Analysis: How Carlyle CEO Kewsong Lee's turnaround of the private equity firm was cut short
12/08/2022 16:36
By Chibuike Oguh and Angelique Chen
NEW YORK, Aug 12 (Reuters) - Kewsong Lee bolstered Carlyle
Group Inc's COG. growth after he took over the reins in 2018,
yet the private equity firm continued to play catchup with its
larger and more diversified publicly listed rivals, according to
people close to the situation, analysts and investors.
Carlyle announced this week that Lee would step down as
chief executive without a replacement lined up. Sources familiar
with the matter attributed the move to a refusal by the firm's
founders, who collectively control 26% of Carlyle, to negotiate
a more favorable employment contract with Lee. urn:newsml:reuters.com:*:nL4N2ZK0GP
The founders -- David Rubenstein, William Conway and Daniel
D'Aniello -- believed some of the organizational decisions Lee
made upset some partners at the firm, according to the sources,
who spoke on condition of anonymity. These decisions included
doing away with the co-head structure in some divisions and
making compensation tied closer to the fortunes of the entire
firm rather than individual funds, the sources said.
The founders also believed Lee did not take enough of their
views into account in the running of the firm, and their
relationship cooled over time, the sources added.
A Reuters review of Carlyle's financial disclosures, as well
as interviews with investors, analysts and current and former
employees, shows that the firm made strides under Lee in
catching up with its publicly listed peers in terms of
profitability, asset diversification and valuation -- yet a
substantial gap remained.
These findings highlight the challenges that Carlyle's
founders face as they seek Lee's successor. The firm said on
Sunday it would work with a headhunting firm to find a new CEO
and did not set a timetable for the process.
Spokespersons for Carlyle, Lee, and the firm's founders
declined to comment.
Carlyle's shares rose 66% from the time Lee started leading
the firm at the beginning of 2018 until he stepped down on
Sunday. He co-led the Washington-based firm alongside Glenn
Youngkin until September 2020, when the latter stepped down and
went on to run successfully 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 start of 2018.
To be sure, Carlyle's stock performance under Lee was
better than under the stewardship of its founders. Carlyle
shares dropped 12% in the five years before Lee took over,
compared with a 110%, 38%, and 121% rise in the shares of
Blackstone, KKR and Apollo, respectively.
That underperformance was driven by Carlyle's slow growth in
assets under management and investor concerns about its strong
reliance on performance fees generated by its private equity
business. Those fees are lucrative but irregular, booked only
when Carlyle sells companies it invested in or distributes
dividends from them.
Lee sought to address this by expanding Carlyle's credit
investment business, which generates management fees that are
lower than performance fees but more reliable. He did this by
acquiring smaller credit managers and signing deals with
insurance companies to manage their assets.
One of those deals, with reinsurer Fortitude Re, boosted
Carlyle's fee-paying assets this year by $50 billion.
As a result, Carlyle's credit assets under management soared
to $143 billion as of June, Lee's last quarter as CEO, from $33
billion at the start of January 2018 when he started on the job.
Credit assets accounted for 38% of Carlyle's total assets as of
the end of June versus 17% at the start 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 grew during the period.
"In this environment, investors want a high degree of
earnings predictability, and Carlyle still makes a large
percentage of its earnings from performance fees, which are
volatile and likely to be under pressure near-term," said BMO
Capital analyst Rufus Hone.
IN NEED OF RETAIL MONEY
Another reason for the lag in Carlyle's share performance
relative to its peers, analysts and investors say, is that the
firm is not raising as much capital from high net-worth
individuals and other retail investors as its peers. This weighs
on its stock because investors see this area as offering rapid
growth compared to other more mature private equity businesses.
Carlyle's perpetual capital, which includes money committed
by retail investors, accounts for just 15% of its asset base,
versus 58% for Apollo, 38% for Blackstone and 36% for KKR,
according to regulatory filings.
The firm said last year it was focused on attracting capital
from institutional investors, including public pension funds,
insurance firms and sovereign wealth funds.
"The lag has been because Carlyle's growth strategy was too
private equity- and institutional investor-focused over the past
10 years relative to peers," Piper Sandler analyst Sumeet Mody
said.
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Carlyle CEO Kewsong Lee steps down in abrupt early departure
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(Reporting by Chibuike Oguh and Angelique Chen in New York;
Additional reporting by Anirban Sen in New York; editing by Greg
Roumeliotis and Jonathan Oatis)
((Chibuike.Oguh@thomsonreuters.com; +332-219-1834; Reuters
Messaging: chibuike.oguh.thomsonreuters.com@reuters.net))