What changed in this filing

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Item 1. Business

2022-02-22 compared with 2021-02-23 · 178 added, 133 removed, 393 unchanged (44% of the section changed)

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Our investment objective is to generate current income and, to a lesser extent, capital appreciation primarily through secured debt investments in U.S.

middle market companies.

middle market companies supported by financial sponsors.

Our core investment strategy focuses on lending to U.S.

middle market companies supported by financial sponsors, which we define as companies with approximately $25 million to $100 million of earnings before interest, taxes, depreciation and amortization (“EBITDA”), which we believe is a useful proxy for cash flow.

middle market companies, which we define as companies with approximately $25 million to $100 million of earnings before interest, taxes, depreciation and amortization (“EBITDA”), which we believe is a useful proxy for cash flow.

This core strategy is supplemented with complementary specialty lending and opportunistic investing strategies, which take advantage of the broad capabilities of Carlyle's Global Credit platform while offering risk-diversifying portfolio benefits.

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Our Investment Adviser

Our investment activities are managed by our Investment Adviser.

Our investment activities are managed by our Investment Adviser, a Delaware limited liability company and an investment adviser registered with the SEC under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).

The principal executive offices of our Investment Adviser are located at One Vanderbilt Avenue, Suite 3400, New York, NY 10017, with additional offices in Chicago, Boston and Los Angeles.

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Our Investment Adviser, its investment professionals, our executive officers and directors, and other current and future principals of our Investment Adviser serve or may serve as investment advisers, officers, directors or principals of entities or investment funds that operate in the same or a related line of business as we do and/or investment funds, accounts and other similar arrangements advised by Carlyle.

An affiliated investment fund, account or other similar arrangement currently formed or formed in the future and managed by our Investment Adviser or its affiliates may have overlapping investment objectives and strategies with our own and, accordingly, may invest in asset classes similar to those targeted by us.

As a result, our Investment Adviser and/or its affiliates may face conflicts of interest arising out of the investment advisory activities of our

Investment Adviser and other operations of Carlyle.

and strategies with our own and, accordingly, may invest in asset classes similar to those targeted by us.

As a result, our Investment Adviser and/or its affiliates may face conflicts of interest arising out of the investment advisory activities of our Investment Adviser and other operations of Carlyle.

See “ —Allocation of Investment Opportunities and Potential Conflicts of Interest ” and “ Risk Factors—Risks Related to Our Business and Structure—There are significant potential conflicts of interest, including the management of other investment funds and accounts by our Investment Adviser, which could impact our investment returns ” in Part I, Item 1A of this Form 10-K for more information.

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With $301 billion of assets under management (“AUM”) as of December 31, 2021, Carlyle’s purpose is to invest wisely and create value on behalf of its investors, portfolio companies and the communities in which we live and invest.

Carlyle employs 1,825 employees, including 678 investment professionals in 29 offices across five continents, and serves more than 2,650 active carry fund investors from 95 countries.

Carlyle’s Global Credit segment, which currently has $55.9 billion in assets under management, advises a group of 71 active funds that pursue investment strategies across the credit spectrum, including liquid credit, illiquid credit, and real assets credit.

Carlyle employs nearly 1,850 employees, including more than 690 investment professionals in 26 offices across five continents, and serves more than 2,850 active carry fund investors from 89 countries.

Carlyle’s Global Credit segment, which currently has $73.4 billion in assets under management, advises a group of 87 active funds that pursue investment strategies across the credit spectrum, including:

liquid credit, illiquid credit, and real assets credit, a well as cross-platform vehicles.

Global Credit has been Carlyle’s fastest-growing segment in total AUM over the past three years, and Carlyle continues to expand its reach into additional areas of focus, such as real estate credit.

Since the establishment of Global Credit in 1999, these various capital sources provide the opportunity for Carlyle to offer highly customizable and creative financing solutions to borrowers to meet their specific capital needs.

In 2020, Carlyle hired several new senior investment professionals to continue to build Global Credit’s investment breadth and geographical presence.

Primary areas of focus for Carlyle’s Global Credit segment include:

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The structured credit funds invest primarily in performing senior secured bank loans through CLOs and other investment vehicles.

In 2020, Carlyle closed three new U.S.

CLOs and one CLO in Europe with a total of $1.3 billion and $0.6 billion, respectively, of AUM at December 31, 2020.

As of December 31, 2020, Carlyle’s loans and structured credit team advised 52 structured credit funds and two carry funds in the United States, Europe, and Asia totaling, in the aggregate, approximately $29.4 billion in AUM.

In 2021, Carlyle closed eleven new U.S.

CLOs and three CLOs in Europe with a total of $5.9 billion and $1.5 billion, respectively, of AUM at December 31, 2021.

As of December 31, 2021, Carlyle’s loans and structured credit team advised 67 structured credit funds and two other structured credit funds in the United States and Europe totaling, in the aggregate, approximately $34.1 billion in AUM.

Illiquid Credit

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Carlyle’s direct lending business includes Carlyle’s BDCs, which invest primarily in first lien loans (which include unitranche, “first out” and “last out” loans) and second lien loans of middle market companies, typically defined as companies with annual EBITDA ranging from $25 million to $100 million, that lack access to the broadly syndicated loan and bond markets.

