Carlyle Buys Churchill in Latest Move to Grow Its CLO Business, Prep for IPO: Corrected

Continuing to diversify its revenue streams as it prepares for a public stock offering, The Carlyle Group has acquired leveraged lender Churchill Financial Group LLC from its current backer, buyout firm Olympus Partners, according to sister publication Buyouts.

The deal means that 13 Churchill investment professionals will be doing their loan underwriting for Carlyle going forward. Olympus, however, plans to retain ownership of Churchill’s existing lending vehicle, a $1.25 billion collateralized loan obligation (CLO) that is coming to the end of its extended reinvestment period.

“We’re going to be generating revenue from Churchill for quite a while,” as borrowers repay their loans to the CLO, Paul Rubin, a partner at Stamford, Conn.-based Olympus, told Buyouts.

For Carlyle, the Washington, D.C.-based buyout megafirm, the deal for Churchill fortifies its position in leveraged lending to the middle market.

“This is an attractive time for middle-market lending and adding this team and platform means we can now provide comprehensive financing solutions to the middle market, which we view as a secular opportunity and complementary to what we’ve been building with our Global Market Strategies platform,” Carlyle Managing Director Mitch Petrick (pictured) told Buyouts via email. The head of Carlyle’s Global Market Strategies added: “As we do in all areas, we’ll continue to look for ways to develop innovative strategies to address investors’ middle-market needs.”

Carlyle has been working aggressively to expand its CLO business. In August the firm announced that it had issued its first new CLO since 2008, a $507 million capital pool called Carlyle Global Market Strategies 2011-1. At the same time, the firm announced it had purchased the management contract on a $500 million CLO from The Foothill Group Inc.

In the preceding 12 months, Carlyle added 17 CLOs worth $5.9 billion to its portfolio, the firm said in the August announcement. Carlyle’s structured credit team manages 31 collateral loan funds in the United States and Europe totaling $12.7 billion. Linda Pace, a managing director at Carlyle and its head of U.S. Structured Credit, and Kencel will both report to Petrick, a spokesman for the firm said.

In addition to its efforts on the CLO front, Carlyle also completed its acquisition, effective July 1, of the Dutch fund-of-funds manager AlpInvest, which manages more than $40 billion in private equity funds. Overall, Carlyle manages $153 billion in assets.

The firm filed in September for an initial public offering and appears to be diversifying into areas such as loans, with their more predictable fund flows, as a way to smooth its earnings for future public shareholders. Other publicly traded private equity firms, such as Apollo Global Management and The Blackstone Group, employ a variety of investment strategies beyond buyouts.

Churchill launched in February 2006 with the backing of Irving Place Capital and has set up six funds worth more than $3 billion. But the lender ran into trouble during the credit crisis, and Irving Place sold it to Olympus in May 2010. Olympus invested $200 million in Churchill to buy out former holding company debt holders and shareholders, while also investing directly in the CLO because the vehicle was “offsides on their CLO metrics,” as Rubin put it, but the business has performed well since then, investing more than $1 billion in the past 18 months.

“For the last two years, risk return on senior lending has been as strong as we’ve ever seen,” with strong interest rates and low leverage, Rubin said. So why sell now? “Carlyle, as a much larger asset manager, can operate Churchill more efficiently than as a stand alone company and those savings will accrue to Olympus in better future cash flows,” Rubin said.

The leveraged lending business does face challenges. Regulators are planning to impose risk retention rules on CLO managers under the Dodd-Frank financial reform law that would require the managers to hold a 5% stake in the pools they manage—funds that typically invest in bank loans to companies—but the industry has argued that such a requirement would shut out all but the largest firms from the CLO business.

Churchill filed in April to pursue an alternative approach, by setting up a $150 million business development company, which would be a publicly traded entity. But a number of competing BDCs also have been trying to come to market, and with the closing of the IPO window, and with increasing volatility as credit concerns have roiled global stock markets, existing BDCs have been trading in recent months below their net asset value, signalling a difficult fundraising environment for the sector.

CORRECTION: This story has been edited to more precisely define the terms of Olympus Partners’ acquisition of Churchill Financial from Irving Place Partners, to correct the phrase “risk retention” to “risk return” in a quote by Paul Rubin and to provide a fuller explanation by Rubin of the reasons for the sale to Carlyle.

Steve Bills is a senior editor at Buyouts Magazine. Any opinions expressed here are entirely his own. Follow him on Twitter @Steve_Bills. Follow Buyouts tweets @Buyouts. For information on how to subscribe, contact Greg Winterton at greg.winterton@thomsonreuters.com.