One of Wall Street’s biggest comebacks has been about a decade in the making. In 2015, the four founders of Churchill Financial parted ways with their private equity owner, Carlyle Group, and restarted their business with investment adviser TIAA. Today, the firm known as Churchill Asset Management is one of the largest direct lenders with $50 billion in committed capital.
Churchill is a major player in private lending, one of the hottest sectors in alternative finance. Private credit refers to firms, which are not banks, that provide loans to businesses, usually small and medium-sized companies. These companies are usually too big or risky for banks and too small for public bond markets. Demand for these services has grown so much that BlackRock expects the global private debt market to reach $3.5 trillion in AUM by the end of 2028.
Like almost all players in the private credit sector, Churchill has experienced significant growth. Last year, Churchill was a lender on more than 450 portfolio investments, said Churchill founder and CEO Ken Kencel. This year, the firm ranked as the second most active PE lender in the US middle market in the second quarter, behind the much larger Ares Management, according to league table data from PitchBook. “We were the number one most active direct lender in the United States last year,” Kencel said.
Kencel, in fact, claims that he is one of the first to publicly state that the private credit markets are in the midst of a Golden Age. “We are certainly in a good period of time in terms of financing and private lending in the middle market,” he said.
Churchill doesn’t focus on the high-profile, $10 billion-plus deals that make headlines, such as Silver Lake’s $13 billion acquisition of Endeavor. Instead, Churchill typically makes loans of up to $500 million to middle-market companies with $10 million to $100 million in EBITDA, Kencel said. He added that Churchill’s senior lending team made 23 new investments and 30 additions in the second quarter of this year, worth about $4 billion.
The private loan market is facing a business environment where mergers have slowed significantly since the record pace of 2021. The mid-market, however, has recovered better than large deals, Kencel said. For Churchill, the number of senior credit financings in the second quarter tripled year-over-year and doubled compared to the first quarter, he said. Churchill is not targeting tech startups, but established businesses that are owned by private equity. Customers include Clean Solutions Group, which manufactures nonwoven filtration and cleaning products; Ascend, which partners with accounting firms; and, Heartland Paving Partners, a provider of commercial asphalt and concrete maintenance services.
In the US, Churchill’s committed capital is about 50 billion dollars. More than half, or $33 billion, of that is in its private debt business, he said. The rest Churchill invests in private equity solutions, in the form of secondaries, co-investments and fund commitments. Churchill and Arcmont have 700 institutional investors, or LPs, including public and private pensions, insurance companies and sovereign wealth funds.
“We are a very large LP in over 310 US middle market private equity funds,” Kencel said. Churchill invests more than $1 billion a year in PE funds, he said. It is an LP for funds including Kohlberg & Co, Stone Point Capital and The Jordan Co.
Churchill’s AUM grew by $24 billion after Nuveen closed its acquisition of Arcmont Asset Management, one of Europe’s largest private equity lenders, last year. Both Churchill and Arcmont are part of the $74 billion Nuveen Private Capital platform. Churchill employs about 200 people while Arcmont has another 100.
Drexel served as a launching pad
Kencel, who spoke to wealth from its offices in midtown Manhattan, has faced its share of obstacles. He was adopted at birth, orphaned at a young age and then raised by his uncle. He grew up in a working-class environment in Buffalo, New York, attended Georgetown University for undergraduate and then law school at Northwestern University. Both were on scholarship. His uncle, a steel worker, pushed Kencel to attend good schools. “You have to get out of here,” his uncle told him.
Kencel started out as a lawyer. At the Dewey Ballantine law firm, Kencel worked on high-yield transactions that helped land him a job at Drexel Burnham Lambert, the investment bank led by legendary financier Michael Milken. Kencel’s boss at Drexel was Alison Mass, who is now a Goldman Sachs partner and head of investment banking. “I loved being at Drexel… I loved the culture. I think most of us who were there felt extremely fortunate to be in such an outstanding entrepreneurial organization,” Kencel said.
Drexel was a breeding ground for talent, Kencel said. Many of the executives would later go on to found some of the most well-known credit firms. There’s Marc Rowan, who helped make Apollo Global Management one of the biggest lenders; Tony Ressler, a co-founder and executive chairman of Ares Management; Bennett Goodman, co-founder of GSO Capital Partners. (Blackstone bought GSO, now known as Blackstone Credit, for $1 billion in 2008.); and Craig Packer, co-president of Blue Owl Capital. (Rowan and Ressler, along with Leon Black and Josh Harris, all worked at Drexel and later helped launch Apollo.)
