Jeff Davis quoted in FundFire's "Carlyle Rebrands to Spark Private Credit Growth"

Eaton Partners Dec 15, 2016
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Carlyle Rebrands to Spark Private Credit Growth
By Tom Stabile
FundFire - December 14, 2016

Carlyle Group is continuing its private debt transformation begun earlier this year with plans to rebrand that business under a "Global Credit" banner, moving it away from the broader "Global Market Strategies" unit – where the team had long sat beside hedge funds – and position it to catch up with its private equity rivalsCarlyle has made various moves in 2016 along this path, replacing its leadership in the GMS division in the spring, largely shutting down its hedge fund business in various transactions throughout the year, and naming Mark Jenkins as its new credit strategies top officer in September.

Now, it aims to rename the unit running about $30 billion – including collateralized loan obligation (CLO), middle market lending, distressed debt, and energy mezzanine lending products – to more clearly emphasize private debt, according to CEO David Rubenstein, who spoke last week at a Goldman Sachs conference.

"We’re kind of shifting the title to ‘Global Credit’, because that really reflects what it is," he said. "We expect to see this as the greatest area of growth at Carlyle."

The plans include expanding the middle market direct lending arm – whose lead product is currently a business development company – and building on other existing teams, including its $20 billion CLO unit that is second-largest in the market.

The moves all aim to help Carlyle push for growth to match private equity rivals such as Blackstone Group and Apollo Global Management that developed large private debt businesses over the past decade.

"What we don’t have is as big a credit business as some of our peers, and so that’s where our greatest focus will be in the next couple of years," Rubenstein said. "We’ll put an enormous amount of capital into this, and we’ll grow it into a significant credit business."

The moves come in a year during which private debt fundraising overall is off pace from 2015 totals – when 148 funds closed, raising $95 billion – with only 105 funds closing so far this year, raising $59.5 billion, according to data from Preqin. But another 293 private credit strategies are still in the market, seeking $136 billion in capital, Preqin data shows.

And many of the biggest private equity players have had large credit funds in the market this year, including Blackstone, Apollo, Bain Capital, Oaktree Capital Management, and Cerberus Capital Management.

Oaktree is not only raising a real estate debt fund, an emerging markets debt total return fund, and a $7 billion distressed debt fund, but also has plans to launch new U.S. middle market direct lending and diversified global credit products next year, said CEO Jay Wintrob, speaking at the Goldman conference last week.

Similarly, Apollo CEO Leon Black said credit will remain a main growth area for the firm, which has seen its platform rise to $130 billion in the specialty.

"I think there’s still a lot of room for credit growth," he said. "We’ve tried to create a menu of different yield and opportunistic products… I don’t think it takes that much to take that from $130 [billion] to $200 [billion] over the next few years."

Institutional investors seem to still have a strong appetite for private credit as well, including the $28.5 billion Iowa Public Employees’ Retirement System, which is aiming to add $400 million worth of strategies, according to MandateWire. The $15 billion Illinois State Board of Investment also is planning to increase its allocation to opportunistic debt fund managers to 4% by taking a slice out of five other allocations, according to MandateWire.

Various private equity players also have been building up their private credit arms this year, including Adams Street Partners, a private equity fund of funds and advisory firm that added a new team this year, and Eaton Partners, a placement agent. The marketing firm last week announced it has created a fifth formal fundraising squad to target the area, after having housed credit under its private equity team alongside real estate, real assets, and hedge funds, says Jeff Davis, partner at Eaton.

Eaton has shifted several executives and other staff to have private credit as their main area of focus, Davis says. A big driver has been greater interest from limited partners in private debt as a standalone investment apart from fixed income or private equity, as well as a flurry of new product offerings, he says.

"Over the last five to seven years, we saw the interest in credit expand broadly and the thirst for yield grow," he says. "And it’s grown quite dramatically… We feel this just needs the thought leadership and dedication of a five to six person team."

The strong interest doesn’t guarantee success for anyone, however, Davis says. Larger brands may be able to hold allegiances with their private equity clients with a newer product set, but that may not be the case for others, he says.

"Some firms that have been in private equity for 25 years have found out that getting into credit is not that easy," he says. "There’s a lot of competition from pure play credit managers who have been doing this for years."

But Carlyle sees credit leading the way in terms of growth, Rubenstein said.

"To the extent you see Carlyle adding a lot of different businesses or see us growing our [assets under management], the greatest… percentage growth will probably be in our credit business, so we’re very bullish on our opportunity to do this," he said. "[T]hree or four years from now, I think you’ll see a much larger percentage of our overall earnings coming from global credit."

What’s unclear about the branding shift is whether the GMS name and legacy division will go away, or when any formal name change will take place. Carlyle had named Kewsong Lee to head its GMS arm in May, while he also kept his role as deputy CIO for the private equity business. Lee remains in both roles. A Carlyle spokesman declined to comment.

Any rebrand effort will involve a mix of administrative, communications, and strategy-oriented tasks, says Hank Hakewill, principal of Hakewill & Associates, a marketing and communications consultancy. The most basic level is routine repapering, he says.

"There’s a laundry list of online and offline materials that need to be changed… and they need to have some kind of communications plan for employees and clients," he says.

In Carlyle’s case, it may not require a specific personal outreach effort by a relationship manager, Hakewill says. "It might be a talking point on a call about new products or capabilities," he says.

The change is a smart from a branding perspective in order to grow the credit business, given that the GMS name is "pretty broad," Hakewill says. Unlike Bain’s move earlier this year to rename its Sankaty Advisors arm, Carlyle was already using its main brand prominently.

"You want to take the most recognizable name, and then be descriptive," he says.

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