Analysis: How Carlyle CEO Kewsong Lee’s private equity firm turnaround was cut short


NEW YORK, Aug 12 (Reuters) – Kewsong Lee backed the growth of Carlyle Group Inc after taking the reins in 2018, but the private equity firm has continued to catch up to larger and more diversified listed rivals, according to people close to the situation, analysts and investors.

Carlyle announced this week that Lee would step down as general manager without a replacement. Sources familiar with the matter attributed the move to the refusal of the company’s founders, who collectively control 26% of Carlyle, to negotiate a more favorable employment contract with Lee. Read more

The founders – David Rubenstein, William Conway and Daniel D’Aniello – believed some of the organizational decisions Lee made upset some associates at the company, according to the sources, who spoke on condition of anonymity. These decisions included the removal of the co-responsibility structure in some divisions and compensation closer to the fortunes of the entire company rather than individual funds, the sources said.

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The founders also believed that Lee did not consider their opinions enough in running the business and that their relationship had cooled over time, the sources added.

A Reuters review of Carlyle’s financial information, as well as interviews with current and former investors, analysts and employees, shows the company has made progress under Lee to catch up with its listed peers in terms of profitability, asset diversification and valuation – but a substantial gap remained.

These findings highlight the challenges facing Carlyle’s founders as they search for Lee’s successor. The company said Sunday it would work with a search firm to find a new CEO and did not set a timeline for the process.

Spokespersons for Carlyle, Lee and the company’s founders declined to comment.

Carlyle shares were up 66% from when Lee started running the company in early 2018 until he stepped down on Sunday. He co-led the Washington-based company alongside Glenn Youngkin until September 2020, when the latter resigned and successfully ran for governor of Virginia, leaving Lee as sole CEO.

By comparison, shares of Carlyle peers Blackstone Inc (BX.N), KKR & Co Inc (KKR.N) and Apollo Group Inc (APO.N) have risen 213%, 146% and 73%, respectively, since the beginning of 2018.

Certainly, Carlyle’s stock performance under Lee was better than under its founders. Carlyle shares fell 12% in the five years before Lee took office, compared with a 110%, 38% and 121% rise in shares of Blackstone, KKR and Apollo, respectively.

The underperformance was driven by slow growth in Carlyle’s assets under management and investor concerns about its heavy reliance on performance fees generated by its private equity business. These charges are lucrative but irregular, accrued only when Carlyle sells companies in which he has invested or distributes dividends from them.

Lee sought to solve this problem by developing Carlyle’s credit investment business, which generates lower management fees than performance fees but more reliable. It did this by acquiring smaller credit managers and signing deals with insurance companies to manage their assets.

One such deal, with reinsurer Fortitude Re, increased Carlyle’s earning assets this year by $50 billion.

As a result, Carlyle’s credit assets under management soared to $143 billion in June, Lee’s last quarter as CEO, from $33 billion in early January 2018 when he started work. Credit assets represented 38% of Carlyle’s total assets at the end of June compared to 17% at the beginning of January 2018.

Yet most of Carlyle’s assets are still in businesses that generate performance fees such as private equity and real estate, which also rose during the period.

“In this environment, investors want a high degree of earnings predictability, and Carlyle still derives a large portion of its earnings from performance fees, which are volatile and likely to come under pressure in the short term,” said Rufus Hone. , analyst at BMO Capital.


Another reason Carlyle’s stock performance lags its peers is that the company doesn’t raise as much capital from high net worth individuals and other retail investors as its peers, analysts and investors say. This is weighing on its stock as investors view this area as offering rapid growth compared to other, more mature private equity firms.

Carlyle’s perpetual capital, which includes money committed by retail investors, is just 15% of its asset base, compared to Apollo’s 58%, Blackstone’s 38% and KKR’s 36%, according to regulatory filings. .

The company said last year that it was working to attract capital from institutional investors, including public pension funds, insurance companies and sovereign wealth funds.

“The delay is because Carlyle’s growth strategy was too focused on private equity and institutional investors over the past 10 years compared to its peers,” said Piper Sandler analyst Sumeet Mody.

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Reporting by Chibuike Oguh and Angelique Chen in New York; Additional reporting by Anirban Sen in New York; edited by Greg Roumeliotis and Jonathan Oatis

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