Carlyle Tactical Private Credit Fund
MANAGED BY
Carlyle Global Credit Investment Management LLC
CLASS
Class A
$1.4B*
Unlimited
Core
New York, NY
$2.1B*
Delaware Statutory Trust
Private Credit
June, 2018
Carlyle Global Credit Investment Management LLC
Ernst & Young LLP
Dechert LLP
Investment Strategy
The Carlyle Tactical Private Credit Fund seeks to produce current income and provide investors with access to the private credit markets. The Fund opportunistically allocates its assets across a wide range of credit strategies, with at least 80% of its assets in private fixed income securities and credit instruments, which include various types of loans and debt securities. The Fund's investments may include both secured and unsecured loans, and it may also invest in debt securities that are subordinated to substantial amounts of senior indebtedness. As of year-end 2022, the Fund’s assets were allocated :
36% to Direct Lending strategies: first lien loans, second lien loans, unitranche loans and mezzanine debt.
27% to Opportunistic Credit: senior secured credit or lien-subordinated credit.
16% to Liquid Credit strategies: broadly syndicated loans and high yield bonds.
14% to Structured Credit: collateralized loan obligations (CLO’s).
4% to Real Assets: infrastructure, aviation and real estate.
3% to cash and cash equivalents.
Additionally, the Fund has no restrictions on the amount of its assets that may be invested in non-U.S. securities, allowing for exposure to different countries and regions. As of year-end 2022, the Fund had debt investments across over 250 portfolio companies, with an average investment size of less than 1% of the total portfolio and about 80% of investments in the United States.
Score Breakdown
BULLS SAY
Carlyle’s well-established sponsor, bank and lending relationships cultivated over 30+ years allow The Fund to source unique deal opportunities through Carlyle’s proprietary network and through the deep infrastructure Carlyle has developed in each of the Fund’s credit strategies.
With a 36% allocation to middle market direct lending and 86% of its investments in floating rate securities, Carlyle has built a defensive and diversified portfolio well insulated against various market risks.
The increased allocation (27%) to Opportunistic Credit showcases the Fund's ability to capitalize on yield premiums and bridge liquidity gaps due to the current favorable environment created by higher interest rates and tighter lending conditions.
The Carlyle Tactical Private Credit Fund demonstrated resilience in 2022, outperforming competitors, thanks to the fund's floating-rate senior-secured portfolio construction, higher asset-level yields, and an impressive annualized distribution rate of 9.7%.
BEARS SAY
Expensive: Carlyle charges a significant 3.00% maximum sales load, in addition to 1.9% of NAV in annual fees, amounting to a 4.9% upfront load.
Portfolio managers have a relatively small amount of capital invested in the fund, if any, creating a potential for reduced alignment with investors’ interests.
Despite performing above peers, the private credit market has generated low returns and Carlyle is no exception, posting net returns since inception of 2.02% (annualized) and 13.52% (cumulative).
Managers
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Industry experience 16 years of investment experience.
Career highlights Since joining Carlyle in 2007, Mr. Plouffe has overseen CLO new issuance, led acquisitions of corporate credit management platforms, served as a portfolio manager for structured credit investments, developed proprietary portfolio management analytics, and negotiated a wide variety of financing facilities. Prior to joining Carlyle, Mr. Plouffe was an attorney at Ropes & Gray LLP. He has also served as a clerk on the U.S. Court of Appeals for the First Circuit and as a legislative assistant to a U.S. Congressman.
Education B.S. Princeton University, J.D. Columbia Law School.
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Industry experience 33 years of investment experience.
Career highlights Linda Pace joined Carlyle in 1999 and helped the firm first expand into credit investing. Prior to her current role, Ms. Pace served as head of Carlyle’s Liquid Credit strategy and was responsible for portfolio management for Carlyle High Yield Partners, deploying capital into the U.S. market in cash and synthetic form. Prior to joining Carlyle, Ms. Pace spent 10 years with BHF-Bank AG, where she was Co-Head of the bank’s Syndicated Loan group.
Education B.S. Douglas College, M.B.A. New York University.
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Industry experience 18 years of investment experience.
Career highlights Brian Marcus helped develop TCG Capital Markets, a SEC-registered broker/dealer affiliate of The Carlyle Group and has been involved in the acquisitions of credit management platforms. Prior to coming to Carlyle, Mr. Marcus was with Morgan Stanley in the Principal Investments area, which used the firm’s capital in a diverse array of investments including private equity, distressed debt, and mezzanine.
Education B.S. Wharton School of the University of Pennsylvania.
Full Review
Alignment: BELOW AVERAGE
The Carlyle Tactical Private Credit Fund’s Portfolio Managers have a relatively small amount of personal capital invested in the fund, given its $1.4 billion net asset value (NAV). Justin Plouffe has no equity in the Fund; Brian Marcus owns about 12 thousand shares valued at about $100,000 as of year-end 2022; and Linda Pace’s equity securities in the Fund range somewhere between $100,000 and $500,000. With limited "skin in the game", there is the potential for reduced alignment between the managers' and investors' interests, as the managers may not experience the same degree of risk or reward as other investors in the fund.
