Why Do So Many PE Firms Have Long/Short Credit Hedge Fund Units

Just a question out of curiosity. I've been coming across many PE firms that have a L/S credit unit (Carlyle-Claren Road, for example). Is there some synergistic relationship between vanilla PE & L/S credit I'm just not seeing?

Comments (6)

May 5, 2015

Opportunities to trade based on the massive amounts of market intel that you're looped into as a PE firm.

May 5, 2015

Complementary skill set. You have to understand credit decently well if you're doing PE (a lot of your returns are from leverage). At the very least, that's how you pitch it to investors so they can give you more money to manage. More AUM = more fees of course.

May 6, 2015

Claren Road is actually not a great example of this as Carlyle acquired them, runs them fairly autonomously alongside their other hedge funds (for example Vermillion (commodities) and Emerging Sovereign (macro)), and Claren has a decent amount of eventy/non-credit stuff as well (their big loser last year was Fannie/Freddie, which was broadly held by the HF universe not just credit shops). Carlyle has a lot more AUM in their other "Global Market Strategies" businesses and those segments are more reflective of what most of their peers are doing.

It would be more accurate to say that almost all the mega-PE firms have huge credit PLATFORMS-usually built around some combo of CLOs, Mezz/BDCs/other direct lending, and distressed, and those PLATFORMS usually have a long/short credit component as well. Generally these are at least partially homegrown though many of the biggest grew through acquiring CLO platforms etc during the crisis.

The rational is related to what Qayin said-leveraging the platform. This comes on the asset sourcing/underwriting side (didn't win the auction for that LBO target? Flip the model over to the mezz group. Passed on that new-issue bond? Make sure to keep the CIM on file for the distressed fund when the thing tanks) as well as the fund-raising/LP relations side. One other advantage is that it smooths out firm-wide returns and income (this is especially attractive for publically traded GPs)

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May 6, 2015

Very helpful, thanks everyone!

May 6, 2015

Pretty straightforward actually: credit as an asset class is much bigger than private equity. If a pure buyout shop wants to scale, the "natural" extension is credit.

May 12, 2015