Lending to Private Equity Firms Becoming Latest Niche Investment
Lending to Private Equity Firms Becoming Latest Niche Investment
(Bloomberg) -- Lending to private equity firms is the latest hot new area of investment, according to Carlyle Group Inc.
While buyout firms have long loaded specific deals with debt, they’ve recently started borrowing against the broad value of their funds for more flexibility, through products including preferred equity and net-asset-value lending. Popularity for so-called strategic capital products reached $6 billion in 2020 as the pandemic temporarily squeezed other forms of credit and is set to grow to $31 billion by 2026, according a report by Carlyle’s Alpinvest Partners unit.
The niche credit arrangements let managers layer more leverage on their funds late in their cycle. The borrowing comes on top of loans taken out by many managers when they first acquire a company for their funds.
The products are “one of the most recent innovations in private equity that has the potential to revolutionize the market just as the emergence of direct lending funds did in the aftermath of the global financial crisis,” according to the report.
Alpinvest is planning to raise a fund focused on strategic capital deals, Secondaries Investor reported Dec. 8 citing unnamed sources. A Carlyle spokesman declined to comment on the firm’s fund raising plans.
Another use of strategic capital, said Carlyle, is the emerging trend of lending money to the management companies that run the private equity money pools. Such loans are secured against the fee income generated by the funds and could be used to grow the manager’s team, or expand into a new business line.
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