Carlyle reviews GMS; CLO and originations growth likely

Hedge fund and commodity fund losses challenged Carlyle’s Global Market Strategies platform in the second quarter and have prompted a review of its strategy, according to executives on the firm’s quarterly conference call.

Carlyle is undertaking a review of its global market strategies (GMS) business that could result in an expansion of the firm's loan origination and CLO businesses, according to executives.

“The ability to originate loans is a good skillset to have,” said co-chief executive Bill Conway (pictured),  speaking on the firm's second quarter earnings call. “We have increased the origination capability a lot already, we need to do much, much more and that is one of the things we will be looking at in our review of that platform.”

In May, the firm named Kewsong Lee as head of the GMS unit, replacing Mitch Petrick, who became a senior advisor to the firm.

The strength and future of Carlyle's CLO business was a focus of discussion on the call, with executives highlighting the three CLOs the firm priced in the second quarter at an average size of $450 million. The current challenge with CLOs, according to Conway, is finding the necessary groups of approximately $5 million loans to strong companies appropriate to be placed within the platforms.

“Ten, 20, 30 years ago, banks were in the business of making loans and keeping them on their books,” Conway said. “Today, banks are not in the business of keeping them on their books, they make loans that they can sell. A lot of times the buyer of those loans is the CLO market, so the banks need the CLO market to be big, vibrant, and open because it is a major buyer of bank loans.”

Conway said that US risk retention rules are a driving force behind a consolidation of smaller issuers in the market that will benefit Carlyle and that he expects the firm will be a “big, profitable player” in the business.

With the current size of Carlyle's CLO portfolio at $20 billion, the 5 percent risk retention rules require Carlyle holds about $1 billion in capital, of which about $120 million is currently off the firm's balance sheet, he said. Conway added that he and other Carlyle partners are investors in the firm's CLOs.

“The 'C' in CLO does not stand for Carlyle, it stands for collateralised loan obligation, but it could stand for Carlyle,” joked co-chief executive officer David Rubenstein.

Despite strong performance in its CLO business and distressed debt funds, challenges within the Claren Road Asset Management and Vermillion hedge funds caused a drop in fee-related earnings for GMS during the second quarter, according to chief financial officer Curt Buser. GMS raised $1.6 billion during the three months ending in June while its carry fund valuations fell by 2 percent, driven mostly by depreciation in its energy mezzanine fund.

The economic net income for the unit during the second quarter was $12 million, while it has reported a loss of $43 million in ENI over the last 12 months. Overall, Carlyle reported pre-tax ENI of $158 million for the second quarter, an improvement over the $89 million figure reported in the first quarter of 2016. At the end of the second quarter, assets under management stood at $175.6 billion, down slightly from the $178 of AUM reported in the first quarter. The change in AUM was attributed to a combination of distributions, redemptions and foreign exchange impact.