By the time Harvey Schwartz took the helm of Carlyle Group early last year, the pillars of private equity — the firm’s most well-known business — had already cracked.
Elevated interest rates had upended the golden age of buyouts, when dealmakers could bag handsome returns by loading businesses with cheap debt and finding ready buyers. But Schwartz had to grapple with an even more acute problem.
Key rivals had curbed their reliance on buyouts and were riding the $1.7 trillion private credit boom. Apollo Global Management and other alternative asset managers had spent years scaling up crucial lending businesses and handily notched big profits when yields soared.
Carlyle was behind.
The firm’s footprint in credit grew in fits and starts over much of the past 25 years, marked by turnover and whiplash from strategy shifts. It went from dabbling in buying stakes in hedge funds to aborting such failed experiments to regrouping around a plan to be a bigger nonbank lender. It finally solidified its credit plan about seven years ago, when its biggest competitors already loomed large.
More than a year into Schwartz’s tenure, the 60-year-old CEO is still trying to ramp up the credit business in the face of permanent shifts in the industry — and make Carlyle a bigger alternative-asset superstore. While the Federal Reserve is poised to start cutting interest rates as soon as September, and executives say private equity deals are already making a comeback, credit is becoming the fastest way for firms to grow — and ride out the boom-and-bust cycles of buyouts. U.S. regulators have proposed new capital requirements that could make banks loath to make certain types of loans, increasing the demand for capital from nonbank lenders.
While Carlyle has grown its credit business roughly six-fold to $190 billion in the past seven years, it remains the smallest credit player among the five major U.S. alternative asset managers. That has left it reliant on private equity, a category that drove more than 60% of its fund management fees last year.
“They’re moving in the right direction,” CFRA Research analyst Ken Leon said in an interview. “But it’ll be challenging catching up to some larger competitors.”
Carlyle’s flagship credit fund will test whether investors agree.
The firm initially hoped to collect as much as $6.5 billion when it started raising in 2023 for its latest credit opportunities fund, but netted about half that amount after about a year and a half.
In recent months, Carlyle lengthened its money-raising campaign to later this year. Executives expect it to exceed the firm’s prior $4.6 billion vintage — but they anticipate that it will fall short of their original ambitions. The firm also postponed plans to raise a roughly $2 billion fund for special situations until the coming year.
Success would raise the clout of credit boss Mark Jenkins, who has expanded credit fee-related earnings by 21% each year since he joined. Failure would weigh on Carlyle’s shares, and it could dim the legacies of the firm’s founders and Schwartz.
Jenkins said the firm is executing its credit strategy and aims to grow intentionally. His message is clear: Don’t underestimate the underdog.
“You can’t change and grow something without breaking a bit of glass,” he said in a recent interview with Bloomberg. “But growing is what we will continue to do.”
Under Schwartz — Goldman Sachs Group’s former president and co-chief operating officer — Carlyle is doing more lending against collateral, seeking more cash from wealthy individuals for an array of financing bets and knitting the credit sales team closer to the rest of the firm. The changes have helped boost the credit business, which Carlyle highlighted in its second-quarter results this month.
Fee-related earnings for credit grew 71% from a year earlier, and Schwartz told analysts that the unit was well-positioned to capture market share.
