3. Acquisitions, Strategic Investments, and Acquired Intangible Assets

Investment in NGP

On December 20, 2012, the Partnership entered into separate purchase agreements with ECM Capital, L.P. and Barclays Natural Resource Investments, a division of Barclays Bank PLC (“BNRI”), pursuant to which the Partnership agreed to invest in NGP Management Company, L.L.C. (“NGP Management” and, together with its affiliates, “NGP”). NGP is an Irving, Texas-based energy investor with approximately $12.1 billion in assets under management.

Pursuant to the purchase agreements, the Partnership acquired an equity interest in NGP Management comprised of 7.5% from an affiliate of NGP and 40% from BNRI that together entitles the Partnership to an allocation of income equal to 47.5% of the management fee-related revenues of the NGP entities that serve as the advisors to certain private equity funds. The Partnership also acquired future interests in the general partners of certain future carry funds advised by NGP that will entitle the Partnership to an allocation of income equal to 7.5% of the carried interest received by such fund general partners. In addition, following the termination of the investment period of the NGP Natural Resources X, L.P. fund (“NGP X”), the Partnership will pay $7.5 million to acquire an additional 7.5% equity interest in NGP Management from an affiliate of NGP that, together with the initial interests described above, will entitle the Partnership to an allocation of income equal to 55% of the management fee-related revenues of the NGP entities that serve as the advisors to certain private equity funds.

Under the terms of the purchase agreements, the sellers also granted the Partnership options to purchase additional interests in NGP. Specifically, the Partnership acquired (1) an option, exercisable by the Partnership between July 1, 2014 and July 1, 2015, to purchase from BNRI, for a purchase price in cash that is estimated to be between $65.0 million to $74.0 million plus the net capital amount that has been contributed by BNRI, interests in the general partner of NGP X entitling the Partnership to an allocation of income equal to 40% of the carried interest received by such fund general partner; (2) an option, exercisable by the Partnership from December 20, 2012 until January 1, 2015, to purchase from BNRI, for a purchase price in cash that is estimated to be between $34.0 million to $38.0 million, additional interests in the general partners of all future carry funds advised by NGP entitling the Partnership to an additional equity allocation equal to 40% of the carried interest received by such fund general partners; and (3) an option, exercisable by the Partnership in approximately 13 years, to purchase from ECM Capital, L.P. and its affiliates, for a formulaic purchase price in cash based upon a measure of the earnings of NGP, the remaining equity interests in NGP Management.

In consideration for these interests and options, the Partnership paid an aggregate of $384.0 million in cash to ECM Capital, L.P. and BNRI, and issued 996,572 Carlyle Holdings partnership units to ECM Capital, L.P. which vest ratably over a period of five years. The Partnership will also pay consideration of $7.5 million upon the termination of the investment period of the NGP X fund. The transaction also includes contingent consideration payable to ECM Capital, L.P. of up to $45.0 million in cash, 597,944 Carlyle Holdings partnership units that were issued at closing but vest upon the achievement of performance conditions, and contingently issuable Carlyle Holdings partnership units up to $15.0 million that will be issued if the performance conditions are met. Additionally, the transaction includes contingent consideration payable to BNRI of up to $183.0 million, which will be payable partly in cash and partly by a promissory note issued by the Partnership, if the performance conditions are met. The contingent consideration is payable from 2015 through 2018, depending on NGP’s achievement of certain business performance goals.

The Partnership also entered into a senior advisor consulting agreement with the chief executive officer of NGP and granted 398,629 deferred restricted common units to a group of NGP personnel who are providing the Partnership with consulting services. The deferred restricted common units vest ratably over a period of six years.

The Partnership concluded that NGP Management was a VIE and that the Partnership was not the primary beneficiary. The investment allows the Partnership to exert significant influence over NGP Management but not to control NGP Management; accordingly, the Partnership accounts for its investment in NGP Management under the equity method of accounting. The Partnership recorded its investment in NGP Management at cost, excluding any elements in the transaction that were deemed to be compensatory arrangements to NGP personnel. The Carlyle Holdings partnership units issued in the transaction, the contingently issuable Carlyle Holdings partnership units, and the deferred restricted common units were deemed to be compensatory arrangements; these elements will be recognized as an expense under applicable U.S. GAAP.

