Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Carlyle Group is crashing the credit party, and that should please shareholders. 

In announcing third-quarter results Wednesday, the Washington-based investment firm all but waved the white flag when referring to its dwindling hedge-fund unit, and said its global market strategies group will focus instead on expanding its debt business. The move is positive as it ensures Carlyle remains diversified and doesn't become super-reliant on its larger private equity unit, which can drive unpredictable swings in earnings.

It's not like Carlyle is starting from scratch -- its credit arm is already a $27 billion business. But that still trails rivals by a considerable margin. "I wish we were further along than we are," Bill Conway, Carlyle's co-founder and co-CEO, said on a call with analysts. 

Debt Dreams
Carlyle is aiming to grow its credit business, which is overshadowed in size compared to many of its rivals
Source: Company filings, presentations, websites
*Oaktree figure includes $5.9 billion of AUM related to convertible securities **All figures at latest available quarter (6/30 or 9/30)

Carlyle will likely grow the unit by raising new iterations of existing funds or creating new funds focused on debt strategies that are sought by its various endowment, pension and sovereign wealth funds, as well as family office investors. 

But it's also left the door open to potential acquisitions. The unit is now headed by Mark Jenkins, a credit veteran hired last month from Canada Pension Plan Investment Board, and Conway said that if Jenkins had any "spectacular ideas" in terms of targets, Carlyle would consider them. There's a fair chance of this occurring: Under Jenkins' watch, CPPIB last year beat the likes of Apollo Global Management in an auction for General Electric Co.'s U.S. private equity lending business, a deal worth about $12 billion.

There's also a wrinkle: the purchase of a sizable lending business may end up curbing Carlyle's private equity dealmaking ability, which from time to time leans on alternative sources of borrowings. As I've written, banks have retreated from lending in a slew of private equity deals due to regulatory scrutiny, enabling non-traditional lenders to pick up much of the slack. If Carlyle were to acquire a credit manager of size, say Golub Capital with $18 billion of assets under management, it would be further reducing its own pool of lenders assuming that, once integrated, that unit was restricted from financing Carlyle transactions. 

Credit Check
Carlyle's credit-related assets under management may soon account for a greater portion of its overall assets under management
Source: Company filings
*Include GMS Carry Funds which focus on distressed, corporate and energy lending, among other things

Still, any inflows from new credit funds will contribute to the firm's goal of raising $100 billion in four years. That's a big target and may sound overly ambitious at first, but it's within reach: Carlyle raised nearly $80 billion between 2012 and 2015, and has exceeded the required average annual intake of $25 billion once before, in 2007. 

Going For Gold
Carlyle believes it can realistically raise $100 billion over the next four years, which is a bullish sign for the broader private equity industry
Source: Company filings

David Rubenstein, another of Carlyle's co-founders, said Wednesday that he was comfortable the target would be met, and if so, it wouldn't be "heroic" -- a bullish sign for the broader industry if there ever was one. His confidence likely stems from conversations with key cohorts of investors: family offices and sovereign wealth funds, each of which have trillions under management.  Alternative investment managers such as Carlyle and its peers will find themselves further in favor as such investors pursue outsized returns in a persistent low-interest rate environment. 

If Carlyle can capture a sliver of the assets managed by such groups by continuing to cross-sell new funds to its existing roster of investors and others, then it's no wonder the $100 billion target seems achievable.

Would You Like Another?
Over the past decade, Carlyle has successfully marketed new funds to existing investors. Maintaining this trend should help the firm hit its fundraising goal of $100 billion in four years
Source: Company presentation

Still, it'll take a while for shareholders to reap the rewards (in the form of management and performance fees), which explains why Carlyle's shares barely moved on Wednesday. The firm has a long runway to both fundraise and build its credit business. When it shows signs of delivering, shareholders should give it credit, but only when credit's due.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Family offices and sovereign wealth funds are tasked with investing collective pools of capital worth $4 trillion and $6.5 trillion, respectively. The latter figure is expected to rise to as much as $10 trillion by 2020, according to Rubenstein.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net