the world than anybody else. We are in virtually every part of the world in which we want to be, but there's some parts of the world that we're not, and we have assessed whether we should go there or go back there. We haven't made any final decisions. I think what we are looking at, in terms of building out and might consider, is taking areas where we already are with, let's say, buyout funds or corporate private equity funds, and taking advantage of the brand name we have developed in those countries and building different types of platforms there. So in other words, in the United States, we have a real estate platform, a buyout platform, a growth capital platform, a hedge fund platform in certain hedge funds areas. We don't have those in, let's say, Asia or Latin America in all respects, and so we could well do things, where we -- take advantage of our brand name in a region and build more of a total alternative investment platform there as opposed to just having 1 or 2 funds, and that's an area of -- that we've looked at. But we are trying to be somewhat opportunistic, but the difficulty of being opportunistic in this business is that you can't put together a fund overnight and recruit people, and get -- raise the fund. It takes a while so you have to look at things 1 or 2 years down the road. We do have a number of things in the works now as we do every year. Every year, we try to either come up with or develop a new fund or have a possible acquisition in certain areas where we think we could do the investments well. But beyond that, I won't say we feel we're completely built out, and I would also say that we have a number of things we're anxious to try to see whether we can build more teams in, but I'm not sure if I answered your question.

Our next question is from Matt Kelly of Morgan Stanley.

So just wanted to touch upon what -- you already discussed some of the exit methods that have been more prevalent recently. Just wanted to follow up on that and ask, from your perspective, what brings the strategic corporate buyer more into the market to buy your assets, especially in private equity now versus what we've seen so far.

I'll take that one, David, and Adena, if I can. I think that some of it may be beginning to happen. You're beginning to see some of the bigger buyouts that have been announced lately, but maybe some buyers are beginning to say, "Well, these things, these deals make sense." But interestingly, Dell and Heinz, the 2 biggest ones really, were to some extent almost more like a private equity buyer rather than a strategic buyer. I think what happens is that a lot of strategic buyers, they may be still reeling from the 2008, 2009 situation. And we are all looking down in BizBen, and maybe they're afraid to take on that to make these strategic investments. I expect that it will increase this year. The passage of time between now and 2008 and 2009 is part of it. I think people will become pretty convinced that the central banks are for a while going to keep the world awash in liquidity, and not going to let bad things happen to the world. I think also that the 2 big engines, the U.S. and China, are both likely to have, I think, pretty good years in 2013, so that may bring them back. But as I said, it's a little bit of a mixed blessing because, to some extent, I like them staying quite on the sideline from letting us accumulate the types of portfolios that maybe can accumulate when they're flush and spending it freely.

Okay, that's helpful. And I guess this one's more for David. In terms of, you've talked a lot about in the past about increasing allocations from institutions, mainly the fund benefit plans or that's one the primary areas to alternatives, and you talked earlier in the call about retail high net worth. What's the bigger opportunity? When you guys think about it, is it providing more product to retail, liquids and potentially illiquids longer term and retail and high net worth? Or is it the increasing allocations from institutions?

Well, all right, large institutions in the United States, those are principally public pension funds. That's where most the money for private equity has come from in terms of the U.S. over the last 20, 30 years. Because they've had a denominator problem the last couple of years, it's been hard for them to, I would say, really deploy even up to their allocation, many of them, and over their allocation. As I indicated earlier in my remarks, those denominator problems are going away, as the public markets have come back a bit. So we're beginning to see more the large public pension funds going up to their allocation limits. Some are increasing their allocations to private equity because the rates of return have been pretty good. I'd say that the bulk of -- more money will come from public pension funds in the United States in the next couple of years for firms like ours. Then from individual investors, the individual investor velocity will be much greater. In other words, public pension funds are coming back, but their percentage increase is not going to be as high as the percentage increase we're going to be seeing from individual investors. And I do believe, in time, the individual investors will be able to come into private equity in different ways than they are today. And one thing I have mentioned publicly is that I do believe at some point non-accredited investors, people today who are not allowed to get into private equity vehicles under our rules and regulations in this country, will be allowed for some percentage of their money to come in. And so it will be the case at some point that somebody has a 401(k) program, but he's not or she's not accredited investor, will be able to put, in my view, some money into a private equity fund. That has not yet happened, but I think we're moving in that direction. When that happens, trillions of dollars in 401(k)s will -- or some percentage of it probably will go into alternatives in ways that we can't completely envision today, but that's a 2- or 3- or 4-year kind of phenomenon, I believe.

