Carlyle buys into mid-market lending

The firm’s investment in Churchill Financial highlights the increasingly attractive opportunity to back financial service companies lending into the underserved US mid-market.

With reduced levels of available financing for private equity deals in the US, firms including The Carlyle Group and WL Ross & Company are capitalising on the opportunity to back financial services companies lending into the mid-market.

Last week, Carlyle purchased mid-market lender Churchill Financial from Olympus Partners for an undisclosed sum.

Churchill provides senior secured debt to mid-market companies, lending out of a $1.25 billion collateralised loan obligations structure owned by Churchill Financial Group, which remains a portfolio company of Olympus Partners.

“What we sold to Carlyle was the management team essentially that manages it, and the management company,” partner at Olympus Paul Rubin told Private Equity International. “We still hold the big asset, which is the equity in the CLO, and will be investors in these loans for seven or eight more years.”

Carlyle has brought on 13 investment professionals from Churchill, including Ken Kencel, now a managing director at Carlyle who will report to head of the firm's global markets strategies business Mitch Petrick.

Prior to Carlyle’s investment in Churchill, the David Rubenstein-led firm’s global market strategies platform included mezzanine and energy loans, high-yield loans, structured credit, distressed equity and debt and emerging market equities.

While Carlyle is expected to go public in the near future, the investment is not necessarily evidence of the firm’s plans to be publicly listed, as Carlyle has had a pattern of branching into niche strategies.

“Carlyle’s history over the last 12 to 15 years has been to come up with a strategy for every niche,” Kelly DePonte, partner with placement agency Probitas Partners, told Private Equity International. “That has been a long term strategy and not a short term, tactical response to the IPO discussions.”

Carlyle was not available for comment at press time.

“It’s a very attractive time for mid-market lending,” Stone Point Capital chief executive officer Charles Davis told Private Equity International on Friday. “The big banks aren’t generally dipping down to the smaller areas, the little banks are afraid to loan money and many of the traditional mid-market lenders are not as aggressive as they once were.”

Stone Point recently received a co-investment from The Teachers’ Retirement System of the State of Illinois of up to $40 million in mid-market finance company NXT Capital, which Stone Point acquired in April 2010.

In September, WL Ross committed $100 million alongside The Yucaipa Companies in exchange for a 40 percent stake in Amalgamated Capital, the leveraged finance division of Amalgamated Bank. Earlier this month, the bank began expanding its product offering to include both leveraged cash flow and asset-based financing to back private equity deals with transaction sizes between $5 million and $15 million.

The bank’s transition into asset-based lending could be part of a niche financing trend for medium sized banks, WL Ross founder and chief executive officer Wilbur Ross told Private Equity International in a previous interview.

Churchill was formed in 2006 when Bear Stearns Merchant Banking teamed up with Churchill Capital to form the commercial finance outfit, backed with over $500 million of committed capital to support its financing activities. It has funded more than $1 billion in loans