By the time Harvey Schwartz took the helm of Carlyle Group Inc early last year, the pillars of private equity - the firm’s most well-known business - had already cracked.

Elevated interest rates had upended the golden age of buyouts, when dealmakers could bag handsome returns by loading businesses with cheap debt and finding ready buyers. But Schwartz had to grapple with an even more acute problem.

Key rivals had curbed their reliance on buyouts and were riding the US$1.7 trillion private credit boom. Apollo Global Management Inc and other alternative asset managers had spent years scaling up crucial lending businesses and handily notched big profits when yields soared.

Carlyle was behind.

The firm’s footprint in credit grew in fits and starts over much of the past 25 years, marked by turnover and whiplash from strategy shifts. It went from dabbling in buying stakes in hedge funds to aborting such failed experiments to regrouping around a plan to be a bigger non-bank lender. It finally solidified its credit plan about seven years ago, when its biggest competitors already loomed large.

More than a year into Schwartz’s tenure, the 60-year-old CEO is still trying to ramp up the credit business in the face of permanent shifts in the industry - and make Carlyle a bigger alternative-asset superstore. While the Federal Reserve is poised to start cutting interest rates as soon as September, and executives say private equity deals are already making a comeback, credit is becoming the fastest way for firms to grow - and ride out the boom-and-bust cycles of buyouts. US regulators have proposed new capital requirements that could make banks loath to make certain types of loans, increasing the demand for capital from nonbank lenders.

While Carlyle has grown its credit business roughly sixfold to US$190 billion in the past seven years, it remains the smallest credit player among the five major US alternative asset managers. That has left it reliant on private equity, a category that drove more than 60% of its fund management fees last year.

“They’re moving in the right direction,” CFRA Research analyst Ken Leon said in an interview. “But it’ll be challenging catching up to some larger competitors.”

Carlyle’s flagship credit fund will test whether investors agree.

The firm initially hoped to collect as much as US$6.5 billion when it started raising in 2023 for its latest credit opportunities fund, but netted about half that amount after about a year and a half. In recent months, Carlyle lengthened its money-raising campaign to later this year. Executives expect it to exceed the firm’s prior US$4.6 billion vintage - but they anticipate that it will fall short of their original ambitions. The firm also postponed plans to raise a roughly US$2 billion fund for special situations until the coming year.

Success would raise the clout of credit boss Mark Jenkins, who has expanded credit fee-related earnings by 21% each year since he joined. Failure would weigh on Carlyle’s shares, which are little changed this year, and it could dim the legacies of the firm’s founders and Schwartz.

Jenkins said the firm is executing its credit strategy and aims to grow intentionally. His message is clear: Don’t underestimate the underdog.

“You can’t change and grow something without breaking a bit of glass,” he said in a recent interview with Bloomberg. “But growing is what we will continue to do.”

Under Schwartz - Goldman Sachs Group Inc’s former president and co-chief operating officer - Carlyle is doing more lending against collateral, seeking more cash from wealthy individuals for an array of financing bets and knitting the credit sales team closer to the rest of the firm. The changes have helped boost the credit business, which Carlyle highlighted in its second-quarter results this month.

Fee-related earnings for credit grew 71% from a year earlier, and Schwartz told analysts that the unit was well-positioned to capture market share.

This account is based on conversations with about two dozen current and past executives of Carlyle and investors.

Carlyle’s credit arm initially took shape in 1999 as a bargain-hunting crew that bought loans from financial institutions, and it tried to expand that business by taking stakes in hedge fund managers. But bad bets scared off clients and doomed that strategy.

Credit’s next era unfolded in the last decade. Then-top boss Kewsong Lee set out to build a business that would direct all kinds of investors into steady financing strategies. As head of that unit, Jenkins clarified the business priorities around liquid credit, private credit and lending against assets such as infrastructure and property.

Jenkins implemented radical change soon after joining the firm in 2016, including winding down three teams - spurring multiple credit employees to leave the firm.

“I would have rather started with a blank sheet,” Jenkins said.

During credit’s growth spurt, executives battled over whether the business should have a separate salesforce. Jenkins prevailed and grew that group within the credit team.

In 2022, Carlyle doubled its credit assets by embarking on an asset-buying spree and striking a pivotal deal with Bermuda re-insurer Fortitude Re - the most it had grown in a year during Jenkins’ tenure. Some at the company thought Carlyle was losing its core identity as a buyout firm, though.

