Carlyle Buys Churchill, Expands CLO Business

Continuing to diversify its revenue streams as it prepares a public stock offering, The Carlyle Group has acquired leveraged lender Churchill Financial Group LLC from Stamford, Conn.-based buyout firm Olympus Partners.

The deal means that 13 Churchill Financial Group investment professionals will be doing their lending for Carlyle going forward. Olympus Partners plans to retain ownership of Churchill Financial Group’s existing lending vehicle, a $1.25 million collateralized loan obligation that is coming to the end of its extended re-investment period.

“We’re going to be generating revenue from Churchill for quite a while,” as borrowers repay their loans to the CLO, said Paul Rubin, a partner at Olympus Partners. For Carlyle Group, the Washington, D.C.-based buyout mega-firm, the deal fortifies its position in leveraged lending to the mid-market.

“The Churchill transaction enhances the capabilities of the Global Market Strategies platform at an attractive time for middle-market lending. With the addition of this experienced and talented team, led by Ken Kencel, Carlyle can now provide comprehensive financing solutions to the middle market,” Mitch Petrick, a managing director at Carlyle Group and head of its Global Market Strategies business, said in the press release announcing the deal. “We will continue to look for ways to develop innovative strategies to address the needs of our investors.”

Carlyle Group has been working aggressively to expand its existing CLO business. In August the firm announced that it had issued its first new CLO since 2008, a $507 million capital pool called Carlyle Global Market Strategies 2011-1. At the same time, the firm announced it had purchased the management contract on a $500 million CLO from The Foothill Group Inc.

In the preceding 12 months, Carlyle Group added 17 CLOs worth $5.9 billion to its portfolio, the firm said in the August announcement. Carlyle’s structured credit team manages 31 collateral loan funds in the United States and Europe totaling $12.7 billion. Linda Pace, a managing director at Carlyle Group and its head of U.S. Structured Credit, and Kencel will both report to Petrick, a spokesman for the firm said.

In addition to its efforts on the CLO front, Carlyle Group also completed its acquisition, effective July 1, of the Dutch fund-of-funds manager AlpInvest, which manages more than $40 billion in private equity funds; the deal brings Carlyle Group’s assets under management to some $153 billion. The firm filed in September for an initial public offering of stock and appears to be diversifying into areas such as loans, with their more predictable fund flows, as a way to smooth its earnings for future public shareholders. Other publicly traded private equity firms, such as Apollo Global Management and The Blackstone Group, employ a variety of investment strategies beyond buyouts.

Churchill Financial Group launched in February 2006 with the backing of Irving Place Capital and has set up six funds worth more than $3 billion. The lender ran into trouble during the credit crisis, and Irving Place sold it to Olympus Partners in May 2010. Olympus Partners invested $200 million in the lender to buy out former holding company debt holders and shareholders, while also investing directly in the CLO because the vehicle was “offsides on their CLO metrics,” as Rubin put it, but the business had performed well since then, investing more than $1 billion in the past 18 months.

“For the last two years, risk return on senior lending has been as strong as we’ve ever seen,” Rubin said, with strong interest rates and low leverage. Why sell, then? “Carlyle, as a much larger asset manager, can operate Churchill more efficiently than as a standalone company, and those savings will accrue to Olympus in better future cash flows.”

The leveraged lending business does face challenges. Regulators are planning to impose risk retention rules on CLO managers under the Dodd-Frank financial reform law that would require the managers to hold a 5 percent stake in the pools they manage—funds that typically invest in bank loans to companies—but the industry has argued that such a requirement would shut out all but the largest firms from the CLO business.

Churchill Financial Group filed in April to pursue an alternative approach, by setting up a $150 million business development company, which would be a publicly traded entity. But a number of competing BDCs also have been trying to come to market, and with the closing of the IPO window, and with increasing volatility as credit concerns have roiled global stock markets, existing BDCs have been trading in recent months below their net asset value, signalling a difficult fundraising environment for the sector.

Petrick said he views the Churchill Financial Group deal as a long-term commitment for Carlyle Group. “This is an attractive time for middle-market lending and adding this team and platform means we can now provide comprehensive financing solutions to the middle market, which we view as a secular opportunity and complementary to what we’ve been building with our Global Market Strategies platform,” Petrick wrote in an e-mail message to Buyouts. “As we do in all areas, we’ll continue to look for ways to develop innovative strategies to address investors’ middle-market needs.”