1. What classifies an investment as ‘credit opportunities’ at Carlyle?

The main driver is complexity. If you consider a ‘plain vanilla’ direct lending deal, this typically consists of a senior secured financing to a sponsor-owned company where the level of complexity is low, and the structure, underwriting and governance is relatively straightforward. 

Our credit opportunities platform is an all-weather strategy focused on providing transitional capital. We target good companies looking to finance what is typically a positive event in their evolution. The platform we operate is well positioned to tackle different types of situations where there are additional layers of complexity, allowing us to benefit from what we believe is an attractive return profile for the level of risk we take.

2. And what’s your investment scope in credit opportunities?

We look to invest across the capital structure from senior debt to equity-like instruments, including both sponsorless and sponsored transactions.

In terms of transaction size, we target businesses with an EBITDA of at least €20m and upwards, and our average ticket size is €100-400m as the sole lender. The size of our investments have been and could be larger for the right opportunity.

Our focus is on providing private and bespoke financing solutions with a leaning towards family and founder-owned businesses.

3. Sponsorless transactions at that kind of size are unusual, no?

In our view, there are only a select group of players with the scale and capabilities to execute sponsorless transactions of €200-300m and larger. We believe there is strong demand for capital for large size tickets from companies looking for an alternative form of financing, rather than turning to bank debt, public markets or equity deals. More broadly, we see clear whitespace when it comes to non-sponsored opportunities.

4. What are the barriers for other private credit funds wanting to do more sponsorless transactions?

The first is origination, as non-sponsored businesses often tend to be non-repeat borrowers, and therefore accessing that borrower is more challenging.

Underwriting is also a challenge given the higher level of due diligence required as a lender with a non-sponsor-backed business. The lender is responsible for managing the diligence process and hiring the right advisors, which is more time-intensive versus a sponsored deal.

Typically, in sponsorless deals, once an investment is made, we interact with borrowers continuously as they are seeking a partner to support the company’s growth, which is more demanding than traditional direct lending, which is more transactional.

5. How do you source deals if it’s a sponsorless transaction?

Sourcing sponsorless transactions is complex and requires significant effort across geographies as well as accessing different sourcing channels, including through intermediaries and senior advisers.

Sponsorless transactions are more difficult to source and also to underwrite, execute and ultimately manage. However, we believe they can provide better risk adjusted returns.

6. Do you ever club sponsorless transactions? Even the large ones?

Typically, no. A sponsorless transaction, particularly in the credit opportunities world, does not lend itself to clubs given its bespoke nature – these types of companies are often looking for a partner.

We typically partner with family-owned businesses, taking seats on the board, and providing active support as the company executes its growth strategy, which is more comparable to a traditional private equity investment.

7. Can you provide examples of sponsorless transactions executed by Carlyle?

We have invested across geographies, across sectors, and across the capital structure. We supported Unifrutti, a family-owned business and one of the largest European producers and distributors of fresh fruit globally. We initially financed the business with senior secured debt and subsequently provided additional capital through preferred equity to accelerate its consolidation strategy. In Caffe Nero, a founder-owned business and one of the largest coffee chains in the UK, we provided capital to refinance the company’s existing indebtedness, and support its growth ambitions.

8. And what’s the outlook?

Over the past year, private credit has seen a surge in both return expectations and market share as interest rates globally have increased, and we believe there is broad optimism across the asset class. Traditional credit markets remain in a state of dislocation, and we expect this to continue. Looking at both the US and Europe, the last 12 months has seen the lowest levels of high-yield bond and syndicated loans issuance since the financial crisis and, in terms of the outlook for the remainder of 2023, we are anticipating a similar story. We believe that even large, institutional borrowers will increasingly turn to private credit to provide their financing needs rather than the public markets.

Given broader market uncertainty, we believe that private credit, and particularly opportunistic credit, can provide increasingly compelling investment opportunities as good businesses look to finance their M&A ambitions, as well as refinance and reprofile existing capital structures. This is especially true for family and founder-led businesses, which typically have less access to capital.

9. We hear you’re a convert to padel tennis?

I enjoy playing padel tennis, which is a fast-growing sport and a great way to meet new people. Padel has evolved into becoming the new golf as a networking tool and I’m regularly catching up with my peers and counterparts over a game.