Carlyle bets big on credit for future growth

The firm’s recent initiatives include the acquisition of aircraft leasing investment firm Apollo Aviation Group and the launch of an opportunistic credit fund, distinct from its distressed debt vehicles.

The Carlyle Group has doubled, tripled and quadrupled down on its credit business, underscoring on its fourth-quarter earnings call that debt investing remains a key focus area of growth for the firm.

The Washington, DC-based asset management behemoth held a final close on its second business development company, TCG BDC II, in the fourth quarter, executives said. They also highlighted its distressed debt business and emphasised the importance of its credit arm in growing the firm’s fee-related earnings’ (FRE) margin.

In the fourth quarter, co-chief executive Kewsong Lee said Carlyle’s distressed debt and opportunistic credit teams, which invest from the Carlyle Strategic Partners (CSP) fund series and the Carlyle Credit Opportunities Fund (COF), respectively, saw better opportunities due to market volatility.

The $702.8 million CSP III, which is out of its investment period, posted an 18 percent net internal rate of return and a 1.7x multiple on invested capital. CSP IV, a 2016-vintage $2.5 billion vehicle, is currently still investing and has produced a and MOIC of 1.2x. The COF, a first-generation fund still in market, so far has raised $1.06 billion.

The firm’s direct lending team, which invests mainly out of its publicly traded TCG BDC, originated gross new loans of $635 million for the quarter and $2.2 billion for 2018. TCG BDC is set to report earnings separately later this month.

The firm has it putting more of an emphasis on FRE margins across the business, and chief financial officer Curt Buser said its debt arm will have a higher FRE margin than its private equity, real assets and secondaries businesses.

FRE has seen growth across the credit business, he explained, which in the last couple years has been affected by legacy hedge fund assets and insurance recoveries along with costs of building the business. In 2017, the FRE minus those factors was $14 million and last year it was $40 million.

Growth in the credit branch will also affect compensation costs, Buser said, which he attributed to both the acquisition of Apollo Aviation Group, now Carlyle Aviation Partners (CAP), and the planned expansion of the debt investment team. The firm noted it plans to reduce its equity-related compensation.

The firm grew its credit assets under management from $37.41 billion as of 30 September to $44.42 billion at year-end.

Inflows for credit included $5.79 billion from the CAP acquisition, $1.44 billion from new commitments and a $37 million gain from “other” factors. That gross figure was offset by $74 million in outflows, $79 million in market depreciation and $103 million foreign currency loss.

Firmwide AUM grew from $212.3 billion to $216.47 billion.