Carlyle Group executives are investing in the private equity middle market as a way to take advantage of what they say is a credit bubble, and the giant firm has lots of company.
While investors appear to be on board with this shift in focus, some observers warn that the flood of new money will drown investment opportunities and, therefore, returns.
Carlyle is investing the last of the $1.1 billion fund it raised two years ago to invest in the middle market. Using cheap debt, Carlyle executives are expanding the portfolio companies by acquisition. An example is Service King Collision Repair Centers, a chain of car-repair shops in Texas that it bought two years ago, expanded nationally and sold in July to Blackstone Group.
Carlyle's investment roots are in the middle market, but it was raising such huge sums that it had to invest in larger deals. Firm executives realized middle-market deals “were falling through the cracks,” said Brooke B. Coburn, managing director and co-head of Carlyle Growth Partners and Carlyle Equity Opportunity Fund, the firm's domestic smaller and middle-market buyout businesses, respectively.
Carlyle is not the only bulge-bracket alternative investment firm to invest in the middle market, usually the territory of smaller private equity firms. The Blackstone Group LP and TPG do, too.
Blackstone Group invests in the middle market through its flagship private equity fund, the $16 billion Blackstone Capital Partners VI LP. The firm does not have a separate middle-market fund, said Peter Rose, spokesman.
“We will invest in middle-market companies if we see growth opportunities and/or opportunities to otherwise transform the company,” Mr. Rose said in an e-mailed response to questions.
TPG invests in the middle market through a separate fund, the $2 billion TPG Growth Fund II LP. Last year, TPG's middle market business joined with Google Ventures to invest $285 million in Uber Technologies Inc., San Francisco, which makes a car service mobile application.
The middle market is a “massive market that can benefit from our industry expertise and global network,” Carlyle's Mr. Coburn said.
It might not be Carlyle's largest business, but it is an important one, he noted. William E. Conway, Jr., co-founder, co-chief executive officer and managing director of The Carlyle Group, chairs the investment committee for the middle market fund, Mr. Coburn said.
This and the $100 million of Carlyle Group money invested in the Equity Opportunity Fund, signals the firm's commitment to the business, Mr. Coburn said.
Still, the extent of the larger firms' middle-market activities is difficult to measure. A few firms such as Carlyle and TPG have dedicated private equity middle-market funds, but most incorporate the deals into their flagship funds.
So far this year, 20 middle-market funds have closed on a combined $16.2 billion, while all buyout funds raised a total $97 billion as of July 1, according to Preqin, a London-based alterative investment research firm.