2017-062

New Carlyle Study Finds Potential for Higher Returns for Investors Who Hold Illiquid Corporate Debt to Maturity

Economic Outlook Analyzes the Liquidity Risk Premium in Corporate Credit

WASHINGTON, DC – Global alternative asset manager The Carlyle Group (NASDAQ: CG) today released a new study, The Liquidity Risk Premium in Corporate Credit, which finds that investors who hold loans to maturity can boost returns by increasing exposure to debt that is less liquid. The paper is by Mark Jenkins, Head of Global Credit, and Jason Thomas, Carlyle’s Director of Research.

In their new paper, Messrs. Jenkins and Thomas find that middle-market loans have historically yielded one-third (170bp per year) more than large, bank-syndicated loans due largely to their illiquidity. Consequently, study results suggest that investors with the ability to hold loans to maturity can boost returns by increasing exposure to liquidity risk.

"Not every investor can afford to assume incremental liquidity risk. However, our results suggest that investors with longer-term investment horizons and stable funding sources can have too liquid a credit portfolio, effectively paying for ‘insurance’ they don’t need," explains co-author Jason Thomas.

“Liquidity” generally refers to the ease with which an asset can be converted into cash over a fixed time. The liquidity of an individual loan or bond tends to increase with the size of the borrower or credit facility, the frequency with which the loan or bond trades, and the average size of such trades. Lack of an active secondary market, low trading volumes, and high transaction costs cause smaller, less liquid loans to sell at a discount to larger loans, a disparity that translates into higher average annual returns. The augmented return, which investors receive as a result of the lower liquidity of these assets, comprises the “liquidity risk premium.” 

Links to this paper, as well as an archive of Thomas’s previous publications:

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About Mark Jenkins
Mark Jenkins is a Managing Director and Head of Global Credit based in New York. He is also a member of Carlyle’s Management Committee. Prior to joining Carlyle, Mr. Jenkins was a Senior Managing Director at CPPIB and responsible for leading CPPIB’s Global Private Investment Group with approximately CAD$56 billion of AUM. He was Chair of the Credit Investment Committee, Chair of the Private Investments Committee and also managed the portfolio value creation group. While at CPPIB, Mr. Jenkins founded CPPIB Credit Investments, which is a multi-strategy platform making direct principal credit investments. He also led CPPIB’s acquisition and oversight of Antares Capital and the subsequent expansion in middle-market lending. Prior to CPPIB he was Managing Director, Co-Head of Leveraged Finance Origination and Execution for Barclays Capital in New York. Before Barclays, Mr. Jenkins worked for 11 years at Goldman Sachs & Co. in senior positions within the Fixed Income and Financing Groups in New York. Mr. Jenkins earned a Bachelor of Commerce degree from Queen’s University. He served on the boards of Wilton Re, Teine Energy, Antares Capital and Merchant Capital Solutions..

About Jason Thomas
Jason Thomas is a Managing Director and Director of Research at The Carlyle Group, focusing on economic and statistical analysis of the Carlyle portfolio, asset prices, and broader trends in the global economy. Mr. Thomas is based in Washington, D.C. Mr. Thomas serves as the economic adviser to the firm’s corporate private equity and real estate investment committees. Mr. Thomas’ research helps to identify new investment opportunities, advance strategic initiatives and corporate development, and support Carlyle investors. Previous to joining Carlyle, Mr. Thomas was Vice President, Research at the Private Equity Council. Prior to that, he served on the White House staff as Special Assistant to the President and Director for Policy Development at the National Economic Council. In this capacity, Mr. Thomas served as the primary adviser to the President for public finance. Mr. Thomas received a B.A. from Claremont McKenna College and an M.S. and Ph.D. in finance from George Washington University where he studied as a Bank of America Foundation, Leo and Lillian Goodwin Foundation, and School of Business Fellow. Mr. Thomas has earned the Chartered Financial Analyst (CFA) designation and is a financial risk manager (FRM) certified by the Global Association of Risk Professionals.

About The Carlyle Group
The Carlyle Group (NASDAQ: CG) is a global alternative asset manager with $170 billion of assets under management across 299 investment vehicles as of June 30, 2017. Carlyle’s purpose is to invest wisely and create value on behalf of its investors, many of whom are public pensions. Carlyle invests across four segments – Corporate Private Equity, Real Assets, Global Market Strategies and Investment Solutions – in Africa, Asia, Australia, Europe, the Middle East, North America and South America. Carlyle has expertise in various industries, including: aerospace, defense & government services, consumer & retail, energy & power, financial services, healthcare, industrial, infrastructure, real estate, technology & business services, telecommunications & media and transportation. The Carlyle Group employs more than 1,550 people in 31 offices across six continents.

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Economic and market views and forecasts reflect our judgment as of the date of this presentation and are subject to change without notice. In particular, forecasts are estimated, based on assumptions, and may change materially as economic and market conditions change. The Carlyle Group has no obligation to provide updates or changes to these forecasts.

Certain information contained herein has been obtained from sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for the purpose used herein, The Carlyle Group and its affiliates assume no responsibility for the accuracy, completeness or fairness of such information.

References to particular portfolio companies are not intended as, and should not be construed as, recommendations for any particular company, investment, or security. The investments described herein were not made by a single investment fund or other product and do not represent all of the investments purchased or sold by any fund or product.

This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of The Carlyle Group. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors.

Media Contact:
Elizabeth Gill
+1-202-729-5385

elizabeth.gill@carlyle.com

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