Side Letter: Carlyle’s Asia debt discourse; Future 40 move; Private credit competition

Carlyle Group's Asia chairman isn't fretting about the impact of rising rates in the region. Plus: one of PEI's Future 40 Leaders has jumped ship and an overview of the competitive landscape within private credit. Here's today's brief, for our valued subscribers only.

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Carlyle’s Yang: PE in Asia not driven by leverage (Source: Carlyle Group)

Carlyle won’t fret about debt in Asia
Rising interest rates weren’t exactly the talk of the town at IPEM 2022 in Cannes last week, giving rise to Private Equity International‘s take that the industry both feels it is well positioned to weather the challenges ahead and that it may be in a very different mindset this time next year. Interest rates also cropped up in our interview with Carlyle Group‘s Asia chairman, Xiang-Dong Yang, at SuperReturn in Singapore last week. The bottom line: the impact of the cost of borrowing going up isn’t as pronounced in Asia-Pacific PE.

“First of all, deals in Asia haven’t been that big compared to the US and Europe,” Yang said. “For the bigger buyouts in the billion-plus range there may be some impact in terms of availability of debt, but overall private equity in Asia has not all been driven by leverage. A lot of our deals don’t have leverage. In some of the minority deals, for example, clearly the operating companies don’t take on high leverage.”

Yang expects rising rates and credit volatility to impact the US and Europe more than Asia, noting that borrowing, which is more expensive, hasn’t been the main driver of returns. “Historically, we have predominantly relied on bank financing for our deals, even for buyouts,” he said. “And it’s really driven by the attractive bank loans we get in each locale, whether it’s Korea or Taiwan. We have also borrowed from Chinese banks. We are doing more control deals and we are getting generally attractive financing packages from the local banks.”

Yang also explained why Carlyle is leaning into Chinese PE over the next six to nine months, contrary to some of its global peers and US LPs. You can find out why in our coverage here.

Future 40 move
Salim Belkaid, a director in BNP Paribas’s PE investment team who was recognised in PEI’s Future 40 Leaders of Private Equity list last year, has moved shops, Side Letter has learned. Belkaid is leaving the Paris-based banking group to join UBS in Zurich where he will focus on advising wealth management clients on private markets investments from 1 October.

His move comes at as the PE community increases its focus on wealth management capital, with Blackstone, Ares Management, KKR and Hamilton Lane examples of firms that have bulked up teams or launched them in recent months. In France, for example, the country’s PE association wants to double the amount of capital raised from individual clients, including high-net-worth individuals and family offices, to €10 billion annually by 2030. With developments such as these, Belkaid will have his work cut out for him.

Dispatches from private debt
While we’re on the subject of debt, what’s the competitive environment like for private credit today? This was the “Question of the Week” mulled by credit specialists at law firm Proskauer as part of the firm’s Beyond the Deal series: Evan Palenschat, Sandra Montgomery, Faisal Ramzan and Steve Peck. Among their observations:

Go large: “Lenders that can write bigger cheques will have a competitive advantage for the rest of the year,” says Palenschat. He says sponsors accept pricing and terms have tightened, and their main priority is to get the capital in the door and not have to deal with too many lenders.

It’s all about the credit: Lenders’ “appetite for deals remains robust and focused on the credit worthiness of the investment not the size of the investment”, says Montgomery. She also thinks there’s an opportunity for “less known” lenders to gain a foothold with sponsors and that a greater number of club deals are likely.

The bank fight back: “Over the past 18-24 months, an increasing number of banks have set up dedicated private credit businesses,” notes Ramzan. This is part of a response from banks in Europe, which have been forced to witness funds claiming market share ever since the global financial crisis. With funds having done much of their hiring from the banks, the trend is starting to reverse.

End of the deal boom: “Competition is likely to increase as a result of dealflow retreating to more normalised levels,” says Peck. While price is the main factor in competing bids, certainty of closure and flexibility of terms will also be important. Peck sees an advantage for lenders able to provide flexible financing structures such as holdco loans and debt-like preferred equity.


Chasing unicorns
The US is being outpaced by the EU when it comes to the creation of tech unicorn companies, our colleagues at Venture Capital Journal report (registration required). Research from relationship software provider Affinity found that Europe has been creating tech companies valued at $1 billion or more at twice the pace of the US over the past five years, and has been doubling its total each year. European VC growth continues to exceed that of the US, something that may soon come to a halt: overall monthly VC funding fell more sharply in Europe than in the US in the first half of this year – 50 percent versus 37 percent, respectively.

The US remains dominant in terms of total unicorns and the number that have been created this year. Still, the change is noticeable, Affinity co-chief executive Ray Zhou tells VCJ. “There is now significantly more confidence in European tech start-ups being successful enough to deliver a significant return for investors, which is also providing a virtuous cycle of more investment leading to more success.” All this goes to show, those hunting the elusive unicorn need not limit themselves to Silicon Valley.

Today’s letter was prepared by Alex Lynn with Adam LeAndy Thomson and Tobias Waters.