Additionally, the fund's fee structure raises concerns regarding the overall alignment between the fund managers and investors. In addition to an annual management fee of 1.4% and a distribution fee of 0.5% for Class A shares, Carlyle projects another 1.5% in operating expenses which amounts to a 3.4% annual expense ratio before taking into account the performance fee. These fees are significantly higher than a peer fund like the PIMCO Flexible Credit Income Fund, which charges an annual expense ratio of 2.54%. To make matters worse, investors may be charged a sales load of up to 3% of gross purchase for Class A and 3.5% for Class L.
Conversely, the fund's performance fee structure demonstrates an attempt at aligning the managers' interests with those of the investors. After a hurdle rate of 6% is achieved, the manager earns 100% of the Fund’s remaining net profits up to a “catch-up rate” of 7.06%. 15% of net profits are paid for any excess return thereafter. This performance fee helps to incentivize the fund managers to actively pursue the targeted rates of return, but substantial upfront and annual fees may indicate that the Fund is living too comfortably off these fees alone and thus mitigate the alignment incentive created by carried interest. As a result, excessive fees could hinder the fund's performance and impact long-term returns for investors.
Performance: ABOVE AVERAGE
The Carlyle Tactical Private Credit Fund has shown strong performance, offering investors an attractive opportunity for current income by providing access to private credit markets that are typically out of reach for most individuals due to high investment minimums. Impressively, the Fund has closely tracked its Index benchmark, which consists of a 50% weighting in the Morningstar LSTA US Leveraged Loan Index and 50% in the Bloomberg High Yield Index. This consistency in performance is further evidenced by the Fund's robust track record when compared to other private credit interval funds. For example, the average annual total return for the Carlyle Tactical Private Credit Fund -4.38% for 1 year and 2.02% for inception-to-date. In contrast, a peer comparison fund such as the Apollo Debt Solutions BDC has posted lower average annual returns of -5.17% for 1 year and -1.6% for inception to date. Overall, the Carlyle Tactical Private Credit Fund's performance highlights its ability to provide consistent returns and capitalize on opportunities in the private credit space.
The offering has demonstrated resilience and shown its ability to weather economic downturns over the past year as we have seen asset prices falling and interest rates climbing higher. 2022 was an especially difficult year across all rate-sensitive risk assets and the Carlyle Tactical Private Credit Fund has performed significantly stronger than its peers. In the past year, the fund recorded net returns of -4.38%, while a comparable fund like the KKR Credit Opportunities Portfolio posted net returns of -13.72%.
Several factors have contributed to the Carlyle Tactical Private Credit Fund’s ability to remain robust during a time of economic uncertainty including its floating-rate senior-secured debt portfolio allocation and the Fund’s continued participation in higher base rates that have increased overall asset-level yields. Additionally, the Fund has demonstrated its ability to distribute at a higher annualized rate than its competitors with an annualized distribution rate of 9.7%. In comparison, the KKR Credit Opportunities Portfolio has a significantly lower annualized distribution rate of 7.9%.
The Carlyle Tactical Private Credit Fund offers investors a highly diversified investment approach, allocating its assets across a broad array of credit strategies within The Carlyle Group's impressive $146B Global Credit Platform. The credit strategies employed by the Fund encompass Liquid Credit, Direct Lending, Opportunistic Credit, Structured Credit, Real Assets, and, during certain periods of the economic cycle, Special Situations. The Fund does not currently concentrate more than 36% portfolio in one type of credit strategies, thus maintaining a well-balanced portfolio. As of year-end 2022, the Fund had debt investments across over 250 portfolio companies, with an average investment size of less than 1% of the total portfolio and about 80% of investments in the United States. This comprehensive diversification enables the Fund to not only mitigate risk but also to capture value across different segments of the credit market, ensuring a well-balanced and resilient portfolio for its investors.
Market Risk: LOW
The Carlyle Tactical Private Credit Fund has designed a strategy to mitigate market risk under various economic scenarios. With 36% of its portfolio allocated to middle market Direct Lending, the Fund is well positioned to withstand a market downturn as middle-market companies sustained strong year-over-year revenue growth and steady expansionary activity in 2022.
In addition, the 27% allocation to Opportunistic Credit showcases the Fund's ability to capitalize on yield premiums when deal flow in broadly syndicated markets dries up amid volatility. Carlyle increased its allocation to opportunistic credit deals from 19% at the end of 2021 to 27% a year later. Opportunistic credit managers with adaptable capital are finding an enticing opportunity to bridge significant liquidity gaps due to the current favorable environment created by higher interest rates and tighter lending conditions.
Moreover, the Fund is well-prepared for a rising rate environment. Carlyle has built a defensive portfolio with 86% of its investments in floating rate securities, thus minimizing the potential risk of default within the portfolio. Overall, the Carlyle Tactical Private Credit Fund’s portfolio allocation is insulated against various market risks, while also capitalizing on attractive investment opportunities.