The Partnership records realized investment income for its equity income allocation from NGP, and also records, as a reduction of realized investment income, its share of any allocated expenses from NGP Management, expenses associated with the compensatory elements of the transaction, and the amortization of the basis differences related to the definitive-lived identifiable intangible assets of NGP Management. In some periods, these expenses may exceed the Partnership’s allocation of income from NGP Management, which would result in an investment loss for that period.

The cost of the Partnership’s initial investment in NGP Management was $393.3 million, which was comprised of $384.0 million in initial cash paid, $7.5 million payable in future periods, and $1.8 million of transaction costs. The $7.5 million payable in the future is included in due to affiliates in the accompanying consolidated balance sheet as of December 31, 2012. The Partnership’s basis differences based on the underlying net assets of the entity were $259.8 million, which will be amortized over a period of ten years as a reduction of realized investment income.

For the period from December 20, 2012 through December 31, 2012, the Partnership recognized $1.1 million of net investment income from the investment in NGP Management, comprised of investment earnings of $2.1 million less $1.0 million of expenses associated with the compensatory elements of the transaction and amortization of basis differences.

For purposes of the Partnership’s segment reporting, the Partnership’s share of the revenues and allocated expenses derived from NGP Management is included in the results of operations of the Real Assets segment and in the respective operating captions. The Partnership excludes from its segment results the impact of equity-based compensation and contingent consideration issued in conjunction with acquisitions and strategic investments and the amortization associated with acquired intangible assets.

Acquisition of Vermillion

On October 1, 2012, the Partnership acquired 55% of Vermillion Asset Management, LLC and its consolidated subsidiaries, Viridian Partners, LLC, Crimson Physical Commodities Partners, LLC, Celadon Partners, LLC, and Indigo Partners, LLC, (collectively, “Vermillion”), a New York-based commodities investment manager with approximately $2.3 billion of assets under management. The purchase price consisted of $50.0 million in cash, 1,440,276 contingently issuable Carlyle Holdings partnership units, which are issuable over a period of 4.25 years based on the achievement of performance-based conditions, and performance-based contingent cash payments of up to $131.3 million, which is the maximum amount of additional cash consideration that would be paid within 5.25 years of closing. The contingent consideration is payable to Vermillion sellers who are now senior Carlyle professionals. The 45% interest entitles the holders, while employed by Vermillion, to 45% of the net cash flow profits from Vermillion, which is accounted for as a compensatory award. The Partnership consolidated the financial position and results of operations of Vermillion effective October 1, 2012 and accounted for this transaction as a business combination. Vermillion is included in the Partnership’s Global Market Strategies business segment. In connection with this transaction, the Partnership incurred approximately $2.2 million of acquisition costs that were recorded as an expense for the year ended December 31, 2012.

The acquisition-date fair value of the consideration transferred for the Vermillion acquisition, and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (Dollars in millions):


Acquisition-date fair value of consideration transferred
Cash	$	50.0
Contingent cash consideration		54.0
Contingently issuable Carlyle Holdings partnership units		32.7

Total	$	136.7

Estimated fair value of assets acquired and liabilties assumed
Cash and receivables	$	8.4
Accrued performance fees		0.2
Net fixed assets and other assets		4.0
Finite-lived intangible assets—contractual rights		139.4
Deferred tax liabilities		(4.9	)
Other liabilities		(10.4	)

Total	$	136.7

The amount of revenue and earnings of Vermillion since the acquisition date and the pro forma impact to the Partnership’s consolidated financial results for the years ended December 31, 2012 and 2011 as if the acquisition had been consummated as of January 1, 2011, was not significant.

The fair value of the contingent cash consideration included in this acquisition was based on probability-weighted discounted cash flow models. This fair value measurement was based on significant inputs not observable in the market and thus represented a Level III measurement as defined in the accounting guidance for fair value measurement. The fair value of the contingently issuable Carlyle Holdings partnership units was based principally by reference to the quoted price of the Partnership’s common units. This fair value measurement was based on inputs that are not directly observable but are corroborated by observable market data and thus represented a Level II measurement as defined in the accounting guidance for fair value measurement.