Try, try again
Kencel launched Churchill Financial in 2006. The New York firm was originally backed by the commercial banking unit of Bear Stearns, and Churchill did well as a senior lender to middle-market companies owned by PE firms. This changed in 2007 with the advent of the global financial crisis, which caused several banks, including Bear Stearns and Lehman Brothers, to fail.
Churchill was also affected by the GFC. In 2008, when JPMorgan Chase bailed out Bear Stearns and bought the failing investment bank, the terms of that deal limited the merchant bank’s ability to continue investing in Churchill. Some of Churchill’s mezzanine loans defaulted and the firm could not lend. (Bear Stearns Merchant Banking changed its name in 2008 to Irving Place Capital.) In May 2010, Olympus Partners bought Irving Place stock at a discount and invested several hundred million dollars to get the firm back on track, a person familiar with the matter said. with the situation he said.
Over a year later, in November 2011, Olympus sold Churchill to the Carlyle Group, which was looking to expand its credit business. Olympus doubled its money with the sale, the person said. “[Olympus] ended up doing pretty well,” the person said. Olympus is currently best known for its industrial and business services deals, though it still invests opportunistically in financial services.
With the sale, Churchill became Carlyle’s senior middle market lending business. Thirteen Churchill executives joined Carlyle, including co-founders Kencel, Randy Schwimmer, Chris Cox and George Kurteson. One of Churchill’s team’s first actions was to set up a more than $1 billion private-to-public business development company, which eventually went public through an IPO in 2017. (A BDC is a type of closed-end fund closed that invests in small and medium-sized companies as well as companies in difficulty.)
Their time at Carlyle was short-lived. In mid-2014, all four of Churchill’s founders left. Kencel said he enjoyed running and managing his firm. “And so I wanted to get back into this job,” he said. Others say their departure was not voluntary. Kencel and the other founders were treated poorly at Carlyle, another person familiar with the Carlyle situation said. “They were definitely kicked out,” the source said.
Carlyle could not be reached for comment.
Churchill’s founders needed capital to establish their new firm. They found that with TIAA, a provider of retirement products that had been building its alternative business since 2015. TIAA did not have a subsidiary that invested in private markets or credit. Jose Minaya, who was TIAA’s head of private assets, had never met Kenceli before. But he said he knew within 40 minutes of meeting him that investing in Churchill “made so much sense…. “Ken came with a team that was very capable and had a good history.”
That year, in 2015, TIAA launched Churchill Asset Management by investing $300 million from its general account, according to Bill Huffman, CEO of Nuveen.
In addition to the $300 million, Churchill had little else; no customers, no AUM and the company didn’t even have offices. Churchill’s founders had an advantage — they were able to say they were the former Carlyle credit team, had a proven track record and could raise money from third parties, Kencel said. “It earned us a lot of respect in meeting with investors globally,” he said.
Nearly 10 years later, Churchill manages $50 billion across its debt and equity co-investment strategies. It is one of the most active private lenders in the US. All of the founders, except for Kurteson, who retired, remain with the firm, which began offering equity to all of its employees this year. “[Churchill] you are doing fantastic. And we couldn’t be happier,” said Nuveen’s Huffman.
Not everyone is convinced that Churchill is a complete success. A private equity executive who has invested in loans says the firm has benefited from a strong market for legacy lenders. “No one has looked bad for the last five years. The real test is how [Churchill] it does when markets turn sour,” they said.
Today, Churchill has a good relationship with Carlyle. The firm has financed and invested in a number of Carlyle deals. Kencel said he considers David Rubenstein, one of Carlyle’s three co-founders and co-chairmen, a mentor. (Rubenstein appeared at Churchill’s 2022 annual meeting, where he interviewed TIAA’s CEO.) “David Rubenstein is the person I admire probably more than anyone else in the business,” Kencel said.
Carlyle, meanwhile, is still trying to grow its credit business, Bloomberg reported in August. At $190 billion, Carlyle’s credit unit is the smallest among the top five U.S. alternative asset managers, the story said.
Kencel, nearly 10 years later, has a positive outlook on his time at Carlyle and subsequent departure. “It turned out to be the best thing that ever happened to me,” he said.