Carlyle Group expects significant growth in its private credit business over time, CEO Harvey Schwartz said during the company’s third quarter earnings call on 7 November.
Schwartz said that Carlyle is focusing on private credit: “Global Credit has built a diverse set of strategies to serve an increasing number of institutional and private wealth LPs to manage over $150 billion in assets today, nearly triple the level of just three years ago, including the world’s largest CLO business.”
Carlyle became the largest CLO business by virtue of its acquisition of CBAM Partners’ portfolio, a deal struck in March 2022. Schwartz was not CEO when that deal was made. Schwartz, formerly with Goldman Sachs, moved into the top job at Carlyle after the abrupt departure of Kewsong Lee. Lee left in August 2022 amid a dispute over his pay package. Co-founder William Conway stepped in as interim CEO until a more permanent appointment could be made. He handed over the reins to Schwartz in February this year.
A trend at Carlyle towards greater reliance on private credit, then, is a development that Schwartz inherited, although he seems comfortable with it.
Schwartz said on the call that private credit may benefit from “the significant opportunity to attract assets from bank balance sheets to private capital strategies”, something that “we expect to play out over the next several years”.
Carlyle puts the fair value of its global credit funds at $17 billion, with a 2 percent appreciation in the third quarter. Fundraising for these funds was $700 million for the third quarter, $2.3 billion year to date and $3.9 billion over the past twelve months.
CFO John Redett also, in his remarks on the call, highlighted the growth of global credit. Redett (who has been with Carlyle since the early days of the global financial crisis) said the company has raised “new capital for opportunistic credit, direct lending and our private wealth fund, CTAS”. Fee-related performance revenue, which is down this quarter for private equity (a trend that is “likely to persist in Q4”, Redett added), is up for private credit, moving “higher with good asset flows and strong performance in our evergreen products”.
Collateralised loan obligations
The fair value of Carlyle’s CLO investments in the US is $38 billion. That incorporates an average annual default rate of 0.5 percent. The fair value figure for the company’s European CLOs is $11 billion, with an average annual default rate of 1.3 percent. Both default rates have increased year-on-year, “reflecting the pressure of inflation and higher financing costs on debt-service capacity”, the Q3 report says.
Schwartz expressed confidence that his team is doing a very good job of mitigating risks regarding and he added a tease: “We have a fund that’s in the process of being raised, should close end of November, December, which will be a captive equity fund, which will help really support the business through growth.”
The company sustained a decrease in the fair value of assets covered by the strategic advisory sources agreement with the re-insurer Fortitude. This has been at least partially offset by fundraising and a carry fund appreciation of 2 percent.