Okay, and then just one last one for me, and then I'll jump back in. You talked about M&A a little bit, too. So as you think about -- you've been very active on that front, as you think about moving for a platform build out, build versus buy, is it fair to assume that there's going to be more organic growth less M&A, based on what you've already bought and what you have the brand name to build going forward?

Well, I would say we -- obviously, it's always less expensive in many ways to build something because you're hiring people, you have to deploy capital, you're not getting earnings back on that for a while, and we have built Carlyle largely from recruiting people or growing people internally and then building a fund around it. But it takes 4 or 5 years before you realize the benefits of that. In something like NGP, we will be seeing cash earnings from that relatively quickly after the acquisition. So I don't think we have a mindset that we will do building versus buying or buying versus building. I suspect it will be a mix, and we just felt in the energy, for example, we really wanted to kind of replace what we had with Riverstone, and that's why we were very intent on building out this energy platform that we described. There are other areas that we're looking at, but we don't have anything set in motion now that we should buy a certain percentage of our new assets or should build a certain percentage. We don't have anything as formulaic as that or any kind of set policy. Bill, do you have any different view or Adena, any comments?

No, I think David, you're right. Oftentimes, you're trading off cost versus time. And I think on energy, we want to move quickly with the investment in NGP and the other things that we've said. I would expect that, for example, one area that we haven't touched on very much where we have been active in acquisitions and partnerships has been the GMS area, Global Market Strategies business. And there, we early on we bought a number of CLOs. They were very nice accretive businesses. You didn't really have a lot of people you knew the assets, underlying assets very well. Then we did the partnerships with Vermillion, Claren Road and ESG. And I think in the hedge fund world, what we've so far done is try to look for hedge funds that are pretty unique hedge funds as opposed to building a fund to funds business, we said, "What a particular asset classes that investors might find intriguing like a commodities hedge fund or a long short credit hedge fund or emerging markets hedge fund." And I wouldn't be surprised to see us continually look for acquisitions in that way. And I think David is also right that you could see various geographic expansions. For example, there hasn't been successfully, I don't think so far, a CLO done in Europe in the last 5 years, whereas the United States market for CLOs last year, we did 4 of them and I think we've -- about got one done already this year. We're looking at CLOs, perhaps, in Europe. And maybe over time, we'll be looking outside of Europe and the United States as well for CLO. So I think there'll be some geographic expansion in the platform. And a lot of that, we'll probably do de novo as opposed to acquisitions.

And on the acquisitions front, as all of you on the phone know, large financial institutions that you probably work for, you've made acquisitions and from time to time, they haven't been wonderful, let's say, in some cases. So when you make financial service industry acquisitions, you really have to be careful and know what you're doing. Fortunately, all the ones we have done so far have worked out, and we're very happy with them and we thought we paid a price that was fair at the time, but we're very happy with the price we paid. So we are pretty cautious to make sure these things work, and you can't do an infinite number of them in any given year because it's so difficult to find the right mix and so forth, and we also want to make sure that our culture becomes the culture that's the dominant culture overall with the acquisition. We don't really want to have our own culture kind of disrupted by an acquisition.

Our next question is from Patrick Davitt of Autonomous Research.

You guys are uniquely positioned with the dedicated fund in Japan, and there's been a lot of conversation around that market finally opening up to foreign investment again. Curious to what extent you're seeing opportunities for capital deployment ramping up there and to what extent that opportunity may merit another follow-on fund or could a broader Asia fund take care of that?

