December 15, 2014
Interviewed by: David Snow
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Inside Carlyle’s Middle-Market Group

Private equity mega-firm The Carlyle Group has a separate arm for investing in middle-market companies. The firm’s Rodney Cohen tells Privcap how his team sources opportunities and how the division benefits from deal flow elsewhere at Carlyle. He also discusses survival tactics for today’s competitive middle market.

Private equity mega-firm The Carlyle Group has a separate arm for investing in middle-market companies. The firm’s Rodney Cohen tells Privcap how his team sources opportunities and how the division benefits from deal flow elsewhere at Carlyle. He also discusses survival tactics for today’s competitive middle market.

Inside Carlyle’s Middle-Market Group
With Rodney Cohen of The Carlyle Group

David Snow, Privcap: Today, we’re joined by Rodney Cohen of The Carlyle Group. Rodney, welcome to Privcap. Thanks for being here.

Rodney Cohen, The Carlyle Group: Thank you for having me.

Snow: You are in a special group within Carlyle that invests in the middle market. I don’t think a lot of people are aware that Carlyle has a separate group that focuses on the middle market. I would love to hear about the genesis of your team and how you define middle market.

Cohen: Sure, absolutely. Starting about 2010, there was a recognition at the firm that as our bigger buy-out fund had continued to get larger and larger; they were leaving what we call the middle market. I know that definition is subject to a lot of interpretations, but the way we think about it is equity checks under $200 million. That’s a big part of the market and a market where Carlyle historically was incredibly successful. Lots of volume, lots of interesting opportunities, and no home within the firm dedicated to addressing that space.

Snow: You’ve been around since 2010. Are you benefiting from deal flow by being at Carlyle? I mean, for the larger buy-out group, do opportunities come in the door that maybe aren’t appropriate and they get kicked down to you?

Cohen: Absolutely and it actually works both ways. We identify things that start out potentially smaller and end up larger, that we likewise pass up to them. The bigger buy-out fund is set up in industry verticals. So, within the firm—within the fund I should say—you see an industrial vertical. You see an aerospace and defense vertical and a healthcare vertical, and each of those verticals is staffed with a team exclusively dedicated to that vertical. So, you can imagine the expertise within that vertical is very strong. And we leverage off of those verticals.

Snow: What are some other ways that the broader Carlyle organization is supportive of what your team does?

Cohen: Where are we sourcing from? We’re trying to stay out of auctions today, because auctions are incredibly pricey. So we’re using our network of CEOs, former CEOs, operating advisors and industry consultants. We’re using industry resources that are still affiliated with the firm. We’re using our portfolio companies and our companies overseas. We’re using our companies to point us in the right directions—to trends and to things that are changing. So, when you focus on all of those, it’s a very powerful network.

Snow: Rodney, a question about the operating platform of your group. After you’ve acquired a company, what sorts of people, resources or ideas can your sub-team within Carlyle bring to bear to increase or enhance the operations of these portfolio companies?

Cohen: Really, we’re trying to focus in on someone who’s been in the industry for a long time, people who understand the nuances of a particular business. Management teams really take to them and look up to them for guidance, and their networks and their contacts. I’m not asking one of them to come in and operate the company. But I might ask one of them if they could recommend someone who could come in and provide a sales function or a sourcing function, etcetera.

Snow: How do you try to be a successful investor in the middle market, which has become much more competitive?

Cohen: It is a competitive market today, for sure. You try to do a couple of things. We really try to stay out of competitive auctions. In today’s market with debt being as available as it is, and the pricing and the covenants that come with it, things tend to get bid up a bit higher and people are stretching and pushing. There’s lots of capital out there, and obviously, it’s a very efficient market. So, in that circle, it’s tough. It’s tough. When someone calls you and tells you that you won, you know it’s because you’re paying the highest prices. You have to pause and scratch your head a bit about, “Did I win or did I lose?” But it is a tough place to be. We try to stay on the periphery of that. We try to find entrepreneurs, founders, owners; we try to get to people before they’re going to do a process.

Snow: How many investments has your team made so far?

Cohen: We have 10 platform investments and one follow-on. So, 11 investments at this point.

Snow: Walk me through some key themes your firm has as it looks at the middle market. What are some key themes that drive your investment sourcing?

Cohen: Again, there are some areas that historically Carlyle is very strong in and we’re going to clearly gravitate to those. Aerospace and defense, we love. We’re in that. Industrials, transportation—we love that. We’re in that. Software service businesses—again, another area we like a lot and have had great success in. So, we’re in that as well. We try to develop a very diversified portfolio and, again, one advantage in a firm like ours is there is so much expertise that we really are unlike other middle-market funds in the fact that we can go and have such incredible depth of knowledge in so many different areas. We have been focused on some of the energy changes and things going on in that space. We’ve definitely been focused on metals and mining a bit as well, and we think that’s an area that, again, [is] a bit less competitive [with] more opportunity there. But I would say we have a very generalist approach to what we do.

Snow: Briefly talk about the way the new energy opportunity in America, in North America, is changing the industrial landscape. What kinds of companies will win in that changing environment?

Cohen: If you believe in cheap, natural gas and reasonably—, I don’t want to talk about oil. That would take us probably a whole other session. But clearly as a feedstock, you’re looking at the country at a time where we really have an excess. We have a very good view of what that excess will look like over the next five to 10 years, and every reason to believe that pricing should stay very competitive.

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