‘You have to be cautious, but I’d say we are a net beneficiary of the volatility,” says Taj Sidhu, a London-based managing director at Carlyle and head of European illiquid credit. “We think borrowers who looked to the public markets are now coming to us because the public markets are getting much less reliable.”
It was back in 2016 that Carlyle opted to grow its private debt activity to keep it proportionately as large as its other alternative assets activities, writes Andy Thomson. Mark Jenkins, a former senior managing director at Canada Pension Plan Investment Board, was brought in as the New York-based head of global credit and, since then, the firm’s credit activities have scaled up extremely fast.
The idea was to develop products across the whole credit spectrum, including in the liquid market, where Carlyle laid claim to the title of being the world’s largest collateralised loan obligation manager with the acquisition of a portfolio of assets from CBAM Partners in March this year.
But growth in illiquid credit, where Sidhu’s team focuses, has if anything been even more dramatic. The firm had credit assets under management of around $25 billion to $30 billion when Jenkins joined – that has shot up to around $140 billion.
The firm has a direct lending business, mainly centred around sponsored deals, which has been scaled rapidly with most of the activity taking place in the US but increasingly in Europe also. The opportunistic performing strategy lends across the capital structure with a bias to non-sponsored deals (including some sponsored), often in the junior part of the capital structure. In April, Carlyle closed its second opportunities fund on $4.6 billion, beating a $3.5 billion target.
“We have seen that the last two years have been fruitful in terms of portfolios being tested and investors gaining more confidence”
While most of the firm’s focus is on the corporate market, it also does real assets deals in areas such as infrastructure, aviation and real estate.
Although North America and Europe have been the main focus so far, Asia-Pacific is just creeping onto the radar and it seems likely that announcements about strategic moves in the region are not far off. “We are looking to grow across Asia-Pacific and it would be the whole spectrum of activities,” says Sidhu. “But we think those markets are much less developed and there’s so much variety between them. But there’s not much we can discuss now other than we have set up discrete platforms already and we have some team members in Hong Kong.”
Optimism around underwriting
The economic clouds may have darkened with the prospect of rate rises, lingering inflation and even the prospect of recession, but a change in approach should not necessarily be expected. “There has been a huge amount of volatility over the last two years and we have to underwrite on the basis that it will continue,” says Sidhu.
“The backdrop is that private credit has been growing structurally for over a decade and we think you’ve still got quite a healthy M&A market. Volume for us appears to have been helped by the public markets having closed and bank underwriting appetite becoming very limited.”
He adds that the firm applies close scrutiny to underwriting new investments, given the economic uncertainty and its impact on some industries, as well as the price of natural gas and the consequences for consumer spending. But he believes the asset class’s resilience through the pandemic stands it in good stead. “We have seen that the last two years have been fruitful in terms of portfolios being tested and investors gaining more confidence. Private credit is mainly floating rate and, given the rates environment, that positions it well in relation to high-yield bonds, for example.”
Sidhu reflects that, despite Europe facing various profound challenges including the war in Ukraine, “we have been busier in Europe than in the US recently and you see a lot of opportunity here”. He is particularly excited about developments at the larger end of the market, with Carlyle’s opportunistic strategy typically targeting deals of between $150 million and $1 billion.
“We would like the larger end of the market to grow further,” he says. “And I think we’ll see several multi-billion dollar deals over the next few months.” He acknowledges the need for private debt managers not to let syndications get too large. “The beauty of private credit is the two-way conversation. You don’t necessarily have to be sole lender but we think you do get too much dilution of influence when you go above a certain number of lenders. In very big deals, you may see a tail of smaller participants but with the deal led by just one or two.”
Aside from ESG, “we think it’s important to highlight how you’re different. For us, we think that comes down to how we leverage the broader platform in terms of geographic footprint, industry groups for underwriting and asset management to manage the investments and the risk. We’ve had most of our European offices for 20 years or more, so we have that presence along with the industry verticals. We believe we can get to an answer quickly when it comes to due diligence.”