In the 50th episode of the World Financial Podcast, Brian Levitt and the returning Gregory Brown are joined by Justin Plouffe, deputy CIO of Carlyle Global Credit and Co-Portfolio Manager of OFI Carlyle Private Credit Fund, to discuss the current volatility in fixed income markets and the role of private in a portfolio.
Below are a few highlights from the episode:
[6:00] Evolution of Private Credit: The private credit market is enormous, with billions of dollars pouring in from the most sophisticated investors around the world. Most of that money goes to corporations and asset finance in a wide variety of industries like aviation or energy. “It’s become an asset class in its own, much like private equity 15 years ago,” explains Justin Plouffe. At The Carlyle Group, Justin and the team now cover the entire private credit universe. That’s everything from liquid tradeable loans and structured credit securities to loans for middle market companies.
[10:00] Dealing with the Recent Volatility: Volatility returned in oil and fixed income markets during the fourth quarter of 2018. The dramatic moves flipped the script on what was a benign risk environment. So, how did Carlyle react? “There was some time to place some trade but, in the liquid markets, the Collateralized Loan Obligation (CLO) market, for instance, there was definitely opportunities to buy. And we did that,” says Justin, “In the other markets where it takes months and months to originate and structure specific deals, that kind of volatility isn't what you need. You need a longer-term type of downturn and change in the credit cycle to take advantage.”
[16:00] Walking Through a Deal: Carlyle recently struck a deal with a company they worked with in the past. The problem was that the company was doing a bit of a reorganization to focus on their core assets. It’s hard to go to the syndicated bond market for refinancing when you’re in the middle of a corporate event. So, what did they do? “They came to us for a capital solution. We took out their bond that was coming due and replaced it with a loan. The loan has a higher interest rate than the bond did, “Justin tells, “And that was unsecured just like the bond. But on top of that, we gave them another loan that was secured. It was secured by an actual hard asset.” It was a complex solution tailored to the company’s needs.
[22:00] How to Utilize a Private Credit Strategy: Investors should use private credit to generate excess yield in a portfolio, according to Justin. They can also look at it as a hedge against interest rates because almost everything in private credit has a floating rate. One thing to understand is that the asset experiences bursts of volatility but investors shouldn’t panic. He explains that this isn’t the part of a portfolio that should be liquid. This is the part that you want to be generating yield for you over a long period.
[26:00] The Carlyle Advantage: Being parts of The Carlyle Group provides tremendous benefits to borrowers. They have senior operating executives that were previously in C-Suite positions at Fortune 500 companies. “We can put companies and borrowers in touch with industry experts to help them grow their business,” says Justin, “We also have a purchasing power program across our portfolio companies.” Small companies in the program benefit from enormously from the program.