In 2020, Carlyle expanded its direct lending capabilities by adding senior personnel to bolster its underwriting capabilities.

As of December 31, 2020, Carlyle’s direct lending investment team advised two BDCs (including the Company) and five separately managed accounts, totaling, in the aggregate, $5.0 billion in AUM.

As of December 31, 2021, Carlyle’s direct lending investment team advised three BDCs (including the Company) and six separately managed accounts, totaling, in the aggregate, $6.6 billion in AUM.

• Opportunistic Credit.

Carlyle’s opportunistic credit team invests primarily in highly-structured and privately-negotiated capital solutions supporting corporate borrowers through secured loans, senior subordinated debt, mezzanine debt, convertible notes, and other debt like instruments, as well as preferred and common equity in such borrowers.

The team will also look to invest in special situations (i.e., event-driven opportunities that exhibit hybrid credit and equity features) as well as market dislocations (i.e., primary and secondary market investments in liquid debt instruments that arise as a result of temporary market volatility).

As of December 31, 2020,

Carlyle’s opportunistic credit team advised two funds and one separately managed account totaling, in the aggregate, $5.0 billion in AUM.

in liquid debt instruments that arise as a result of temporary market volatility).

As of December 31, 2021, Carlyle’s opportunistic credit team advised two funds and one separately managed account totaling, in the aggregate, $7.8 billion in AUM.

• Distressed Credit.

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(“Carlyle Aviation Partners”) is Carlyle's multi-strategy investment platform that is engaged in commercial aviation aircraft financing and investment throughout commercial aviation industry.

As of December 31, 2020, Carlyle Aviation Partners had approximately $6.1 billion in AUM across four active carry funds, in addition to securitization vehicles and liquid strategies.

As of December 31, 2021, Carlyle Aviation Partners had approximately $10.2 billion in AUM across five active carry funds, in addition to securitization vehicles, liquid strategies and other vehicles.

• Infrastructure Debt.

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The team focuses primarily on senior, subordinated, and mezzanine debt and seeks to invest primarily in developed markets within the Organization for Economic Cooperation and Development (“OECD”).

As of December 31, 2020, our infrastructure debt team managed $1.1 billion in AUM.

As of December 31, 2021, Carlyle’s infrastructure debt team managed $2.0 billion in AUM.

• Insurance Solutions.

Carlyle Insurance Solutions (“CIS”) combines our deep insurance expertise with portfolio construction capabilities, capital sourcing and asset origination strengths to provide comprehensive liability funding/reinsurance, asset management and advisory solutions for (re)insurance companies and fund investors.

The CIS team oversees the investment in Fortitude Holdings.

As of December 31, 2020, AUM related to capital raised from third-party investors to acquire a controlling interest in Fortitude Holdings was $2.6 billion, and Fortitude and AIG have committed approximately $4.7 billion of capital to-date to various Carlyle strategies.

The CIS team oversees the investment in Fortitude.

As of December 31, 2021, AUM related to capital raised from third-party investors to acquire a controlling interest in Fortitude was $3.2 billion, and Fortitude and AIG have committed approximately $7.0 billion of capital to-date to various Carlyle strategies.

• Global Capital Markets.

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Competitive Strengths

Carlyle Global Credit’s key competitive strengths are based on Carlyle’s integrated platform, which allows it to mitigate competition and thereby improve our ability to deliver on the expectations of shareholders.

The following characteristics distinguish Carlyle’s capabilities:

Market Leading Direct Origination Platform .

We have access to Carlyle Global Credit’s large direct origination platform, including a dedicated financial sponsor coverage team and the sourcing capabilities of other investment professionals on the platform who regularly generate attractive investment opportunities for the Company.

Through these integrated efforts the origination team generates, and expects to continue to generate, a significant amount of differentiated, directly originated deal flow from which to select attractive investment opportunities.

Broad Product Capabilities .

Carlyle Global Credit offers a broad range of leveraged finance products to the marketplace, which allows us to invest across the entire capital structure, as well as via specialty products such as asset-based and recurring revenue technology loans.

These integrated and differentiated capabilities make our investment highly relevant to borrowers, as Carlyle Global Credit can construct comprehensive, tailored financing solutions.

By doing so, Carlyle Global Credit is able to more frequently assert greater control over structure, price and terms of investments, which we can leverage in seeking to generate attractive risk-adjusted returns for our stockholders.

Scaled Capital Base.

With $55.9 billion of AUM as of December 31, 2020, we believe Carlyle Global Credit’s hold sizes are among the largest in the market.

Carlyle Global Credit's ability to deploy comparatively larger amounts of capital delivers certainty of execution for borrowers and mitigates the threat of competition, resulting in the ability to drive terms and generate attractive investment opportunities.

In addition, scaled capital deployment allows Carlyle Global Credit to establish leadership positions in financing transactions, which results in improved informational access and incremental influence and control in debt financings.

Carlyle Global Credit’s key competitive strengths are based on Carlyle’s integrated platform – with a breadth of capabilities, scale of capital and depth of expertise – which Carlyle believes allows it to mitigate competition and thereby improve our ability to deliver on the expectations of shareholders.