David, let me take that one if I can start, and you can maybe talk about the fund side. But the investment side, Japan, I think, has been a great market for us. We have about 25 investment professionals there. They're all Japanese. They've been with us probably a decade or so. Their first fund had really great performance. I would say that one of the great situations is because for so long, it did not have that much activity that, frankly, it's one of those markets that it's a $5 trillion economy that hasn't been as competitive as other markets, and I hope my comments don't cause any of our other competitors to jump in, but I think that has been a plus. One of the things that we did was in the last couple of years, we actually found some pretty interesting opportunities by buying companies in the public market in Japan where they were trading at very, very low multiples. Maybe they never should have been public or maybe they were just underappreciated for some reason. And in a private setting, we've been able to have them become good cash generators. We can take them back public, and of course, with the yen having moved 20% in 3 months, it's gone from about 80 to about 95 or so, and it has caused the equity markets in Japan to ramp up quite a bit. The Japanese strategics have been generally unwilling to break themselves up, where they may have had various businesses and pieces of businesses, may have been unwilling to sell those. I think for 5 years, I've been hearing that the Japanese market is going to become more open and more active and more open to private equity. I think the fact we've been there a long time and the fact that, generally, our funds are -- half of the money comes from Japan has been -- made us more Japanese in some ways, which has, perhaps, given us some -- a bit of a head start there.

All right. Let me just add a couple of points. When we went to Asia, we thought that Japan and the rest of Asia were really separate places, and we didn't feel comfortable having a combined Asia fund that had Japan in it because we just felt you couldn't have, let's say, Chinese professionals doing deals in Japan or Japanese professionals doing deals in China as readily as we would like. And so, therefore, we've built the separate teams and we're very comfortable with that, and so we will do another Japan fund at some point and we will not merge it with our Asia fund. Our fourth Asia fund is in the market now, and it's doing quite well in terms of fundraising. It does not include Japan. It could co-invest in Japan, but it doesn't include Japan. We're the only global private equity firm, I believe, that has a dedicated Japan buyout fund, and we think that has given us some distinction in Japan. And I think many people would say that we're one of the leading, if not, the leading private equity or buyout firms in Japan. We like that market-leading position. As Bill said, we've been hearing for a long time that the Japanese companies will finally begin to sell things when things don't work out. That has been a slow-moving process because it's been traditionally considered a loss of face to sell to a financial buyer, and had really admitted a mistake. We think that is changing a bit, and our Japanese team is talking more about it changing. We've talked preliminarily to Japanese investors about a new fund, and we feel that there's a lot of interest in it. We don't know what the size will be, but probably by sometime this year, we would probably be looking at something new in Japan.

Okay, and then Bill, your commentary, I'm curious if you think there's some bias within your own portfolio, either by country or industry, that would show more improvement than maybe what the broader region is experiencing?

I think, first of all, most people would say, "Gee whiz, if I'm going to Europe. I want to be in Germany and the Nordics. They are the strongest economies in Europe, and therefore, that's where I want best." But I understand that rationale, but I would say that -- and maybe it is a function of my bias that we have 5 offices in Europe. So we're in London, Paris, Munich, Milan and Barcelona. And that gives us a view of the totality of Europe. And what I would say is that the investment environment and the economic environment are different that you can have a situation where, yes, the German economy is the strongest economy in Europe, yes, the Nordics are a great place to invest. They're great economies anyway, but that doesn't mean the investment opportunities are the same. I think, sometimes, out in the periphery, you have less competition. For example, at the end of 2011, we bought a cable TV business in Spain. I'd say we had -- we're able to get good financing. The seller really needed the capital at the end of the year. We thought it was a pretty stable business with a good management team, very limited competition to acquire it. So the long-winded answer would be that the investment environment can be different than the economic environment. And sometimes, when there's uncertainty and trouble, you can move to the periphery and make some pretty good deals.

If I could just add on Europe, many American firms have gone to Europe to do buyouts. Some of them have retreated it. Now the dominant investment players in Europe really have been the European indigenous firms. However, there are a few of us that still have dedicated European funds with dedicated European teams that are doing reasonably well, and we can -- we will intend to continue. Our European of fund is in the market now, and I think it's being well-received. We think that Europe is a pretty attractive place, as Bill would say, to invest in many ways because prices have been beaten down. They're well below what they are in the United States in relative terms. So the fact that we see fewer American firms there with dedicated funds or fewer American groups there competing with us makes us feel a little bit better than maybe we did a few years ago.

