Carlyle uses co-investment to bolster $3.1bn credit opps fund firepower

The firm has already deployed $1.3bn in total deal value, almost 35% of which came from co-investments.

The Carlyle Group has closed its debut opportunistic credit fund on $2.4 billion.

The Washington, DC-based firm’s Carlyle Credit Opportunities Fund, which will have $3.1 billion of deployable capital including leverage, has closed on 10 deals so far, head of credit opportunities Alex Popov told Private Debt Investor.

Thus far, co-investment has played a major role: total deal value stands at approximately $1.3 billion, with $850 million invested from the commingled vehicle and the remainder coming from limited partner co-investments and other investors, Popov said. Carlyle will offer co-investments when the potential deal value exceeds the firm’s target cheque size for the fund.

Co-investments have seen dramatic growth in the private equity industry but have been slower to catch on in the credit world. Investors such as the Pennsylvania Public School Employees’ Retirement System have implemented debt co-investment programmes. In an investment policy statement approved in December 2015, the pension fund outlined a higher rate of return, diversification and low-interest rate risk as reasons to pursue.

Carlyle’s opportunistic credit strategy sits between direct lending and the distressed and special situations Carlyle Strategic Partners fund series, Popov said. It targets companies that are slightly larger and in more complex situations than potential direct lending investments, though the businesses are not in financial distress.

The fund will aim to invest in upper mid-market companies with roughly $50 million to $150 million of EBITDA that are facing “idiosyncratic events”. Those situations may have temporarily locked the potential borrower out of traditional credit markets, such as the high-yield or broadly-syndicated loan spaces.

“We have been investing in a very liquid market for quite some time, and finding attractive investment opportunities can be a challenge without the right resources,” Popov said. “This environment isn’t new to us. We use the breadth of Carlyle’s platform and our industry expertise to identify complex situations that are less understood by the traditional debt capital markets. These situations also tend to attract less competition from traditional credit markets.”

The firm’s LP base for the fund consisted of a “healthy mix” of existing investors and those new to Carlyle. It included insurance companies, pension funds and foreign institutional investors, Popov said. The vehicle will be an assortment of both sponsored and non-sponsored deals, though the latter has made up roughly two-thirds of the deployment so far.

The new fund is part of Carlyle’s effort to expand its global credit platform by offering all risk-return profiles to investors, according to Popov. Target returns for the strategy sit between direct lending and the CSP vehicles, he explained, but declined to provide a specific range.

Carlyle global head of credit Mark Jenkins previously told Korean Investors that the strategy would be seeking “low to mid-teens returns”.

Popov joined the firm in 2017 from HPS Investment Partners. Last year, Carlyle made further senior hires with the addition of Taj Sidhu as a managing director to oversee the European credit opportunities team. The firm also brought in Philip Moore to be a managing director for the strategy in London. Earlier this year, Carlyle added Taylor Boswell to its New York office.