We believe the following characteristics distinguish Carlyle’s capabilities in private credit:

• Proven Direct Origination Approach .

Carlyle Direct Lending’s business directly originates nearly 100% of its investments, sourced from both the dedicated direct lending origination team as well as from the many adjacent capabilities across the Carlyle Credit platform.

This origination approach has resulted in a strong and diversified flow of opportunities, approximately 1,850 per annum, from which Carlyle believes it can select investments with the best potential risk/reward characteristics.

• Breadth of Capabilities .

Carlyle believes it has one of the broadest credit investment capabilities in the market today.

As a global private credit platform, Carlyle has the ability to invest across the capital structure in first lien, unitranche, second lien, junior debt and preferred equity.

Carlyle Credit can potentially serve as a one-stop shop, providing creative and holistic solutions for borrowers across the capital structure, which allows it to pursue investment opportunities with limited competition.

• Scale of Capital.

With $73.4 billion of AUM as of December 31, 2021 across its platform, Carlyle Global Credit maintains a significant capital base that can provide a full capital solution, delivering certainty of execution for borrowers and mitigating opportunities for competitive disintermediation.

• Depth of Expertise .

We benefit from our Investment Adviser’s utilization of the broader resources of Carlyle, which includes access to Carlyle’s relationships and institutional knowledge from over three decades of private market investing.

Our Investment Adviser's dedicated, sector aligned underwriting teams have significant experience and tenure.

These teams leverage Carlyle’s broader resources – nearly 680 investment professionals, more than 50 operating executives, information obtained through direct ownership of 256 companies, lending relationships with over 700 companies, and in-house government affairs, ESG and economic research teams – to generate differentiated diligence insights and inform fundamental credit selection.

We believe our ability to draw on the experience and knowledge of these broader capabilities gives us a significant advantage during the underwriting process.

As a firm, Carlyle seeks to bring the collective power of the global platform with respect to individual investments.

We believe this integrated and collaborative approach allows us to move faster, and with higher conviction, than many of our competitors.

Rigorous Investment Process Conducted by Experienced Investment Team.

Carlyle employs a robust, iterative and heavily documented underwriting process.

Our Investment Adviser’s investment team comprises investment professionals who have extensive middle market lending experience.

As of December 31, 2020, the investment team included a team of more than 170 investment professionals across the Global Credit segment.

Our Investment Adviser’s investment committee comprises five of the most senior credit professionals within the Global Credit segment, with backgrounds and expertise across asset classes and over 26 years of average industry experience and 10 years of average tenure.

We believe the breadth and depth of the investment team's experience in sourcing, structuring, executing, and monitoring a broad range of investments provides us with a significant competitive advantage in building a high quality portfolio of investments.

Defensive Investment Approach.

Our portfolio has been defensively constructed, and is highly diversified by borrower, industry sector, sponsor relationships and other metrics.

As of December 31, 2020, we had a portfolio of 160 investments in 117 portfolio companies across 27 industries and 63 unique sponsors.

As of December 31, 2020, approximately 99.1% of our debt investments bore interest at floating rates, primarily subject to interest rate floors, and 67.0% of our portfolio was invested in first lien debt investments (including 3.4% first lien/last out loans).

Carlyle is a market leading global platform with $301 billion of AUM, an experienced and tenured bench of more than 690 investment professionals with well-established, long-standing relationships with sponsors, management teams, and industry experts, as of December 31, 2021.

Carlyle believes that it brings differentiated diligence insights and extensive experience to inform credit selection.

As a firm, Carlyle seeks to bring the collective power of the global platform with respect to individual investments, including sector credit analysts, Carlyle Private Equity’s deep knowledge and relationships with potential customers, suppliers or competitors of a given company, and internal dedicated diligence groups ( e.g.

, government affairs and environment, social and corporate governance (“ESG”)).

Carlyle believes this integrated and collaborative approach allows it to move faster and with higher conviction than its competitors in many scenarios.

• Rigorous Credit Selection.

Carlyle employs a robust, iterative and heavily documented underwriting process for its Direct Lending business, which consists of four “gates” where a credit is reviewed and requires sign-off, including (i) at the point of origination, (ii) by the underwriting team, (iii) by Carlyle Direct Lending’s screening committee (the “Direct Lending Screening Committee” or the “Screening Committee”) and finally (iv) by Carlyle Direct Lending’s investment committee at our Investment Adviser (“Direct Lending Investment Committee” or “Investment Committee”).

This rigorous diligence approach has allowed for a less than 3% closing rate on the approximately 1,850 transactions that were reviewed by the deal team over the past 12 months.

• Defensive Approach.

Carlyle approaches the direct lending business with a defensive mindset that permeates all aspects of investment selection.

On a strategic level, Carlyle seeks to construct well diversified portfolios, heavily weighted towards non-cyclical industries, and applies only moderate leverage at the portfolio level.

In addition, in individual asset selection, Carlyle favors sponsored over non-sponsored borrowers, seeks to transact with sponsors it knows well (approximately 80% of Carlyle Direct Lending’s business is with repeat sponsors), works with companies it knows well via its significant incumbencies, and primarily invests in transactions where Carlyle maintains leadership or roles with significant influence (approximately 85% of originations having a titled role in recent years).

