Carlyle Group is preparing a multibillion-dollar structured financing to seed its next flagship buyout fund and return capital to investors in older vintages, reports Bloomberg.
The deal, known internally as “Project Potomac,” would provide capital for Carlyle Partners IX through a vehicle combining senior debt, preferred shares, and common equity, with Carlyle retaining a significant minority stake in the equity on its balance sheet, according to people familiar with the matter.
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Investors in predecessor funds would roll their holdings into the new structure, receiving a mix of equity exposure and cash, with the vehicle in turn investing in the next buyout fund.
Unlike popular liquidity solutions such as continuation vehicles and NAV facilities, Carlyle’s proposal tackles both sides of the equation — liquidity for existing investors that also capitalizes the next vintage.
Carlyle’s AlpInvest unit is structuring the transaction, which places the firm’s own secondaries platform on the other side of a liquidity solution for its flagship private equity franchise.
The vehicle in some ways resembles a collateralized fund obligation, but has a couple of key differences.
It will not carry a credit rating, which means it won’t be able to access capital from insurance companies and generally narrows the potential buyer universe. In return, the structure offers greater flexibility in the timing of cash distributions, giving Carlyle room to manage distribution waterfalls on its own terms.
The second major deviation is that the proposed Potomac vehicle contemplates a far larger allocation to preferred shares than is typical in rated structures.
The unrated, preferred-heavy proposal requires a buyer base that’s comfortable with non-standard assets and free from constraints such as ratings mandates, which likely means family offices or sovereign wealth funds.
Project Potomac will hold stakes in both Carlyle Partners VII and Carlyle Partners VIII, the people said.
Co-President John Redett said late last year that the seventh fund was “not our best work of art,” though performance has since improved, with 70 percent of invested capital distributed back to investors. Fund VIII is in better shape, with 80 percent of its capital committed and invested, Redett noted on last month’s earnings call.
Carlyle has not yet begun formal fundraising for Carlyle Partners IX. The firm recently disclosed targets of at least $200 billion in capital raised by 2028, including $50 billion for global private equity, $90 billion-plus for credit, and at least $60 billion for AlpInvest.
The final size and terms of Project Potomac are still being negotiated.