Okay, that's helpful. I was actually more referring to the money you have in ground already, and the commentary around the economic recovery.

Do you mean the point that our fund has done better relative to how you think other funds or other economies doing?

Right.

Bill, you want to address that?

Yes, let me talk about that. Our European buyout fund, we have 3 big -- 3 big buyout funds: CP I, which was fully invested and harvested actually; CP II, which has -- it was about, let's see, it's, I think, about $2.7 billion fund, and it's a great fund, it's been in carry; and the third fund actually was one of the very strong appreciating funds in 2012. The fund appreciated pretty well during that period of time. I hope it'll continue to do so. So the in-ground has been -- has had a good appreciation. In fact, the fund moved from being worth below par being worth well above par.

Our next question is from Roger Freeman of Barclays.

Bill, you had -- just on a high level, you said you had hoped that you'd invest more this year, and I was wondering if I could drill down on a couple of dynamics there. One, are you on a run rate on quantity or size of deals you're looking at to do that? And maybe what's the trend in sort of what you've been sort of prospecting, 2012 versus 2011? And then two, companies have been talking about a lack of willing sellers, and I'm wondering how big of a factor that is. And were there deals last year you wanted to do, but it wasn't a receptive target, and if that changed, could that move the needle significantly?

I would think -- I would say that there are always unwilling sellers. Some of them are unwilling at any price and some of them just need a different number in order to become willing sellers. I think the big rally in the equity markets may create additional competition for us in the United States because people may say, "I can now take my business to the public market as opposed to selling it privately, and that will be a factor." Of course, on the other hand, we've got a big public portfolio, and we're selling into that rally as well. I would say one of the reasons I feel pretty confident that 2013 will be stronger than 2012 is the strong start we did get off to this year and a lot of that really was a function of 2012, but closer to 2013. I think we've already closed about $2 billion worth in corporate private equity alone in the first couple of months of the year. DuPont closed, TCW, so I feel that we're off to a good start. Right now, actually, the pipelines outside the United States feel a little stronger than the pipeline in, but that varies month-to-month, frankly.

Okay. If strategics get more aggressive, particularly, chief financing and bid valuations higher, does that make it tougher for you to achieve those objectives?

Yes, I mean, yes, but I say that not because I think it's that -- going to be that much tougher, but just because of the relative obviousness of it. As I said before, I was -- I've been surprised that they have not been more aggressive, particularly in an economy where there's been relatively low growth, let's say, in the U.S. economy, 1% or 2%, how are people going to get earnings growth? Well, the real way they -- one of the ways they should be trying to do it is make acquisitions. And frankly, look at Carlyle, the business, in Carlyle business, we grow organically. Yes, we have new funds, we do this, we do that, but we also grow by making acquisitions and investments. And I see, frankly, less companies that have done what we did. If they begin to do it, I think by definition, there will be more competition in the market.

Yes, okay. I guess on -- with fundraising being more challenging than it's been in the past and recognizing your comments, David, it's easier than over the past few years, do you think the need for seeding, perhaps, even before going to new market with a new strategy, is increasing? And if so, do you think you can continue to source enough from partners to do that? Or is there eventually a need for a larger firm and capital base?

I'm not sure I understood the question, is it...

Do you -- we've heard from others that there's sort of a competition for fundraising, and particularly going into new strategies that investors want to see more money being put into deals by the GP, whoever that -- however that's sourced, and potentially ahead of time already pre-funding a fund and then going to market with it.

