Carlyle Reaches $155M On Mid-Market Lending Pool: UPDATED

Firm: The Carlyle Group

Vehicle: Carlyle GMS Finance Inc.

Estimated Target: $1 billion

Amount Raised: $155 million

Carlyle GMS Finance Inc. has so far raised at least $155 million for a vehicle earmarked for debt investments in U.S. companies generating $10 million to $100 million in EBITDA, according to regulatory documents filed with the Securities and Exchange Commission. The target for the vehicle is estimated at $1 billion. A spokesperson for Carlyle Group declined comment because the fund is still in the market.

Managed by a team that includes bankers from the Churchill Financial mid-market lending business acquired a year and a half ago by Carlyle Group, the firm plans to invest mainly in first-lien senior secured loans and unitranche loans, many of them issued to finance leveraged buyouts. (Unitranche loans combine elements of both first-lien senior loans and subordinated debt into a single package.)

To a more limited degree, Carlyle GMS Finance also plans to make bets on potentially higher-yielding opportunities, such as equity co-investments and high-yield bonds. Expect investment size to range between $5 million and $25 million.

Executives on the investment committee of the fund include Michael J. Petrick, chairman of Carlyle GMS Finance; Kenneth J. Kencel, a managing director of Carlyle Group and former president and CEO of Churchill Financial; George F. Kurteson, a managing director of Carlyle Group; Durant “Randy” D. Schwimmer, a managing director of Carlyle Group; Christopher B. Cox, a principal at Carlyle Group; Linda Pace, a managing director of Carlyle Group; and Prabu Davamanirajan, a managing director of Carlyle Group.

“We believe that a significant opportunity exists to achieve attractive risk-adjusted returns in the senior lending space due to a general lack of bank and other financing alternatives for growing middle market companies,” the firm states in an April 11 Form 10 filed with the SEC. Indeed Carlyle Group is just one of several large buyout shops raising or advising on similar mid-market lending vehicles, including Apollo Global Management, The Blackstone Group and Kohlberg Kravis Roberts & Co.

(Update: A nontraded BDC to which KKR is a sub-adviser, Corporate Capital Trust, raised $186.5 million in the first quarter, according to a 10Q, and $795.6 million since the start of the offering; the vehicle has an estimated target of $1.6 billion. Meantime, FS Investment Corp II, a nontraded BDC to which the GSO Capital Partners credit business of Blackstone Group is a sub-adviser, last year lowered its estimated target from $2 billion to $1.1 billion, according to regulatory filings. It does not appear to have raised significant capital as of March 14, according to its latest 10K. Executives at the BDC were not immediately available for comment.)

Much like traditional private equity funds, Carlyle GMS Finance is raising the fund from institutional and wealthy investors who make upfront capital commitments. The investors are then required to fund “drawdowns to purchase shares of our common stock up to the amount of their respective capital commitments on an as-needed basis…,” according to the Form 10. Carlyle employees and other affiliates plan to commit at least $40 million to the pool.

Investors are charged an annual management fee of 1.5 percent of gross assets.The two-part incentive fee includes 20 percent of net investment income after a hurdle and 20 percent of net realized capital gains.

The firm has been in the market raising money for the vehicle for roughly a year. The date of first sale for the offering is listed as May 2 on a Form D filed on May 8 with the SEC. The form describes the total offering amount as “indefinite” and gives the number of investors at 105.

Carlyle GMS Finance is organized as a business development company, or BDC, under the Investment Company Act of 1940. Such vehicles can use leverage on a one-to-one basis to enhance their returns. In its Form 10, the firm said it plans to establish a credit facility of up to $500 million to make investments.

Carlyle Group is among the largest private equity firms in the United States, with more than $170 billion in assets under management as of year-end and some 1,400 employees. Carlyle GMS Finance is part of the firm’s Global Market Strategies platform, which has $30 billion under management and makes investments in distressed debt, high-yield bonds, mezzanine debt and related assets. It advised 57 active funds as of year-end.

Carlyle Group acquired Churchill Financial in November 2011. The middle-market lender, which has a 13-person investment team led by Kencel, has been providing loans through a mid-market collateralized loan obligation fund valued at $1.4 billion as of December 31, 2012. The re-investment period on that vehicle ends in July 2014.

Like other so-called non-traded BDCs, shares in Carlyle GMS Finance will not initially trade on a public stock exchange. However, in its Form 10 Carlyle GMS Finance said it may eventually go public.