Market Opportunity

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Middle Market.

middle market is the largest market by many measures, which is expected to enable us to invest selectively as approximately 70% of middle market loan volume is sponsor-backed.

According to S&P Capital IQ, as of December 31, 2020, there are over 77,000 U.S.

middle market companies generating between $20

million and $1 billion in annual revenue, compared with approximately 4,000 companies with revenue greater than $1 billion.

We believe these middle market companies, both sponsored and non-sponsored, represent a significant growth segment of the U.S.

economy and often require substantial capital investments to grow.

Benefits of Traditional Middle Market Focus – Leverage, Pricing and Risk.

According to the S&P Global Market Intelligence LCD Quarterly Leveraged Lending Review (Q4 2020) and Fitch U.S.

Leveraged Loan Default Insight (January 28, 2021), middle market companies, which we define as borrowers with EBITDA of approximately $25 million and $100 million, are generally less levered, have larger equity contributions, and experience lower rates of default versus large cap broadly syndicated loans, which we define as loans to borrowers with greater than $100 million of EBITDA.

Middle market loans relative to broadly syndicated loans also tend to achieve more attractive economics in the form of upfront fees, spreads, and prepayment penalties, and benefit from stronger defensive structures through terms including, but not limited to documentation, asset security, priority in payments, covenants, and information/governance, all of which potentially provide more favorable protection against credit deterioration.

Middle market lenders like us are also often able to complete more thorough due diligence investigations prior to investment than lenders in the broadly syndicated space.

We believe the confluence of these factors have resulted in, over the four-year period from 2017 to 2020, middle market loans driving an approximate 150 to 200 basis points spread premium over broadly syndicated loans according to the S&P Global Market Intelligence LCD Leveraged Loan Index, without taking incremental credit risk as evidenced by lower default rates and higher recovery rates as compared to broadly syndicated loans.

The middle market direct lending asset class has undergone tremendous growth and maturation over the past decade and is one of the largest sub-segments of private credit, a now $800+ billion market.

Carlyle believes this growth has been driven by fundamentally sound, secular drivers, including the expansion of private market activity, increased bank regulation and consolidation and structural changes in liquid credit markets, all of which create a significant opportunity for private credit investing.

• Benefits of Traditional Middle Market Focus.

Carlyle believes that there are meaningful benefits to investing in middle market directly originated assets, which allows the strategy to generate excess return as compared to traditional fixed income asset classes, with comparable risk performance.

The excess return is generated by prudently taking incremental complexity and illiquidity risk.

Traditional middle market companies offer more attractive economics in the form of upfront fees, spreads and prepayment penalties.

In addition, senior secured middle market loans typically have strong defensive characteristics and structural protections, including priority in the capital structure and covenants, with a majority of middle market loans structured with financial covenants relative to the broadly syndicated markets.

Additional protection may be gained through better credit documentation and control, enhanced management and diligence access, monitoring of assets, and significantly more influence in the instance of a workout scenario.

• Market Environment Favors Non-Traditional Lenders.

Traditional middle market lenders, such as commercial and regional banks and commercial finance companies, have contracted their origination and lending activities and are focusing on more liquid asset classes or have exited the business.

At the same time, institutional investors have sought to invest in larger, more liquid offerings, limiting the ability of middle market companies to raise debt capital through public capital markets.

This has resulted in other capital providers, such as specialty finance companies, structured-credit vehicles such as CLOs, BDCs, and private investment funds, actively investing in the middle market.

We believe the aforementioned changes and restrictions have created a large and growing market opportunity for alternative lenders such as us.

The direct lending asset class has also benefited from an ongoing secular trend in the banking industry.

Post Great Financial Crisis (“GFC”) in 2008, as tougher regulations have reshaped the landscape, traditional banks have reduced their lending capabilities by nearly 50% over the past ten years.

As banks have retreated due to a number of new laws, regulations and regulatory guidance, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, the federal bank regulatory agencies’ leveraged lending guidelines and Basel III regulatory capital framework, institutional investors have increased their lending capabilities to fill the void.

Post-GFC, institutional investors now originate over 80% of primary leveraged loan issuances in the U.S., generating an incremental capital opportunity for the asset class.

• Favorable Capital Markets Trends.

Current and future demand for middle market financings, driven by private equity investment and upcoming maturities are expected to provide us with ample deal flow.

Current data from the Refinitiv suggests that approximately $553 billion of upcoming loan maturities for middle market companies are due between 2021 and 2027, and the Preqin PE North American Report suggests that there is approximately $865 billion of uninvested private equity capital as of December 31, 2020.

We believe these refinancings and uninvested capital will provide a steady flow of attractive opportunities for well-positioned lenders with deep and longstanding sponsor and market relationships, particularly for providers of full capital structure financing solutions.

Over the past two decades, Carlyle has witnessed a secular trend with respect to the shift in economic activity from public to privately owned businesses due to less appetite for public market exposure.

The number of public companies in the U.S.

has dropped by over 50% from its peak, with a mirror image increase in the rise of private equity-backed companies.

Overall public listing activity has declined by approximately two-thirds over the past forty years.

These privately owned companies often prefer to finance themselves through the private markets, which has allowed for a natural expansion of the market opportunity for direct lenders on a secular basis for over a decade.