Okay. There are -- let's put it this way, some people who don't have a track record of doing as much as we have done over the years of kind of building these new funds and then raising them as we're putting the team together, I've found it, I think, harder to get new areas off the ground. They don't have as much of a track record of getting new funds started and there has been a problem for some of them, I understand, doing that, and therefore, in some cases, they have used their balance sheet or other sources to get -- to show they can do a deal in area a. They'll do 1 or 2 or 3 deals, use those 3 deals as evidence of their ability and go raise a fund. In our case, because our investor base is pretty used of doing this now, it's not that uncommon for us to come out with a new fund where we haven't done deals before. For example, in Peru, we've just raised, I think, $308 million for Peru fund, and honestly, we haven't done a deal in Peru. But our investor base recognize that this is our model that we've done for many, many years, and so it hasn't been as big a problem for us. There's no doubt, though, when you're raising a new fund, if you do 1 or 2 deals while you're raising that fund, it can help if the deals are good, get the fund done. But I don't suspect that we will do too much of what you allude to because I don't think we've found that to be as big a problem.

David, let me add to that if I can. I think there are kinds of 2 types of seeding here in my view of that. One is seeding the fund by the fundraising side, where are you going to get the money to make these investments and this investment strategy? And there, I would encourage you to look both at what Carlyle has done over the last years, but also what's happened to the market. And maybe 20 years ago, a general partner put up 0.1% of the capital, and that was all they had to do under the law to have it pre-qualified as a partnership and various other things. Then over time, people wanted to see the general partners really investing in the business and the general partners were putting maybe 1% or 2% of the capital. I would say on the investing side, it's pretty typical today that Carlyle, through our balance sheet and our partners, puts in 5% to 10% of the capital of these funds being raised. So it's a different kind of seeding. It isn't so much -- it's really a sign of our support for the deal. And frankly, sometimes, we don't have better places to invest in our own funds, and I would say that's general -- generally the case. The second kind of seeding is, frankly, the first deal that goes into a fund that's in the process of being raised. David may add to this, but it's been our general experience that people like to see, what was that first or second deal in the fund going to look like? It's fine to have read the offering circular about what a certain kind of deals or fund is going to do and in size and management team and the opportunities and investing environment in place or area x. But it's really different when they can say, "Oh, that's the kind of deal you're going to do. I now understand." And therefore, sometimes, these 2 activities can kind of be self-reinforcing, where the investment seeding that, as the deals would do, reinforces the investors coming more into the fund.

And in that regard, when we have done -- when we are raising a fund and let's say, it's new, and the fund capital hasn't been raised adequately yet, we might offer our balance sheet or through the internal coinvestment, in effect, bridge the equity needed to, for the first yield, in a fund that will be placed in that fund, but the fund hasn't yet closed. So in that sense, we have "seeded it" because we've enabled the fund to do their first deal even though the funds hasn't really been raised yet.

Okay, that's really helpful color. Just lastly, David, you made a bunch -- a number of interesting comments on the retail front. I was wondering if you think about the buckets you're targeting and maybe over the next 5 years, not even factoring in some of the changes that could be made with non-accredited investors, and what percentage of capital raising do you think those retail buckets could be? And then do you think that you'd have to enhance the distribution platform over time, perhaps, even partner with a traditional manager with retail ties to kind of get at the total target areas?

Private equity firms historically didn't have the internal fundraising teams. We were, of course, the first that really built a significant in-house team and other firms like ours have it now. But none of us in this space have the resources really and the inclination to build a large retail distribution network of having 50, 100, 200 people who are really working on that market. So in effect, all of us are more or less, I'll say, renting that by working out feeder fund arrangements with the kind of people that I discussed earlier, and I'm sorry if I didn't mention everybody's name. We deal with everybody else in the phone, as well. I didn't mention Barclays. I didn't mention Bank of America. We do it with all the large organizations. We are probably, and I think other firms would probably do the same thing, in effect, we will probably add more people to our firm who relate to those people, but we won't build an internal distribution network of hundreds of people. We might enhance it by a reasonable amount, and we are working on ways to do that, but we don't want to try to replicate the enormous amount of retail-related people or private wealth management people that a Goldman Sachs or JPMorgan or the equivalent have. And I think, probably, for the foreseeable future, we will, in effect, rent a lot of what we are doing within the retail market.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Daniel Harris for closing remarks.

Thanks for joining us today. We hope we were able to answer any of the questions you had. However, I'm around all day if you have any remaining questions. Thank you for your time and interest in Carlyle, and we look forward to talking to you next quarter.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.