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Carlyle and KKR compete for Discover’s $10bn student loan portfolio

Carlyle Group and KKR have emerged as final bidders for Discover Financial’s $10bn portfolio of US student loans, underscoring private investment firms’ growing interest in filling the lending void left by traditional banks, according to a report by the Financial Times. 

Discover, in the midst of a $35.5bn acquisition by Capital One, initiated the sale of its student loan portfolio as part of the merger deal. Other final bidders include major players in the private credit industry such as Ares, Blackstone, Brookfield, Fortress and Oaktree. 

The bidding is expected to conclude later this month or in early July. 

Since the financial crisis, private credit firms have increasingly filled the void left by banks retreating from traditional asset-backed lending, accelerated by the collapse of several US regional banks last year, prompting other lenders to seek capital by divesting billions of dollars’ worth of loans. 

Both Carlyle and KKR have expanded into various asset-backed investments, including rooftop solar power, credit card receivables, mortgages and rail cars. The latter and Kennedy Lewis purchased about $7bn in recreational vehicle loans from the Bank of Montreal. 

Private credit giant Blackstone has also shown interest in asset-backed finance, acquiring $1.1bn in consumer credit card debt from Barclays earlier this year, while Ares acquired a $3.5bn portfolio of consumer and small-business loans from PacWest last June. 

The student lending sector, once a domain of major banks like Citigroup and Bank of America, has seen a significant retreat since 2008 due to higher default rates compared to other debt types. Discover, among the last private lenders in this sector, has faced regulatory scrutiny over its lending practices, including a $35m settlement with the Consumer Financial Protection Bureau in 2020. 

Carlyle has been actively investing in student lending, recently acquiring a $415m portfolio from Truist and investing in Monogram, a provider managing approximately $7bn. 

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