Business Risk: BELOW AVERAGE
This offering poses a high valuation risk. Carlyle engages third-party valuation firms to provide independent prices on securities that are illiquid, but its internal valuation committee maintains complete discretion over its ultimate valuation and they can override any third-party information. As the Investment Adviser, Carlyle Global Credit Investment Management will value investments at fair value, which represents the amount that the Fund could reasonably expect to receive if the investment were sold at the time of valuation. Fair valuation involves subjective judgments, and it is possible that the fair value determined for a security may differ materially from the value that could be realized upon the sale of the security, creating valuation risk for investors. For reference, according to the Fund’s latest 2022 Annual Report, investments for which the valuation inputs were unobservable and significant to fair value calculations made up 85% of the portfolio.
Despite the high valuation risk, the Carlyle Tactical Private Credit Fund mitigates business risk with a strong advantage in deal flow and sourcing capabilities. The investment team benefits from Carlyle's significant scale and resources, and uses a rigorous, consistent investment process to identify key sector themes and assess investment opportunities across industries. The Fund has access to Carlyle's extensive global relationships and proprietary network, including sponsor, bank, and lending relationships, and ongoing active dialogue with corporate private equity professionals. The team also leverages the OneCarlyle platform with nearly 700 origination and underwriting resources across Global Credit and Private Equity.
Liquidity Risk: BELOW AVERAGE
The Fund does not currently intend to list the Shares for trading on any securities exchange and does not expect any secondary market to develop for its shares in the foreseeable future. As a result, shares in the fund are highly illiquid. Carlyle plans to provide some liquidity to investors by making quarterly share repurchase offers for between 5% and 25% of the Fund's outstanding shares at NAV, but it is likely that the Fund may offer to repurchase only the minimum amount of 5% of outstanding shares.
Although the Fund plans on making quarterly repurchase offers, they have the right to postpone or suspend share repurchases if approved by a vote of a majority of the Board. For reference, during fiscal year 2022, the Carlyle Tactical Private Credit Fund repurchased approximately $250 million worth of shares amounting to 18% of NAV at the end of period. Investors should evaluate the illiquid nature of the shares and their investment time horizon before considering an investment in the Fund.
Debt Risk: LOW
Investors should be aware that, while leverage is critical to amplify returns, the use of leverage exposes the Fund to a higher degree of additional risks, including risk of default or a decrease in creditworthiness, particularly in a significant economic downturn. Some assets within the portfolio have been acquired with the use of leverage and the investment team may borrow money for future investments as well.
The Fund has entered into a loan agreement with JPMorgan Chase Bank to borrow up to a maximum amount of $650 million, of which $315.3 million was borrowed as of year-end 2022. Additionally, the Fund adds leverage by issuing Preferred Shares called Mandatorily Redeemable Preferred Shares. At the end of 2022, the Carlyle Tactical Private Credit Fund had raised $292.9 million by issuing preferred shares. Altogether, this amounts to a relatively conservative leverage ratio of 29%.
Transparency: HIGH
The Carlyle Tactical Private Credit Fund provides investors with regular reporting and a user-friendly website to help ensure transparency and reliability. As an interval fund, investors benefit from daily public NAV per share updates on the Fund’s website to keep track of performance. To create transparency with regards to their valuation methodology, the Fund’s financial statements include a breakdown of the changes in investments’ fair value for which valuation inputs required significant management judgment. However, identifying third party pricing services and disclosing their appraisals would go a long way.
Fund updates are shared quarterly with investors, including financial information on portfolio holdings and share repurchase offer notices. Updates are accessible on the Carlyle Group website, making it easy for investors to seek information about the fund's strategy, performance, and investment process. The Fund also produces several marketing materials such as fact cards, brochures, and quarterly market commentary by portfolio managers.
Peer Group Comparison
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|---|---|---|---|
| Vehicle Name | Carlyle Tactical Private Credit Fund | KKR Credit Opportunities Portfolio | PIMCO Flexible Credit Income Fund |
| Minimum Investment | $10,000 | $10,000 | $2,500 |
| Holding Period | Permanent Capital | Permanent Capital | Permanent Capital |
| Fee Structure |
Sales Load: 3.00%
Annual Fee Load: 1.9% |
Sales Load: 2.00%
Annual Fee Load: 2.12% |
Sales Load: 2.00%
Annual Fee Load: 2.84% |
Bottom Line
The Carlyle Tactical Private Credit Fund is suitable for investors looking for an income strategy, with a long-term investment horizon and a moderate to high risk tolerance. As the Fund allocates its assets across a wide range of credit strategies, it provides investors with exposure to diverse investment opportunities within the private credit markets. Investors looking to allocate part of their portfolio to such strategies, and able to sustain significant annual fees, may find the Carlyle Tactical Private Credit Fund an appealing investment opportunity as the Fund has outperformed peer offerings and continued to generate current income through a market downturn.
The Fund's investments in both secured and unsecured loans, subordinated debt securities, and potentially non-U.S. securities indicate that investors should be comfortable with a degree of risk and volatility associated with these types of investments. Overall, this private investment offering is suitable for investors seeking to generate current income while gaining exposure to a diversified portfolio of credit strategies and different geographical regions, provided they have the appropriate time horizon and risk appetite.
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