[Interview] Carlyle sees huge potential in private credit: Co-CEO

  • 2018-09-07

The Carlyle Group, one of the world’s biggest private equity firms, puts the expansion of credit business as a top priority as the private debt market is expected to grow at a faster pace than private equity, said its co-chief executive officer Kewsong Lee.

Kewsong Lee, co-CEO of the Carlyle Group

Kewsong Lee, co-CEO of the Carlyle Group

In the face of high valuations and intense competition, Carlyle will take advantage of its PE business to create investment opportunities for private debt so that it can better compete with credit-focused investment companies.

“Private credit market today appears strikingly similar to where private equity was approximately 20 years ago. We have considerable white space to launch new products and expand investment mandates,” Lee told the Korean Investors in a recent written interview.

“Carlyle’s board and top management has made credit a top priority. We see the credit as a huge area of potential expansion of the firm.”

Private credit has seniority of claims to equity as a type of debt. Their strategy varies from senior, mezzanine and subordinated notes to distressed and structured debt.

Private credit market has been expanding at an explosive pace, filling the void left by US and European banks which reduced lending since the 2008 global financial crisis.

Lee, Korean American, and Glenn Youngkin took the helm of Carlyle as co-CEOs at the start of this year, in the first generational change among major private equity groups such as Blackstone and KKR & Co.

Lee, a graduate of Harvard Business School, joined Carlyle in 2013 as deputy chief investment officer for corporate private equity. Previously, he had worked at Warburg Pincus for 21 years.

Carlyle has $210 billion of assets under management.

Following are Q&As with Lee.

Why is credit business so important to Carlyle?

“Carlyle’s board and top management has made credit a top priority, building out its team under the oversight of global head Mark Jenkins who was hired from Canada Pension Plan Investment Board, huge commitment at board to become a leader in credit.”

“We see the credit as a huge area of potential expansion of the firm. We have $34 billion of asset under management in credit group, which includes direct lending, credit opportunities, and distress investing.”

“Private credit market today appears strikingly similar to where private equity was approximately 20 years ago. We have considerable white space to launch new products and expand investment mandates. Growth will likely come not only organically but also through the selective acquisitions in focused areas.”

“In today’s market where there is more volatility, credit is a good asset class because of the downside protection from being higher in the capital structure.”

How is Carlyle differentiated from private credit-focused managers?

“Carlyle is greatly positioned in credit due to (i) great performance, (ii) broad platform that is balanced, (iii) lack of conflict because we have not overly focused on SMAs, and (iv) strong synergy and connections to our global franchise and strong firm knowledge of industries and sectors around the world.”

“Our extensive networks in industries and in the markets helps us tremendously.”

You entered the PE business in 1992. Would you see any difference in the PE industry between now and then?

“It used to be a relatively a small business in 1980s. Now there are thousands of firms and approximately $1 trillion of capital that has been raised for investment. During this time, the industry has created enormous value for pension plans and retirees, as the industry’s returns have consistently outperformed public markets—this is the most important role we play.”

“Over the years, PE has gone from being an exotic investment strategy, to now, an important and necessary strategy to create returns. The business world realizes the very important role that private equity can play in helping them with their business.”

You were hired in 2013 by David Rubenstein, a co-founder and co-executive chairman of Carlyle, who made several attempts to recruit you. Which part of your character or abilities do you think made him think highly of you?

“You’d have to ask David! But, my guess is that I have a good understanding of people and existing organizations, and the founders believed there would be a good fit with me and Carlyle.”

You took the reins from co- founders as a co-CEO, five years after hired by Rubenstein:

“I came to Carlyle initially to focus on PE and played the role of deputy chief investment officer, a role where I in essence helped lead the entire PE segment, the largest segment of the firm. I  began to integrate and create strategy of having the entire PE area work better together. I drove much of the investment process at IC and helped the segment strategically with new product launches (i.e., long dated funds). I also made very tough decisions of shutting funds that were too small and underperforming.”

“After initial success at PE segment, the founders asked me to take additional responsibility for credit business, which back then, consisted of primarily hedge funds. I shut down poor performing hedge funds, and made tough decisions to totally revamp strategy to focus on private credit as opposed to hedge funds. Now the platform is well poised to grow robustly and the market reacted to the change quite positively.”

“While all this was happening, I was also very helpful in developing and expanding Carlyle’s relationships with our investors, to help raise capital for our funds.”

“With such visible improvements at PE and global credit segment, I was able to enjoy strong backing from the founders and the board, which helped me make it to the current position. I currently oversee PE and global credit, in addition to corporate strategy, capital markets and corporate development and chair the Executive Committee of Carlyle.”

▶ On the recent macroeconomy and investment environment:

“The real economy and the investment environment are two very different things. The real economy is actually, at the present and in general, doing pretty well around the world. The investment environment is more challenging, as valuations are in general, fairly high, and competition is quite robust. More recently, geo-political issues have created more uncertainty, and the volatility complicates investing.”

“It is really important to appreciate that our business is a long-term business and is very diversified and broad — we invest in good times and bad, through all points of the economic cycle, and have generated attractive returns throughout cycles. This long-term orientation is quite important because it allows us in times like today to see opportunity and to partner with management to build for the long-term and to do what is really best for a company, without being overly influenced by short term issues.”

You are among the second-generation leaders of the global PE industry. How would you see the PE industry evolve going forward?

“The momentum of this industry will continue, and the role of private capital (not just private equity) will expand. Private credit will continue to grow faster than private equity, and it will become an important force in the financial markets. Private infrastructure solutions as well will become important. In general, the importance of the industry will continue to expand into different asset classes.”

▶ Can South Korean retail investors invest in Carlyle’s private credit products?

“We are currently exploring the possibility of developing the investment products for the Asian retail investors, as we did for the US investors. We need the reliable local partner to do it properly and plan to look for the partner candidates in the different markets in Asia. There’s nobody today that offers the benefit of their entire credit platform for the retail investors. Rival firms tend to offer only more specific products to high-net-worth individuals. We are able to structure the retail products in a way that has the best end-outcome for the investor.”

“On the back of our broad credit platform, we have many ways to address the illiquidity issues, through the structuring of the products or the asset allocation.

(Note: Earlier this year, Carlyle hired Sean Lee, ex-chief strategy officer in Asia of Permira, London-based private equity firm, as head of Asia Credit Strategy. In June, it launched a private credit fund for the high net-worth individuals and advisors in the US through its joint venture.)

By Chang Jae Yoo

yoocool@hankyung.com

<Edited by Yeonhee Kim>