Given current market dynamics, Carlyle believes that the asset class will continue to expand.

Investment Strategy

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We may also make secondary purchases of all of the above types of investments and other securities on an opportunistic basis.

Investment Approach and Risk Monitoring of Investments

Our Investment Adviser utilizes a robust, iterative, and heavily documented due diligence underwriting process to evaluate all investment opportunities.

Our Investment Adviser’s investment teams primarily consist of origination professionals, underwriters and portfolio management professionals.

An investment team works on a particular transaction from initial screening through closing, and the same team continues to monitor the credit for the life cycle of the investment.

We view our investment process as consisting of the phases described below:

Our Investment Adviser has built a strong direct origination platform.

Our Investment Adviser’s origination team sources approximately 1,400 opportunities per year with an ultimate investment rate by us of less than 5% annually.

The scale of our Investment Adviser’s origination platform allows us to maximize access to investment opportunities, enhance overall investment selectivity and diversify risks in our portfolio.

We further seek to reduce risk by partnering with experienced sponsors with strong track records.

We believe lending to companies owned by leading private equity firms (versus non-sponsored companies) has several important and potentially defensive characteristics.

Carlyle's financial sponsor origination team covers over 200 private equity firms, financial institutions, other middle market lenders, strategic relationships and arrangements, financial advisors, and experienced management teams, generally organized on a regional basis with offices in Boston, Chicago, Los Angeles and New York.

It is their responsibility to source specific opportunities, identify potential loan candidates, and apply creative and flexible solutions to solve clients’ financing needs.

Each originator maintains long-standing relationships with potential sources of deal flow and is responsible for covering a specified target market.

We believe those originators’ strength and breadth of relationships, combined with our platform's capabilities, allow us to source investments across a wide range of markets enabling our Investment Adviser to be highly selective in recommending investments.

Transaction Screening.

After the originator and a senior investment team member have completed an initial screen, the investment team will prepare and present a screening memo that includes, but is not limited to, a business description, proposed transaction financing structures, preliminary financial analysis (including a cash flow forecast incorporating downside scenarios), debt and equity comparables, and the team's initial assessment of investment merits and key risks and market/industry considerations to a screening committee of senior members of the Direct Lending team (the "Screening Committee").

Based on feedback from the Screening Committee, the deal team will prepare and disseminate an outcome email that documents the takeaways from the meeting, including preferred financing structure as well as terms, key diligence items, and next steps.

Underwriting.

Following an indication from the Screening Committee to move forward in the diligence process, the investment team will compile a detailed diligence list and prepare for in-depth credit analysis.

During the investment process, the investment team works closely with the private equity sponsor / borrower in all aspects of due diligence.

Formal due diligence includes meeting the management team, reviewing the data room and performing key financial analysis, creating a more

detailed financial model with sensitivities across various market environments, reviewing sell-side and third party research including industry reports and financial diligence, following up with industry experts within the Carlyle network for additional feedback and drafting the commitment papers and term sheet.

As part of the extensive due diligence process, the investment team fully leverages all internal Carlyle resources to aid in investment decisions.

This includes, as needed, speaking to Carlyle Private Equity investment professionals (in accordance with information barrier restrictions), Carlyle operating executives, Carlyle’s Chief Economist & Director of Research, Carlyle’s government affairs professionals, and any executive within Carlyle’s private equity portfolio, which includes over 250 companies worldwide.

In addition, the investment team may utilize third party expert networks to supplement its work to gain further insight into company and industry factors from various thought leaders across the company’s markets.

Carlyle recently enhanced its due diligence process by incorporating formal ESG reviews.

While ESG has always been a component of the screening process, all deals will now be thoroughly vetted using sector and sub-sector specific Sustainability Accounting Standards Board standards.

ESG diligence will further incorporate country risk assessments for corruption and anti-money laundering concerns as well.

This part of the process is iterative and involves re-screening with members of the Investment Adviser's investment committee before seeking final investment committee approval.

Over the course of the underwriting process, the investment team crafts a fulsome memo, with diligence completed on a variety of industry, company-specific, financial and legal topics that includes, but is not limited to, the following:

• Overview of the opportunity, investment team recommendation, and risks and mitigants

• Structure, terms and pricing of the proposed facilities

• Sources and uses and capitalization table

• Industry growth (including total addressable market, penetration and whitespace), key industry trends, risk of disruption (with focus on technological disruption), competitive landscape and side-by-side analysis of key competitors, borrower's market position and reputation, industry fragmentation and consolidation trends, M&A trends and valuation multiples, barriers to entry for new adjacent or substitute players and regulatory framework

• Details on core product and service offering, including revenue visibility and quality, revenue and gross profit build-up by key products / services (including price and volume trends, if applicable), concentration and margins, and other relevant sector-specific metrics

• Customer diligence, including concentration, wallet share, tenure, health of customer base, contract details (if applicable), and sales and marketing team and related strategy

• Contracts, including maturity and termination, renewal waterfalls, ability to pass through costs, exclusivity

• Supply chain diligence, including supplier concentration, raw material exposure, pricing power and logistics

• Details on operations, including IT and technology, operating footprint (including real estate and leases, if applicable), distribution, and employee base

