Up Close with Carlyle: The Opportunity in Non-sponsored Lending

Up Close with Carlyle

Welcome to Up Close with Carlyle, where we look at the investment landscape from a different point of view in each edition by sharing insights from executives across our firmSubscribe here to be notified of future editions.

The $1.5 trillion private credit market has expanded by $300 billion in less than a year, according to Bloomberg data, driven by higher rates, bank lending in retreat, and borrowers valuing the availability, flexibility, and certainty of execution offered by private lenders. Investors looking to allocate to this asset class should understand the two main types of private credit transactions: sponsored and non-sponsored. Carlyle’s Head of European and Asian Private Credit, Taj Sidhu, explains the difference and discusses why certain managers pursue opportunities in non-sponsored while others do not.

Sponsored financing is where a market participant provides credit to a business that is owned by a private equity firm, whereas non-sponsored lending covers financing businesses that have no PE sponsor. Non-sponsored lending is inherently more complicated and often takes longer to originate and execute transactions – but there are a number of reasons for why we believe this is an attractive area. Sidhu explains the advantages and considerations:

  1. A larger universe of dealflow. Non-sponsored provides a broader set of potential borrowers: there are far more non-sponsored businesses out there than those owned by private equity. But they typically are not repeat borrowers and may only transact once every few years, unlike a private equity firm where a manager could do multiple sponsored deals per year. Accessing non-sponsored borrowers is therefore harder – but that’s a good thing.
  2. Limited competition. This is a less competitive space because we see fewer lenders focused on these types of transactions given the scale, capabilities, reputation and brand required to execute sponsor-less transactions.
  3. Labor intensive and complex. Non-sponsored deals are generally more difficult to source, underwrite, execute and ultimately manage. It requires a very different team with experience specific to this borrower base. For example, underwriting requires deep, primary diligence that goes beyond what is provided in sponsor-backed transactions.
  4. Potential for higher risk-adjusted returns. Non-sponsored transactions typically expect to capture a premium over an equivalent sponsor-backed deal. There is often tighter documentation and a larger equity cushion or a lower LTV. More structured protections are increasingly becoming important as economic and market conditions shift.

While non-sponsored is not for everybody, Carlyle has a differentiated platform with significant expertise that we believe addresses this borrower base. Our global platform, deep local presence in regions, and sector focus provides the capabilities that we believe are necessary to position ourselves to capitalize on these opportunities. Our team and network is structured to originate transactions, manage complexity, and provide ongoing support to borrowers looking for a lender to support their growth ambitions.

Part of Carlyle’s Global Credit business, the Private Credit platform provides flexible financing solutions to a wide range of middle market companies across Opportunistic Credit, Direct Lending, and Distressed and Special Situations strategies.