Carlyle and KKR beat rivals to win $10bn Discover Financial loan portfolio

Carlyle and KKR have won an auction for a $10bn student loan book from Discover Financial, clinching one of the largest loan portfolio sales of the year, according to four people with knowledge of the matter.

The joint bid from the two private investment groups eclipsed a competing offer from Sixth Street, BlackRock and the Canada Pension Plan Investment Board, with the loan book selling above par, two people added.

The auction attracted some of the biggest names in private credit, including Ares, Blackstone and Oaktree, as private investment firms become larger financiers of consumers and Main Street businesses.

Discover announced its plan to sell the portfolio late last year, after it agreed to sell itself to rival bank and credit card issuer Capital One for $35.5bn. The auction offered a rare opportunity for investors to buy a large private student loan book.

Banks including Bank of America, Citigroup and JPMorgan Chase had already halted their offerings of student loans, while Wells Fargo sold roughly $10bn of student loans to Apollo and Blackstone in 2020.

One person familiar with the Discover loan sale said Carlyle’s investment in Monogram, a student loan origination platform, had bolstered its bid. Sixth Street, BlackRock and CPPIB were outbid, others involved in the sale said.

Carlyle and KKR are expected to split the loan book equally.

Carlyle, KKR, Sixth Street, BlackRock and CPPIB declined to comment. Discover did not respond to a request for comment.

Banks across the US and Europe have been studying loan sales for much of the past year, as some lenders look to shore up liquidity and others attempt to free up regulatory capital as they stare down more stringent requirements.

That has opened the door to private credit investors, who have swooped in to buy pools of loans that banks no longer find attractive.

“Asset-based finance is . . . probably a $5tn market on its way to $7tn to $8tn,” Scott Nuttall, co-chief executive of KKR, said on the company’s earnings call last month. “The deployment opportunity will continue to be robust, and banks are trying to free up capital, whether it’s for M&A or to redeploy into other areas that they find interesting. So we’ve got plenty of opportunity here.”

Some credit investors have bought loan books outright, as Carlyle and KKR plan to do with Discover, while others have partnered with banks.

In those instances, private credit investors have agreed to invest in future loans a bank makes, while the bank maintains its client relationship. That was the case earlier this year when Blackstone agreed to buy equipment leases underwritten by KeyCorp, and struck a deal to invest in new equipment loans KeyCorp makes to clients.