As of December 31, 2012 the fair value of the performance-based contingent cash and equity consideration was $87.0 million and has been included in due to affiliates in the accompanying consolidated balance sheets. These payments are not contingent upon the senior Carlyle professional being employed by Carlyle at the time that the performance conditions are met. Changes in the fair value of these amounts were $0.3 million for the year ended December 31, 2012 and are recorded in other non-operating expenses in the consolidated statements of operations. As of December 31, 2012, the amount accrued for employment-based contingent cash consideration was $8.8 million and has been included in accrued compensation and benefits in the accompanying consolidated balance sheets. Changes in the value of these amounts were $8.8 million for the year ended December 31, 2012 and are recorded as compensation expense in the consolidated statements of operations.

Refer to Note 4 for additional disclosures related to the fair value of these instruments as of December 31, 2012.

Acquisition of CLO Management Contracts

On February 28, 2012, the Partnership purchased certain European CLO management contracts from Highland Capital Management L.P. for approximately €32.4 million in cash. The acquired contractual rights are finite-lived intangible assets. Pursuant to the accounting guidance for consolidation, these CLOs are required to be consolidated and the results of the acquired CLOs have been included in the consolidated statements of operations since their acquisition. This transaction was accounted for as an asset acquisition.

2011 and Prior Acquisitions

On November 18, 2011, the Partnership acquired 100% of Churchill, a CLO asset manager focused on senior loans to middle-market companies. The consideration transferred in this acquisition consisted solely of the Partnership’s assumption from the seller of certain operating liabilities of Churchill. The Partnership consolidated the financial position and results of operations of Churchill effective November 18, 2011 and accounted for this transaction as a business combination. The Partnership recorded a gain of $7.9 million as a result of this transaction, which is included in gain on business acquisition in the consolidated statements of operations.

On July 1, 2011, the Partnership completed the acquisition of a 60% equity interest in AlpInvest for total purchase consideration of approximately €138.4 million ($199.3 million as of July 1, 2011). The Partnership consolidated the financial position and results of operations of AlpInvest effective July 1, 2011 and accounted for this transaction as a business combination. The Partnership also consolidated certain AlpInvest-managed funds effective July 1, 2011.

On July 1, 2011, the Partnership acquired 55% of Emerging Sovereign Group LLC, its subsidiaries, and Emerging Sovereign Partners LLC (collectively, “ESG”), an emerging markets equities and macroeconomic strategies investment manager. The purchase price consisted of $45.0 million in cash, an ownership interest in the Partnership and performance-based contingent payments of up to $110.5 million, which is the maximum amount of additional consideration that could be paid, of which $73.5 million would be payable within five years of closing and $37.0 million would be payable by year six. The Partnership consolidated the financial position and results of operations of ESG effective July 1, 2011 and accounted for this transaction as a business combination. The Partnership also consolidated four ESG-managed funds effective July 1, 2011 and one additional ESG-managed fund for which it obtained control during the third quarter of 2011.

On December 31, 2010, the Partnership acquired 55% of Claren Road, a credit hedge fund manager. The purchase consideration was comprised of $157.8 million in cash and promissory notes in the amount of $97.5 million. Also included in the consideration were contingently issuable equity interests in the Partnership equivalent to $51.3 million as of the closing date. Also, the Partnership may pay additional contingent consideration up to $146.7 million, which represents management’s estimate of the maximum amount of consideration to be paid, over a period of ten years based on the achievement of certain performance criteria, including Assets Under Management (AUM) growth. The Partnership consolidated the financial position and results of operations of Claren Road effective December 31, 2010, and has accounted for this transaction as a business combination. The Partnership also consolidated two Claren Road-managed hedge funds effective December 31, 2010.

For a complete description of these acquisitions (collectively the “2011 and Prior Acquisitions”), refer to Note 3 of the Carlyle Group combined and consolidated financial statements for the year ended December 31, 2011, which are included in the Partnership’s final prospectus dated May 2, 2012, included in the Partnership’s Registration Statement on Form S-1, as amended (SEC File No. 333-176685).

