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Carlyle’s credit business overtakes private equity for the first time in 35 years

Dealmaking pioneer Carlyle Group has more fee-earning assets in its credit investment business than in private equity for the first time in its 35-year history.

In second-quarter earnings published on Thursday morning, the New York and Washington-based group reported $116bn in fee-earning assets under management in credit investments, compared with $106bn of assets in its private equity unit.

The change at Carlyle, which was founded in 1987 and has struck some of Wall Street’s most high-profile buyouts, including the takeover of the coffee chain Dunkin Donuts and last year’s largest deal for Medline Industries, shows how the private capital industry is changing.

As with other publicly listed alternative asset managers, such as Blackstone Group and Apollo Global, its buyout business is not as dominant as it once was.

“The largest share of our fee-earning assets under management is now associated with global credit,” Carlyle chief executive Kewsong Lee told the Financial Times.

Since Lee assumed sole leadership of the $376bn-in-assets group in 2020, he has embarked on a strategy to broaden Carlyle’s operations.

“It’s a very different firm than just a few years back,” Lee said. “We have been deliberately diversifying our business.”

In its results, Carlyle also reported distributable earnings — a metric that is favored by analysts as a proxy for overall cash flow — up 36 per cent to $529mn from the same time last year, which equates to $1.17 a share. This beat analyst forecasts.

The shift inside Carlyle is the result of two factors.

Its credit business is making acquisitions, becoming Carlyle’s fastest-growing unit and one that is poised to be its biggest business by overall assets at year-end.

Meanwhile, fundraising for traditional private equity strategies has slowed since markets started to fall this year.

In credit, overall assets under management surged 57 per cent from last quarter to a record $143bn. On April 1, Carlyle closed a deal with reinsurer Fortitude, which brought in $48bn in new fee-earning assets, and its $800mn acquisition of CBAM, a manager of secured loans with $15bn in assets.

By contrast, assets under management in Carlyle’s global private equity business fell by 1 per cent to $167bn as $4.1bn in inflows was outweighed by $6.3bn in asset sales.

Carlyle, like many of his competitors, has struggled to raise new money for large takeovers since the war in Ukraine hammered financial markets.

Its eighth flagship buyout fund, which started raising money last autumn, raised just $2.2bn during the quarter. Total investor commitments of $13.5bn are well below a target reported by Bloomberg last year as $27bn.

Though fundraising slowed to just $9.8bn in the quarter, Carlyle has passed the halfway point of a goal Lee set to raise $130bn in new investor money by the end of 2024. He remains confident Carlyle will hit the target.

Investment performance at Carlyle was strong: all of its private equity funds either rose, or avoided losses. Its corporate buyout funds were unchanged from the previous quarter, versus a 6.7 per cent drop reported by Blackstone.

Carlyle’s decision to not divest hydrocarbon assets paid off. Its natural resources funds rose 14 per cent, buoyed by surging oil and natural gas prices. Accrued performance revenues from such investments rose 427 per cent to $739mn. The overall performance revenues Carlyle holds on its balance sheet hit $4.3bn, a new record.

Net income attributable to Carlyle shareholders was $245mn, versus a $29mn loss at Blackstone.

Lee brushed off the slowdown in fundraising for buyouts, noting that investors were increasing allocations to other strategies.

“The chatter is about the challenges in the PE fundraising market. That’s kind of old news,” he said. “We’re seeing that the demand for private credit, infrastructure and investment solutions is quite high.”

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