By Miriam Gottfried | Photographs by Dorothy Hong for The Wall Street Journal
Carlyle Group Inc., one of the original private-equity
powerhouses, has had a rocky stretch as a public company.
The Washington, D.C., firm's shares have significantly
underperformed since its 2012 initial public offering. Though they
have more than tripled over the period, based on a metric that
takes dividends into account, the S&P 500 is up nearly
fourfold. Meanwhile, shares of Blackstone Group Inc. are up more
than 11 times, Apollo Global Management Inc. -- more than nine
times, and KKR & Co. -- more than six times.
Carlyle's stock has been held back by the company's stumbles in
its hedge-fund and other businesses, prompting it to exit them.
Carlyle also focused on generating fees tied to investment
performance, rather than on management fees, which are more highly
prized by public investors for their steadiness and
predictability.
Its main rivals have raised more money than Carlyle, which was
once known for its fundraising prowess and now manages about $250
billion.
Chief Executive Kewsong Lee, 55 years old, has made it his
mission to clean up Carlyle's problem areas and close the gap with
competitors. The Albany, N.Y., native became the firm's co-CEO in
2018 and its sole chief last year.
He has simplified its sprawling fund structure and organized the
firm into three distinct business units -- private equity, credit
and investment solutions, which helps clients build custom
portfolios. Under his leadership, Carlyle has abandoned its
partnership structure, which gave extra power to insiders via
supervoting shares, and converted into a corporation, becoming the
first of its peers to adopt a "one share, one vote" structure. And
he has hired people to focus on areas like talent, fundraising,
diversity and socially responsible investing.
Now Mr. Lee is trying to position the 34-year-old firm for its
next chapter of growth. At an investor event a couple of months
ago, he outlined a strategy of "thinking bigger, performing better
and moving faster."
In an interview, Mr. Lee said Carlyle's strengths are its
investment performance, global reach and culture. The challenge, he
said, is preserving those elements while making needed changes,
including improving communication among investment teams,
streamlining global operations and encouraging more nimble
decision-making.
"Not a day goes by where I'm not always thinking about balancing
the old with the new, and the stable with the need to progress," he
said.
He has also set a goal of raising more than $130 billion in
fresh capital by 2024. Investors will get an update on Carlyle's
progress with its first-quarter earnings report, scheduled for
Thursday.
Behind the fundraising target lies a worrisome reality. While
trends have improved somewhat of late, Carlyle's assets under
management have grown much more slowly than those of its peers,
even as the overall private-equity industry balloons.
Globally, private-market assets under management have more than
doubled since the end of 2012 to more than $9 trillion, according
to data provider Preqin, as persistently low interest rates lead
institutions to pour money into the asset class in a quest for
yield.
Yet the spoils haven't been evenly distributed. At the end of
2012, Carlyle managed about $170 billion, roughly 80% of
Blackstone's total and significantly more than Apollo or KKR. By
the end of 2020, Carlyle's asset base represented less than 40% of
Blackstone's, and Apollo and KKR had both surpassed it.
Meanwhile, firms that have elected to stay private, such as
technology specialists Silver Lake and Thoma Bravo LP, have been
raising bigger funds.
There remains a question as to whether Mr. Lee's plan will be
enough to keep it relevant to institutional investors and
investment talent in an increasingly crowded field of big funds.
Most Carlyle employees appreciate the clarity of the new strategic
direction under Mr. Lee, according to an internal survey the firm
conducted, but a handful of senior investment professionals -- some
with tenures of two decades or more -- have left amid the
changes.
When Mr. Lee joined Carlyle from rival Warburg Pincus LLC in
2013 to serve as deputy chief investment officer for the
private-equity business, the firm was operating under the
leadership of its three co-founders: David Rubenstein, William
Conway and Daniel D'Aniello. (Messrs. Rubenstein and Conway are now
co-chairmen, while Mr. D'Aniello, who served for a period as
chairman, is now a regular board member.) The three men had made
most of the big decisions over the years, and they determined
Carlyle's investing would benefit from a fresh perspective,
according to people familiar with their thinking.
Mr. Lee's arrival at the hidebound firm, however, immediately
caused a stir. Mr. Conway, under whom Mr. Lee would be serving,
hadn't told Peter Clare, a Carlyle veteran and a hopeful for the
position, that he planned to hire Mr. Lee, according to people
familiar with the matter. Mr. Clare was so upset by the slight that
he refused to come into the office until the founders coaxed him
back, the people said.
(Mr. Clare, now chief investment officer for private equity,
among other titles, was elevated to Mr. Conway's deputy alongside
Mr. Lee in 2015.)
Mr. Lee successfully launched Carlyle's long-term fund strategy,
and in 2015, after he spoke passionately about the potential for
the firm's credit business, the founders granted him authority over
its direction, too.
The following year Mr. Lee orchestrated an exit from Carlyle's
struggling hedge-fund business and recruited Mark Jenkins from
Canada Pension Plan Investment Board to build and lead a
stand-alone credit-investing platform, incorporating the
credit-related strategies that were previously part of the
hedge-fund unit.
Carlyle's credit assets under management have doubled to $56
billion since Mr. Lee assumed control of the business. He and Mr.
Jenkins hope to double that again by 2024 by moving into new areas
such as aviation finance and managing assets for insurance company
Fortitude Re, which Carlyle and Japanese insurer T&D Holdings
Inc. bought from American International Group Inc. last year.
Mr. Lee has also overhauled the firm's private-equity business.
When he started, the firm had two dozen strategies, the product of
its longtime practice of raising money around every investment
opportunity that came along, no matter how limited. Previous
Carlyle investors recall crowding into the Ritz-Carlton hotel in
Washington for the firm's annual meeting to hear Mr. Rubenstein
pitch the latest offerings, which over the years included vehicles
dedicated to investing in Ireland, Mexico and sub-Saharan
Africa.
Carlyle now has 16 strategies and has made investing in
fast-growing companies a division of its flagship private-equity
fund. The firm's investment professionals now work with others who
share their sector expertise and evaluate deals for both
earlier-stage and established companies as an integrated team.
"Kew has been very respectful of the founders and the past
because it's driven the success we've had today," said Sandra
Horbach, Carlyle's co-head of U.S. buyout and growth. "He's also
not been afraid to make some changes. We need to keep evolving to
be successful in the future."
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com
(END) Dow Jones Newswires
April 25, 2021 08:14 ET (12:14 GMT)
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