• Financial diligence, including cyclicality, seasonality, fixed and variable costs, EBITDA adjustments, capital expenditures, working capital (including aging and write-offs), detailed, bottom up cash flow modeling with sensitivities for key business risks, tax characteristics and tax shield, accounting policies (including revenue and cost recognition), bonding requirements, foreign exchange exposure, and earn-outs and off-balance sheet liabilities

• Financial model, including detailed, bottom-up cash flow model with sensitivities for key business risks

• Debt and equity comparables

• Details on management team, including quality, depth and reputation, and private equity sponsor (if applicable)

• Details on legal documentation, including construction of EBITDA and indebtedness, financial covenants and equity cures, affirmative covenants (including reporting requirements, audits, budgets, and maintaining good standing), permitted indebtedness, permitted liens and incremental facilities (including most favored nation protection), restricted payments and tax distributions, permitted acquisitions and investments, permitted divestitures and mandatory prepayments, events of default and cure periods, enforcement of remedies, security and collateral package, assignability of key contracts, leases, material IP or other key collateral, limitations on fundamental changes and transferring collateral, voting and assignment provisions, and other key terms

Investment Process

The direct lending investment team’s multi-channel origination model generates attractive investment opportunities through a variety of sources, including over 250 private equity firms, financial institutions, other middle market lenders, strategic relationships and arrangements, financial advisors, and experienced management teams.

The origination team supplements these relationships through personal visits and marketing campaigns focused on maximizing investment deal flow.

It is their responsibility to identify specific opportunities, refine opportunities through candid exploration of the underlying facts and circumstances and to apply creative and flexible solutions to solve a borrower or sponsor’s financing needs.

The eight origination professionals are located in New York, Chicago, Boston and Los Angeles.

Each originator maintains long-standing relationships with potential sources of deal flow and is responsible for covering a specified target market, organized by geography and secondarily by sector.

Carlyle believes the originators’ strengths and breadth of relationships across a wide range of markets generate numerous financing opportunities, which enable it to be highly selective through its diligence and investment process, with less than 3% of total deals screened over the past 12 months closing.

The direct lending investment team has cultivated very strong relationships with private equity sponsors with whom it works closely in sourcing and executing transactions.

Carlyle believes that borrowers benefit from full financing solutions, access to the vast Carlyle network, and reliable execution.

The underwriting process is led by an experienced team of senior underwriters with an average of 14 years of experience that are organized by sector and benefit from a deep base of shared information enabled by platform integration, as well as OneCarlyle resources.

The typical deal timeline is sixty to ninety days and follows a multi-faceted four-step process:

The deal team reviews marketing materials and industry reports, compiles debt and equity comparables, reaches out to industry experts within the Carlyle network, builds an initial cash flow model incorporating downside scenarios, identifies key credit strengths and risks and formulates a view on structure.

The deal team then presents an initial analysis through a screening memo to the Screening Committee for high-level feedback and a decision to move forward with additional credit work.

Based on feedback from the committee, the deal team will prepare and disseminate an outcomes email that documents the takeaways from the meeting, including preferred financing structure as well as terms, key diligence items and next steps.

Formal Review.

Following an indication from the Screening Committee to move forward in the diligence process, the deal team will compile a detailed diligence list and prepare for in-depth credit analysis.

During this process, the deal team works closely with the private equity sponsor / borrower in all aspects of due diligence.

Formal due diligence includes meeting with the management team, reviewing the data room and performing key financial analyses, creating

a more detailed financial model with sensitivities assuming various market environments, reviewing sell-side and third-party research, which includes industry reports and financial diligence, following up with industry experts within the Carlyle network for additional feedback, and drafting the commitment papers and term sheet.

As part of the extensive due diligence process, the deal team fully leverages all internal Carlyle resources to aid in investment decisions.

This includes speaking to Carlyle Private Equity investment professionals to discuss broad industry trends, as well as Carlyle operating executives, Carlyle’s chief economist and director of research, Carlyle’s government affairs professionals and senior executive officers within Carlyle’s private equity portfolio, including over 270 companies worldwide.

In addition, the deal team may utilize third-party expert networks to supplement their work to gain further insight into company and industry factors from various thought leaders across the company’s markets.

Carlyle enhanced its diligence process by incorporating formal ESG reviews, and our Investment Adviser utilizes this process as it seeks to achieve our investment objective.

While ESG has always been a piece of the screening process, all deals will now be thoroughly vetted leveraging sector- and sub-sector-specific Sustainability Accounting Standards Board standards.

ESG diligence incorporates country risk assessments for corruption and anti-money laundering concerns as well.

The underwriters are responsible for assessing these ESG risks and including their assessment in the deal memo that the Screening and Investment Committees will review.

The formal review part of the process is iterative and involves re-screening with members of the Screening Committee, typically two to four times over the course of the deal, to produce a fulsome investment memo and provide a full term sheet and commitment papers, subject to outstanding diligence items.

Final Investment Committee Approval.

After the Screening Committee has signed off on the investment memo, which consists of approval by the Investment Adviser’s Chief Investment Officer, Head of Underwriting, Chief Risk Officer, and a senior Managing Director, the deal team prepares for the Investment Committee approval process.

