The Carlyle Group (Nasdaq: CG) expects to step up the pace of CLO issuance as it continues to raise capital over the remainder of the year.
The private-equity firm has seen its collateralized loan obligation portfolio assets grow 16% – or $5 billion – in the past year, the company said Tuesday in announcnig its first-quarter earnings. It completed a single transaction the first quarter, the €413.5 million ($497 million) Carlyle Euro CLO 2018-1, and expects to issue another $4 billion of deals by year’s end, co-CEO Kewsong Lee said in a conference call with analysts.
Although the elimination of risk-retention standards could crowd the market with new entrants in the management space, “we’re comforted by the fact our position in the market is so strong, and our ability to gain [loan] allocation is quite important,” Lee said.
“The liability side could be more challenged as spreads do what they will do in this interest rate environment,” Lee added, “but thus far we are seeing very strong demand in the CLO business.
Carlyle’s assets under management grew to $201.5 billion, an increase of 24% from the first quarter of 2017, through $48 billion in fundraising and $15.4 billion in market appreciation. The company is also on target to raise another $25 billion in investable capital by year’s end, putting it on pace to meet its $100 billion, four-year capital-raise goal by the end of 2019.
Much of the fundraising is supporting a strategy to ramp up distressed and opportunities fund investments within Global Market Investments, which includes CLOs. Carlyle has only just launched a new credit-opportunities fund and has distressed business investment funds prepared to take advantage of market dislocations – included in nearly $73 billion of dry powder and $27 billion of pending fee-earning assets under management.
“Obviously, if M&A picks up or if deal activity continues the way it seems to be progressing, that seems good for our business in terms of financing activity,” said Lee. “We’ve only touched the surface of it. We do have very large ambitions.”
Carlyle’s transition to these new funds partly explains the decline in year-over-year earnings in the first quarter, which fell to $161 million (after taxes) compared with $364.6 million in the first quarter of 2017. Market volatility held Carlyle’s portfolio valuation growth to only 4%, down from 9% from last year but ahead of the 1.2% of the S&P 500 index, Lee and other executives pointed out.
But Carlyle’s fee-earning assets under management – which consist largely of CLOs – rose 14% year over year, the firm reported. Meanwhile, management fees are at a $230 million (annualized) run rate, an increase of 20% from this point in 2017.
Within the global credit area, direct-lending activity spearheaded asset-yield growth of 9% year over year, with an existing loan portfolio “exhibiting exceptional credit performance,” said Lee.
