William Conway, the co-founder of The Carlyle Group, has reportedly criticised the credit decisions of lenders to the private equity industry, and suggested that his own firm should start targeting less risky deals with lower returns.
The comments by Conway were made in an internal memo, seen by trade paper Financial News.
Conway said: “There is so much liquidity in the world financial system that lenders are making very risky credit decisions. This debt has enabled us to do transactions that were previously unimaginable.” He cited the examples of Carlyle’s $2.3 billion acquisition of Hertz, the car rental company, and the $18 billion deal for Freescale, a US semiconductor business.
Conway does not believe liquidity in the debt markets was unlikely to dry up in the next year or two but urged his team to start planning for the worst. “If the excess liquidity ended tomorrow, I would want as much flexibility as possible – are our covenants loose enough? Have we hedged against a share upward move in rates? Can we draw down on our revolving credit loan facilities?
This could involve a significant shift in strategy, he said. “Liquidity has led to a significant reduction in risk premiums. Our strategy should evolve to take lower risk deals and earn lower returns.”
Conway said the only solution was for Carlyle to take a more cautious approach to investments. “We should redouble our focus on deals with downside protection – asset coverage, multiple and early exit paths, strategic partners, government protection, consumer needs, controllable capital expenditures and defensible market positions.”