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Carlyle: the buyout pioneer in need of a CEO

When Carlyle went public in 2012, it was blessed with the ideal economic backdrop and an impressive record but there was one notable absence: a formal succession plan for the co-founders who had made the firm one of the buyout industry’s pioneers.

A decade later, the vexed question of succession is dogging Carlyle just as rising interest rates and a cooling global economy leave it navigating the toughest conditions for private equity since the 2008 financial crisis.

The firm has been without a permanent chief executive since the abrupt exit in August of Kewsong Lee after he lost a power struggle with Carlyle’s co-founders, William Conway, David Rubenstein and Daniel D’Aniello. The 73-year-old Conway has been interim CEO since Lee’s departure.

Fears that the trio are unwilling to relinquish control are diminishing some of the appeal for external candidates of what should be one of the most coveted jobs on Wall Street, according to people familiar with the matter.

“The search has been really challenging,” one of the people said. “A lot of candidates who would take the job want Bill and David to step off the board.”

Some of the external candidates approached by Carlyle have even requested that the billionaire co-founders take a formal step back from a company in which they still own almost 30 per cent, the people said.

The struggle to find a new chief executive both betrays and deepens a broader unease about the future of the company, which manages almost $400bn in assets. After founding the firm in 1987, the trio built its buccaneering reputation for takeovers, including that of Dunkin’ Donuts and Kinder Morgan, without the scrutiny of public markets.

Since its listing, however, Carlyle has ceded its once dominant position to rivals such as Blackstone, Apollo and KKR. Lee sought to close the gap by pushing the firm into credit, real estate and insurance-based investments, mimicking a strategy that had proved successful for competitors.

The aggressive effort to play catch-up by Lee, who was co-chief executive from 2017 before becoming the firm’s sole leader in 2020, strained relations with the founders and did little to fully resolve questions over the firm’s long-term future in an industry that has moved beyond buyouts.

According to people briefed on the matter, doubts over Carlyle’s strategic direction were partly behind the firm’s tentative efforts to explore a potential sale after Lee’s exit, an outcome that would have also solved its succession dilemma.

Kewsong Lee
Kewsong Lee lost a power struggle with Carlyle’s co-founders © Kyle Grillot/Bloomberg

As the firm continued to seek a replacement for the Korean-American, executives at BlackRock, the world’s largest asset manager, discussed whether to pursue a takeover of Carlyle but decided against it, according to three people with knowledge of the discussions.

While Carlyle would turbocharge BlackRock’s expansion into alternative assets, where it has focussed on niche acquisitions, the size of the deal and turmoil at the buyout firm were two factors that put it off, according to one of the people

BlackRock executives also decided that owning a business in which people were making tens of millions would “culturally . . . create a massive problem”, another of the people said.

“They [BlackRock] want to buy an alternative manager, but I don’t think they are going to do anything sometime soon,” the person added.

Analysts say that a tie-up with an asset manager such as BlackRock or a large insurer would help Carlyle expand beyond institutional investors to wealthy retail customers, a new and potentially lucrative frontier for buyout firms.

A sale would also offer Rubenstein an elegant exit and the ability to focus on interests like his Declaration Partners family office, according to people familiar with his thinking. The 73-year-old has sold 38 per cent of his stock since the beginning of 2020.

Rubenstein was not the only founder to reduce his stake as shares in buyout firms boomed during the final leg of the bull market. Corporate filings show that in November 2021, with Carlyle’s stock trading near a record high, D’Aniello sold 1.5mn shares, largely at $58 a piece. Conway donated 2.5mn shares to charity the same month.

Just over a year later, Carlyle’s shares are trading at $29, injecting greater urgency into the firm’s need to find a new leader.

In a memo sent to staff on Wednesday, Conway said that the firm had undertaken an “exhaustive search” and was “making good progress”. Although “no decisions have been made”, the firm hopes to have “more to share” soon, according to the memo, a copy of which was seen by the Financial Times.

Nasdaq chief executive Adena Friedman, who was Carlyle’s chief financial officer between 2011 and 2014, was seen within the firm as a top external candidate, according to people familiar with the matter but was not interested. This week Nasdaq made her chair of the group, alongside her role as CEO.

Goldman Sachs president John Waldron was also seen as an attractive potential candidate, the people said, but is not pursuing the role. It is not clear if Waldron and Friedman were among those who had concerns over whether a CEO’s power would be stifled by Carlyle’s founders.

BlackRock and Carlyle declined to comment, as did Nasdaq and Goldman Sachs.

Once nicknamed the “ex-presidents’ club” for its habit of appointing former political leaders, including George W Bush and onetime UK prime minister John Major as advisers, Carlyle has said it would also consider internal candidates to replace Lee.

Mark Jenkins, Carlyle’s head of credit, and Peter Clare, a longtime partner who chairs the firm’s private equity business, joined Conway on a November earnings call to discuss the third-quarter results.

The pair are seen as the most likely internal candidates, according to people briefed on the firm’s thinking. Sandra Horbach, co-head of Carlyle’s US buyout business, has dropped out of the race, the people said.

Carlyle’s race to replace Lee was not part of the script for its founders, who spent years trying to turn the firm into one that could flourish after their retirement.

They began executing a succession plan in 2017, when they named Lee and Glenn Youngkin as co-chief executives. Youngkin left in 2020 to pursue his political ambitions and was elected governor of Virginia last year.

The challenges, meanwhile, facing Lee’s eventual successor are growing. Carlyle recently asked investors for an extension in raising its newest flagship $22bn buyout fund. Its shares fell sharply in November after it raised just $6bn in new capital during the third quarter, a sharp slowdown that was more pronounced than rivals all battling tougher conditions.

“We were pleased with how things were going before the announcement of Lee’s departure,” said one of Carlyle’s largest outside shareholders. “Whenever there is a change in a transition plan, it is always something that gives you heartburn,” said the investor, adding that he expected Carlyle to eventually get the appointment right.

Additional reporting by Brooke Masters and James Fontanella-Khan in New York and Arash Massoudi in London

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