The following table summarizes the contingent consideration liabilities associated with the 2011 and Prior Acquisitions:


	As of December 31,
	2012		2011
	(Dollars in millions)
Amounts payable to the sellers who are senior Carlyle professionals
Performance-based contingent cash consideration	$	104.6	$	98.6
Performance-based contingent equity consideration		24.6		36.9
Employment-based contingent cash consideration		87.4		62.3

		216.6		197.8
Contingent cash and other consideration payable to non-Carlyle personnel		28.1		33.7

Total	$	244.7	$	231.5

At December 31, 2012 and 2011, the fair value of the performance-based contingent cash and equity consideration payable to the sellers who are senior Carlyle professionals has been recorded in due to affiliates and due to Carlyle partners, respectively, in the accompanying consolidated balance sheets. These payments are not contingent upon the senior Carlyle professional being employed by Carlyle at the time that the performance conditions are met. Changes in the fair value of these amounts were $15.9 million and $14.1 million for the years ended December 31, 2012 and 2011, respectively. For periods prior to the reorganization and initial public offering in May 2012, the change in the fair value of this contingent consideration was recorded directly in partners’ capital in the consolidated balance sheets. For periods subsequent to the reorganization and initial public offering, changes in the fair value of these amounts are recorded in other non-operating expenses in the consolidated statements of operations. On December 31, 2012, 504,734 Carlyle Holdings partnership units (approximately $13.1 million) were issued to the Claren Road sellers upon satisfaction of the performance-based condition.

At December 31, 2012 and 2011, the amount of employment-based contingent cash consideration payable to the sellers who are senior Carlyle professionals have been recorded as accrued compensation and benefits and due to Carlyle partners, respectively, in the accompanying consolidated balance sheets. Changes in the fair value of these amounts were $25.1 million and $6.8 million for the years ended December 31, 2012 and 2011, respectively. For periods prior to the reorganization and initial public offering in May 2012, the change in the value of this contingent consideration was recorded in partners’ capital in the consolidated balance sheets. For periods subsequent to the reorganization and initial public offering, changes in the value of these amounts are recorded as compensation expense in the consolidated statements of operations.

At December 31, 2012 and 2011, the fair value of contingent consideration payable to non-Carlyle personnel is included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. Changes in the fair value of the contingent consideration payable to non-Carlyle personnel of $(3.4) million and $3.5 million for the years ended December 31, 2012 and 2011, respectively, are recorded in other non-operating expenses in the consolidated statements of operations.

The fair values of the performance-based contingent cash consideration related to the 2011 and Prior Acquisitions were based on probability-weighted discounted cash flow models. These fair value measurements are based on significant inputs not observable in the market and thus represent Level III measurements as defined in the accounting guidance for fair value measurement. As of December 31, 2012, the fair value of the contingently issuable Carlyle Holdings partnership units was based principally by reference to the quoted price of the Partnership’s common units. This fair value measurement was based on inputs that are not directly observable but are corroborated by observable market data and thus represents a Level II measurement as defined in the accounting guidance for fair value measurement. Refer to Note 4 for additional disclosures related to the fair value of these instruments as of December 31, 2012 and 2011.

Intangible Assets

The following table summarizes the carrying amount of intangible assets as of December 31, 2012 and 2011:


	As of December 31,
	2012			2011
	(Dollars in millions)
Acquired contractual rights	$	797.7		$	615.8
Acquired trademarks		6.8			6.8
Accumulated amortization		(150.4	)		(64.5	)

Finite-lived intangible assets, net		654.1			558.1
Goodwill		37.0			36.8

Intangible assets, net	$	691.1		$	594.9

The following table summarizes the changes in the carrying amount of goodwill, by segment as of December 31, 2012. There was no goodwill associated with the Partnership’s Corporate Private Equity and Real Assets segments.


	Global Market Strategies		Solutions		Total
	(Dollars in millions)
Balance as of December 31, 2011	$	28.0	$	8.8	$	36.8
Foreign currency translation		—		0.2		0.2

Balance as of December 31, 2012	$	28.0	$	9.0	$	37.0

Intangible asset amortization expense was $85.6 million, $60.9 million and $3.6 million for the years ended December 31, 2012, 2011 and 2010, respectively, and is included in general, administrative, and other expenses in the consolidated statements of operations.

The following table summarizes the estimated amortization expense for 2013 through 2017 and thereafter (Dollars in millions):


2013	$	103.2
2014		97.6
2015		93.7
2016		89.0
2017		83.4
Thereafter		187.2

	$	654.1