EFTA01452601.pdf

28 January 2014 Brokers. Asset Managers & Exchanges Alternative Asset Manager Initiation Rating Coal pa ny f;c ', Nth: Buy The Carlyle Group Research Ana t North Amt-ric a United States Price at 24 Jan 2014 36.04 (USD) Price Target 4100 I:friar:Fa; 52-week range 3711- 24.19 Brokers, Asset CG 00 CGS Managers & Exchanges relat,e An emerging consistent growth story with lower risk profile; initiate at Buy Initiating coverage with a Buy rating and $43 PT We see the following positive catalysts for CG units over the next 12 months: —334. Cents Grout. 1) an inflection from among the weakest distributable earnings (DE) growth SSP see INDEX 01•11~11 stories in 2013 to the second strongest (behind BX) in 2014-15 upon greater Performance (%) 1m 3m 12m DE contribution from a broader array of funds, 2) greater investor appreciation Absolute 4.0 21.2 26.2 over the next several quarters for CG's lower risk profile emanating from its S&P 500 INDEX 0.0 4.7 22.3 conservative investing philosophy and greater diversification by product type, Sow* Chuncly Sn asset class and business line, and 3) a strong pace of fundraising over at least i at. the next several quarters, bolstering CG's' ability to maintain positive DE Market Cap (USE) 11181.6- growth post the current industry realization cycle over at least the next 1-2 Shares outstanding (m) 314.9- years. We see these dynamics helping CG narrow its P/E gap to traditional Free float 1%) asset managers during 2014, though less so than peers given its current Volume (23 Jan 2014) 96.496- premium valuation to the group; hence the story is more DE growth-oriented. ... .... Option volume lund. shrs.. .... 1M ... ... 4,79S- .... ... ,v8.I.... Earnings outlook Soca* /13/4**01* art We believe DE, from which cash distributions are paid to unit holders, is the most important earnings metric to value the Alts. rather than economic net Implied & Realited Volatility 13M f income (ENI) that forms Consensus estimates. We forecast CG to grow DE per 110% 40% jr...4U1s ebdir unit from $2.11 in 2013 to $2.84 in 2014E and $3.38 in 2015E. Key drivers are: 30% 1) a relatively stable pace of realizations 2014-16, 2) CEP III moving into carry 20% 10% position in 4Q13-1Q14. & 3) strong fundraising across business lines. 0% Ju 13 INK I2 Valuation & Risks We think the catalysts outlined above will drive CG' PIE from 11.4x 2014E ENI to 13-14x 2015 DE 12 months from now, narrowing its discount to the S&P 500 P/E from -25% to -15%. This drives a $43 PT, which implies a total return of 25% over the next 12 months, inclusive of a 6.2% forecast distribution yield for 2014. Downside risks for CG are: 1) a slowdown in US/global economy, 2) a prolonged equity market correction, & 3) an inability to generate strong organic growth in 2014 that would jeopardize long-term growth in DE after a likely strong realization cycle over 2014-15 and 4) an inability to deploy capital effectively in its PE funds given the strong pace of fund raising. Deutsche Bank Securities Inc. Page 49 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0109735 CONFIDENTIAL SDNY_GM_00255919 EFTA01452601