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Carlyle’s Popov: post-covid demand for illiquid credit to fuel push to $80bn

“Illiquid credit led the way toward recovery last year,” Popov told Buyouts. “It will retain its importance going forward as a necessary ingredient of recovery.”

Illiquid credit is in the vanguard of Carlyle Group’s plan to reach $80 billion-plus in private debt assets in the next four years, Alex Popov, head of illiquid credit strategies, told Buyouts.

Carlyle in February announced the scaling target for private debt as part of a broader campaign to raise at least $130 billion across all strategies by 2024. The goal is to boost the private equity giant’s credit platform assets by more than 40 percent by leveraging strong tailwinds behind the asset class.

Among these tailwinds, Popov said, is rising demand for “transitional capital” – direct loans, opportunistic credit and special situations financing – from corporate borrowers, both sponsored and non-sponsored.

Carlyle’s illiquid strategies deployed $4.4 billion in 2020, roughly the same amount invested a year earlier but up from 2018. Popov sees “a lot of room to grow” in the months ahead as businesses increasingly focus on opportunities and challenges in the post-pandemic recovery.

“Illiquid credit led the way toward recovery last year,” Popov said. “It will retain its importance going forward as a necessary ingredient of recovery.”

Companies across the economy are undergoing “pretty meaningful transitions” spawned by the health crisis, Popov said. Having “weathered the storm,” many are now ready to adjust, reposition and expand. As businesses prepare to make investments in priorities like M&A and technology, large numbers are finding themselves “short of capital.”

Filling a void

Private debt is set to play a leading supply role in this next cycle, Popov said. That is because traditional lenders, such as banks, have over time reduced their exposure to leveraged credit assets. In last year’s virus-roiled market, he noted, traditional lenders “retrenched further.”

Carlyle is betting its illiquid strategies – above all, direct lending and opportunistic credit – will continue to benefit from this secular trend and help fill the void left by traditional lenders.

Direct lending, which offers flexible financing options to PE-backed mid-market companies, was “significantly augmented” prior to 2020, Popov said, and will see more scaling in the next four years. This will be achieved by reinforcing the strategy’s importance to sponsored borrowers, in part by emphasizing larger deals that support growth and M&A initiatives.

Opportunistic credit, jumpstarted as a Carlyle strategy in 2017, is also poised for major growth. It is “a meaningful transitional component,” Popov said, because of its ability to tackle complex situations for sponsored and non-sponsored borrowers alike.

The flow of opportunistic credit opportunities is greater with companies “staying private longer,” Popov said. Such businesses, many of them family- and founder-owned, will run into complex situations that cannot be addressed by traditional capital markets, which lack the data and resources to underwrite a solution.

Deal flow involving family- and founder-owned establishments, while key to the strategy, is “not easy to access,” Popov said. Sourcing requires a model that differs from PE-backed origination, including the use of information sources and networks across the entire Carlyle organization.

Carlyle in 2019 raised $2.4 billion for a debut opportunistic credit fund. A second offering with a $3.5 billion target in 2020 collected an initial $1.9 billion, according to a Form 10-K. Direct lending is being funded through business development companies and other pools.

In all, Carlyle last year secured more than $10 billion for the credit platform. Popov declined to comment.

Defensive & offensive

The upcoming credit cycle “is not going to be monolithic,” Popov said. It will instead reflect “a lot broader opportunity set” relative to past cycles, with a role for both “defensive capital and offensive capital.”

This may – or may not – include a prominent role for distressed debt, Carlyle’s third illiquid strategy, which is not highlighted in the four-year plan. That is likely because distressed opportunities, expected to multiply in 2020 with covid-19’s economic fallout, did not materialize substantially outside of certain hard-hit industries due to central bank liquidity and government stimulus.

Popov declined to speculate on how distressed debt trends will evolve. He noted, however, that “an increasing number of businesses have accumulated debts in excess of their going-concern value.” Distressed opportunities may emerge as these companies near the end of their liquidity runway.

On the other hand, Popov said, a recovery characterized by strong economic growth “might push out this type of credit investing.”

Popov joined Carlyle in 2017 after a long career as a credit executive with firms like HPS Investment Partners and Oaktree Capital. Working with Mark Jenkins, Carlyle’s head of global credit, he built out illiquid strategies as part of a massive expansion of the overall private debt platform. Over 2016-2020, total platform assets doubled to $56 billion.

Assets held by illiquid strategies stood at $13.2 billion as of December 31. Based on the plan outlined by Carlyle in February, they could reach $20 billion or more by 2024.

Popov leads an illiquid credit team of 85 professionals, up 50 percent from four years ago. They include Taylor Boswell, CIO of direct lending; Andreas Boye and Taj Sidhu, managing directors of credit opportunities; and Ian Jackson, who leads the distressed unit.