Private credit has been expanding its scope with fund managers looking outside of the regular pool of institutional investors. They’re also aiming to be the lender of choice of any type of company.

Non-sponsored lending and the new buzz-word — retailisation — are trending. Carlyle has been on top of the developments. Since the beginning its private credit platform has been created with the intention of being able to originate and underwrite non-sponsored opportunities as well as private equity-led ones, Taj Sidhu, head of European and Asian private credit at Carlyle told 9fin.

In February 2024, Carlyle launched a European private wealth product to meet the opportunity offered from the large global private wealth market, which is still under allocated.

9fin sat down with Sidhu to talk about how these strategies are progressing, opportunities and challenges in the current market.

1. Carlyle recently launched a dedicated European private wealth product. What is the concept behind this strategy?

The concept is to give to individual investors in Europe access to the types of European credit investment opportunities that have historically, or at least traditionally, been reserved for institutional investors.

If you look at private credit, the characteristics which make it an attractive asset class for institutional investors are the same for individual investors. The simple concept of a stable, predictable income stream that comes at a premium to traditional fixed income markets is why you've seen so much institutional demand for private credit over the last decade.

The global private wealth market is large and significantly under allocated to private markets overall. The Carlyle brand has always been well received in the private wealth space and is a real differentiator for that investor base.

2. There has been some criticism towards the so-called retailisation of the market, suggesting that it might involve additional regulations, for instance. What's your take on this?

I'm not a regulatory expert, but there is already robust regulation, which varies significantly by geography, profile of investor, and the product that they might be investing in. That regulation is obviously designed to ensure the right level of disclosure and protection to those underlying investors.

The key should always be that people are given the appropriate level of disclosure regarding the exact type of investment that they're allocating capital to and what they should expect with respect to terms and risks.

3. On a broader point, what do you think are the main challenges and opportunities in the market?

At a high level, the opportunity for private credit hasn't changed. What continues to persist is that businesses are staying private for longer.

There's a significant amount of private equity dry powder out there and this will continue to drive the longer-term need for private credit, specifically within the broader private capital universe.

And we do believe that in the medium to long term private credit will continue to take share from the more traditional bank-led lending markets or fixed income markets.

More specifically, we believe there continues to be opportunity today on the more opportunistic side, or the capital solution side, of the private credit universe.

This higher rate environment helps to drive a significant amount of opportunity, especially when you combine that with the increasing level of debt maturities that will be coming up in the next two or three years for deals that were financed in a much lower rate environment. So that's an exciting opportunity from our standpoint.

Asset-backed finance is another area where we believe there will be significant growth.

In terms of challenges, we have seen a subdued level of private equity activity, in combination with tighter pricing in the last six months.

I can't predict exactly when, but we will see a return to more normal levels of activity. We believe private equity activity will increase. It's just a question of time.

4. Among the opportunities Carlyle has spoken about frequently the focus has been on non-sponsored lending. What is the latest on this strategy?

It's always been an area of focus for us. We built our private credit platform with the express intention of being able to both originate and underwrite non-sponsored opportunities, as well as obviously serving the traditional sponsored market.

And so that continues to be a core part of what we do. It's an opportunity set that we expect to grow as private credit continues to become a more mainstream source of finance for borrowers.

In the last 12 to 18 months, we have seen that a lot of the activity has actually been on the non-sponsored side on a relative basis, given that traditional private equity-led deal activity has been more subdued.

We believe private equity-owned businesses represent less than 5% of all businesses out there. Now, it can't be true that the remaining percentage of businesses are not suitable for private credit. Even if we are dealing with a small fraction of those, the market potential is clearly there.

5. Among recent deals, was the Ottobock financing an example of this strategy and of the focus on family-owned businesses? 

Yes, that's a very good and a relatively high-profile example of a non-sponsored lending opportunity. It's a global market leading family-owned business that required a tailored capital solution to meet the family's specific needs.

It’s also a good example of the advantages of private credit versus other forms of finance. We were able to underwrite and tailor the financing solution to the family and to their very specific requirements. The family had a real desire to achieve a specific outcome in terms of that financing. We were able to sit down and work with them over a number of months to provide a highly tailored financing solution.

The beauty, if you like, of private credit versus more distributed capital markets is that we own the risk that we lend. We're not looking to underwrite something which then is sold into a broader market. Therefore, we need to create a solution that works for the borrower, and works for us as lenders – we do not have to cater to third parties.

6. Connected to that, we have obviously been seeing the return of the BSL market especially in the large cap space. What is the impact for Carlyle as a large cap lender?

First, we cover both the mid-market and the large cap. We're not singularly focused on a particular sub-segment.

Our view is that it is healthy to have a functioning broadly syndicated loan market. This is ultimately a key driver to driving the return of M&A volume. The private credit market and the broadly syndicated loan markets have coexisted for a very long period of time and will continue to coexist, long-term.

There are always situations where the broadly syndicated loan market is the right solution, for a variety of reasons, but there are often situations where private credit is the right solution. There's always deal-specific reasons why one is more suited versus the other.

And then sometimes together. We have seen a number of transactions where there may be firstly a broadly syndicated part of the capital structure and then a junior private credit part of the capital structure. They coexist well, especially within the current rate environment.

But it's early. It's only been a few months where we've seen the banks really willing to underwrite risk again. Two to three years ago, we had a functioning and growing private credit market and a functioning broadly syndicated loan market. It is optimal for both of these to be functioning well.

7. Certain lenders seem to be moving more to the mid-cap space also due to competition: has the activity in mid cap changed in any capacity?

We see activity across the board whether it is the mid cap or large cap end of the market, sponsored, or non-sponsored.

Our view is that the reopening of the broadly syndicated low market will increase the number of transactions overall. It doesn't mean that, private credit is not going to be relevant anymore.

Private credit was highly relevant in the large cap end of the market three years ago. We don’t think that's going to change when we see a functioning, broadly syndicated loan market.

8. With your role also as head of APAC private credit, how much of your activity is in that market and which geographies do you expect to be an opportunity for private credit?

It’s a small part of our private credit business currently, but it's clearly a market that we anticipate will grow over time.

It's a very, large geographic area with significantly different markets, and different dynamics in each of those markets.

From our standpoint, our primary focus in the short term is in Australia and New Zealand, markets where you see similar dynamics to those in Europe and the US. The big banks there are slowly retrenching and are losing market share due to the growth of private credit.

9. Talking about different geographies, one of your recent financings was for Big Bus Tours. What has been one of the best tours you have done in one of the 25 cities where Big Bus Tour operates?

For me, the tours are all about the kids. So, it's London. They like using their buses to get around because they can see things and learn about the city. It's a great way to hop on and hop off and have a bit of fun as you travel around London.

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