The deal team reviews and summarizes final third-party industry work, the final quality of earnings report, and tax, legal, IT, HR and insurance diligence packets, conducts relevant background checks, performs outstanding ESG and regulatory due diligence, and begins drafting the definitive legal documentation for the transaction.

Once the credit work for the transaction has been finalized, the deal team will finalize the investment memo and present the investment to the Investment Committee, where approval by a majority of the committee is required to approve a transaction.

Once the investment has been approved and prior to funding, the deal team will prepare a closing memo for the Investment Committee documenting any updates since approval, changes to key legal terms, and the final financial covenant analysis.

Once the sponsor / borrower legal diligence, and the know your customer, anti-money laundering and legal documentation have been finalized, the transaction will close and fund.

The deal team focuses on lending to companies that it believes are performing, high quality businesses with a focus on strong fundamentals, market leadership with unique competitive advantages and high barriers to entry, positive cash flow generation on a historical and pro-forma basis including downside scenarios, and modest loan-to-value across economic cycles.

The deal team crafts a fulsome memo with pages including, but not limited to, diligence completed on a variety of industry, company-specific, financial and legal topics.

Topics may include:

• Industry growth, including total potential market opportunity, current market share and potential new business development

• Key industry trends and risk of disruption (with focus on technological disruption)

• Competitive landscape and side-by-side analysis of key competitors

• Market position and company reputation

• Industry fragmentation and consolidation trends

• M&A trends and valuation multiples

• Barriers to entry for new adjacent or substitute players

• Regulatory framework

• Revenue visibility and quality

• Price and volume trends

• Details on products and services, including concentration and margins

• Customers, including customer concentration

• Contracts, including maturity / termination provisions, renewal waterfalls, ability to pass through costs and exclusivity

• Supply chain, including supplier concentration, raw material exposure, pricing power and logistics

• Management team, including quality, depth and reputation

• Sales and marketing team

• IT and technology platform

• Details on real estate and leases

• Environmental, regulatory, or legal issues and insurance coverage

• Adherence with environmental, social and governance policies

• Items as to which approval is conditional and which require further due diligence and/or subsequent resolution

We view proactive portfolio monitoring as a vital part of the investment process, which includes the continuous review by the portfolio management, underwriting and workout teams, with multiple layers of risk review and oversight.

Our Investment Adviser utilizes a proprietary credit surveillance dashboard, an Internal Risk Rating system and proprietary

valuation model to assess risk in the portfolio.

• Cyclicality

• Seasonality

• Fixed and variable costs

• EBITDA adjustments

• Capital expenditures, including breakdown between maintenance and growth

• Working capital requirements, including aging and write-offs

• Detailed, bottom up cash flow modeling with sensitivities for key business risks

• Foreign exchange exposure

• Accounting policies, including revenue and costs recognition

• Bonding requirements

• Claims on income streams and off-balance sheet liabilities

• Tax characteristics and tax shield

• Definitions of EBITDA and indebtedness

• Financial covenants and ability of a sponsor to invest incremental capital into the borrower

• Affirmative covenants, including but not limited to reporting requirements, audits, budgets, and maintaining good standing

• Permitted indebtedness, permitted liens and incremental facilities (including most favored nation protection)

• Restricted payments and tax distributions

• Permitted acquisitions and investments

• Permitted divestures and mandatory prepayments

• Events of defaults and cure periods

• Security and collateral packages

• Assignability of key contracts, leases, material IP and other key collateral

• Limitations on fundamental changes and transferring collateral

• Enforcement of remedies

• Voting and assignment provisions

• Other debt agreements and relevant intercreditor and subordination agreements

Portfolio and Risk Management

The investment team views proactive portfolio monitoring as a vital part of its investment process, which includes the continuous review of a borrower by portfolio management, underwriting and workout professionals, with multiple layers of risk review and oversight.

The investment team follows a rigorous monitoring strategy that utilizes a proprietary dashboard template

for each transaction, which tracks financial performance, covenant compliance, follow-on transactions and amendments, and real-time updates to internal risk ratings based on qualitative and quantitative factors.

The portfolio management process involves a variety of ongoing and scheduled reviews that allow for early detection of issues and escalation to the Investment Committee and workout team to avoid credit losses.

This process includes detailed portfolio dashboard updates, monthly reviews of watch list credits, quarterly meetings to conduct formal portfolio reviews, focused on technical analysis of financial performance and portfolio diversification, and ongoing ad-hoc meetings to handle borrower-specific requests, including follow-on transactions and amendments.

Our Investment Adviser supplements these processes with additional analyses and projections, including stress scenarios, to assess the potential exposure of our portfolio to variable macroeconomic factors and market conditions.

For more information on the Internal Risk Ratings of our portfolio, see Part II, Item 7 of this Form 10-K “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Portfolio and Investment Activity .”

In connection with the quarterly portfolio reviews, the investment team also compiles a quarterly risk report that examines, among other things, migration in the portfolio and loan level investment mix, industry diversification, internal risk ratings, revenue and EBITDA and leverage.

Frequency of review of individual loans is determined on a case-by-case basis, based on internal risk ratings as laid out below, total exposure and other criteria set forth by the Investment Committee.