Acquisitions brought complications, boosting the credit doubters’ arguments.

One deal to buy bundles of loans from another firm, CBAM Partners, turned Carlyle into a some US$50 billion collateralised loan obligation giant. But absorbing US$15 billion in new assets also intertwined Carlyle with investment company Eldridge Industries and its affiliates - which holds important equity slices of the instruments. At times in negotiations, both sides had to grapple with differences of opinion over the fine print of CLO contracts, according to people familiar with the matter.

There was internal friction at Carlyle, too.

The year Carlyle doubled its credit assets, CEO Lee abruptly left the firm after a power battle with the founders. Jenkins made the short list for the CEO role, but Schwartz ended up landing the top spot. More changes ensued for the credit division after the leadership shakeup.

Schwartz has emphasised that he wants to ramp up the credit unit, and he has said it has the components it needs to expand. After he took over, Schwartz and his new investor relations head directed the credit salesforce to work more closely with the broader client team - a move intended to prevent the groups from competing for the same dollars.

The new CEO also imposed restrictive noncompete contracts for a broader group of executives and tied dealmakers’ pay more closely to future gains of funds across the firm. As Schwartz focused more on performance, Carlyle pushed out some executives. Others quit.

At the credit business, Andrew Curry, who led investor relations for credit, and direct lending chief Aren LeeKong, both departed during a recent 18-month stretch when a dozen client-facing employees across the firm also left. Carlyle declined to comment on the departures.

Investors have noticed the churn.

Fresno County Employees’ Retirement Association - which had invested in Carlyle’s direct-lending strategy - saw two of its main client representatives leave, the first in early 2023, and the second earlier in 2024. While Carlyle staff were well-trained and familiar with the portfolio, said Don Kendig, the California pension’s retirement administrator, “I do have to rebuild the relationship and the trust and confidence that comes with time.”

In early 2024, Carlyle’s direct-lending arm had moved on to its fourth round of leadership in the past half-dozen years. Justin Plouffe - the deputy investment chief for credit who took on leadership over direct lending - said key staff have remained to drive steady returns.

The departures haven’t fazed other investors.

“The turnover hasn’t been an issue,” said Joseph Stivaletti, managing director and portfolio manager overseeing credit investments for Canadian pension fund manager PSP Investments, which has backed Carlyle’s flagship credit funds and financed several Carlyle buyout deals. “And the returns have been strong, which is the bottom line.”

Two key opportunistic credit funds are performing above pooled returns of private credit peers raised in the same year, MSCI data for December 2023 show.

While he’s leaving his own mark on credit, Schwartz is also sticking with the central parts of Jenkins’ strategy - including using Fortitude Re’s balance sheet to fuel lending.

The CEO pushed teams across Carlyle to pitch in to locate loans backed by safe collateral that insurers covet. Schwartz also instructed dealmakers to coordinate more with an in-house investment banking arm to package loans into rated securities.

Carlyle even enlisted some partners in the effort. The credit arm ultimately took stakes in a solar-financing provider and student loan management platform to help it originate more loans.

The firm has the chance to gain ground in an expanding industry.

“They’re behind the curve relative to the competition,” said Marc Irizarry, a former Goldman Sachs equity analyst who’s now an investment banker at boutique advisory firm Republic Capital Group. “But the shape of things to come in the industry creates huge possibility for growth.”

Carlyle’s credit business is continuing to broaden its European presence. In 2023, the firm launched a dedicated Europe direct-lending strategy. Carlyle briefly looked at Hayfin Capital Management when the lender shopped itself in recent months, but the two never entered talks. Carlyle is working on a three-year plan to steer its Europe lending business to profitability on its own.

Schwartz also wants to make Carlyle more of a household brand. He told executives to think about any funds Carlyle had overlooked that it could offer on additional bank platforms. Meanwhile, a fund known as CTAC that offers a range of credit strategies for individuals has roughly doubled assets to more than US$4 billion since he arrived.

Carlyle’s credit unit recently struck its biggest deal when it won a bid with KKR & Co to take over Discover Financial Services’ US$10 billion loan book.

Schwartz pitched in to make calls to get the negotiations over the line.

The firm is still trying to gain ground on rivals, knowing it won’t be a straight line. As Jenkins says, “You’ve got to move forward recognizing you’re going to stub your toe occasionally.”

  - Bloomberg