The direct lending team has developed an internal risk policy which regularly assesses the risk profile of each investment and rates them based on the following categories, which are referred to as internal risk ratings.

Rating Definition

1 Borrower is operating above expectations, and the trends and risk factors are generally favorable.

2 Borrower is operating generally as expected or at an acceptable level of performance.

The level of risk to our initial cost bases is similar to the risk to our initial cost basis at the time of origination.

This is the initial risk rating assigned to all new borrowers.

3 Borrower is operating below expectations and level of risk to our cost basis has increased since the time of origination.

The borrower may be out of compliance with debt covenants.

Payments are generally current although there may be higher risk of payment default.

4 Borrower is operating materially below expectations and the loan’s risk has increased materially since origination.

In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due, but generally not by more than 120 days.

It is anticipated that we may not recoup our initial cost basis and may realize a loss of our initial cost basis upon exit.

5 Borrower is operating substantially below expectations and the loan’s risk has increased substantially since origination.

Most or all of the debt covenants are out of compliance and payments are substantially delinquent.

It is anticipated that we will not recoup our initial cost basis and may realize a substantial loss of our initial cost basis upon exit.

Beyond the policies detailed above, our Investment Adviser’s investment team performs analyses and projections to assess potential exposure of the portfolio to variable macroeconomic factors and market conditions.

Sample analysis includes impact from falling energy prices, volatility in foreign exchange rates, Brexit, interest rate sensitivity and quite notably, the COVID-19 pandemic.

These analyses can take the form of periodic (weekly/monthly/quarterly) reports as well as ad hoc analysis based on current market conditions.

Portfolio Composition

As of December 31, 2020 and 2019, the fair value of our investments was approximately $1,826 million and $2,124 million, respectively, in 117 and 112 portfolio companies/investment fund, respectively.

The type, geography and industry composition of our investments, each as a percentage of the fair value of our investments as of December 31, 2020 and 2019, were as follows:

As of December 31, 2021 and 2020, the fair value of our investments was approximately $1,913 million and $1,826 million, respectively, in 117 and 117 portfolio companies/investment funds, respectively.

The type, geography and industry

composition of our investments, each as a percentage of the fair value of our investments as of December 31, 2021 and 2020, were as follows:

As of December 31,

Type—% of Fair Value 2021 2020

First Lien Debt (excluding First Lien/Last Out Debt) 63.63 % 74.63 %

First Lien/Last Out Debt 3.41 3.68

First Lien Debt 64.4 % 67.0 %

Second Lien Debt 17.9 15.6

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Cyprus 0.4 0.4

Jamaica — 0.01

Luxembourg 2.0 1.6

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Construction & Building 0.6 0.1

Consumer Goods:

Durable — 0.6

Consumer Goods:

Non-Durable 0.3 0.1

Consumer Services 1.4 1.9

Containers, Packaging & Glass 2.7 3.2

Durable Consumer Goods 0.60 0.55

Electricity — 1.46

Oil & Gas 2.2 2.2

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Advertising, Printing & Publishing 0.4 2.0

Broadcast & Subscription — 2.19

Diversified & Production 1.0 1.1

Non-durable Consumer Goods 0.09 0.09

Metals & Mining 0.1 —

Retail 2.4 1.9

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Transportation:

Cargo 1.61 1.99

Transportation:

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The SEC has granted us exemptive relief that permits us and certain of our affiliates to co-invest in suitable negotiated investments (the “Exemptive Relief”).

If Carlyle is presented with investment opportunities that generally fall within our investment objective and other board-established criteria and those of other Carlyle funds, accounts or other similar arrangements (including other existing and future affiliated BDCs) whether focused on a debt strategy or otherwise, Carlyle allocates such opportunities among us and such other Carlyle funds, accounts or other similar

arrangements in a manner consistent with the Exemptive Relief, our Investment Adviser’s allocation policies and procedures and Carlyle’s other allocation policies and procedures, where applicable, as discussed below.

strategy or otherwise, Carlyle allocates such opportunities among us and such other Carlyle funds, accounts or other similar arrangements in a manner consistent with the Exemptive Relief, our Investment Adviser’s allocation policies and procedures and Carlyle’s other allocation policies and procedures, where applicable, as discussed below.

More specifically, investment opportunities in suitable negotiated investments for investment funds, accounts and other similar arrangements managed by our Investment Adviser, and other funds, accounts or similar arrangements managed by affiliated investment advisers that seek to co-invest with us or other Carlyle BDCs, are allocated in accordance with the Exemptive Relief.

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We do not currently have any employees.

Our Chief Financial Officer, a Managing Director of Carlyle, Treasurer and Principal Accounting Officer, a Principal of Carlyle, and our Chief Compliance Officer and Secretary, a Vice President of Carlyle, are retained by our Administrator pursuant to the Carlyle Sub-Administration Agreement.

Our Chief Financial Officer, a Managing Director of Carlyle, Treasurer and Principal Accounting Officer, a Managing Director of Carlyle, and our Chief Compliance Officer and Secretary, a Managing Director of Carlyle, are retained by our Administrator pursuant to the Carlyle Sub-Administration Agreement.

Each of these professionals performs their respective functions for us under the terms of our Administration Agreement.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business