As Kewsong Lee’s five-year contract drew to a close, advisors to the CG -6.23% CEO of Carlyle Group Inc. worked with representatives of the buyout firm to prepare an initial proposal for a new deal. The contract proposal, submitted last spring, received no response from Carlyle’s board, according to people familiar with the matter.
Carlyle said late Sunday that Mr. Lee, who has been chief executive since 2018, will step down from the company effective immediately. William Conway, the company’s co-founder and former co-CEO, who was also chief investment officer, will serve as interim chief executive until a permanent replacement can be found.
The exact reasons for the board’s unwillingness to negotiate with Mr. Lee are not entirely clear, but his sudden departure without a successor means that one of the company’s enduring problems is compounded: the underperformance of its share price.
Shares of Carlyle fell more than 6% on Monday to close at $35.29.
The surprise announcement late Sunday night, after The Wall Street Journal began investigating the matter, is a rare instance in which a handpicked successor to a private equity firm’s founders was shown the door.
When Mr. Lee took the helm of Carlyle, its shares had consistently underperformed its peers and the broader market since its IPO in 2012. This was in large part because companies that generate the steady, predictable management fees that shareholders value, such as
Carlyle’s growth in assets under management also lagged behind its peers. At the end of 2012, Carlyle managed approximately $170 billion, approximately 80% of Blackstone Inc.’s total assets and significantly more than that of Apollo Global Management Inc. or KKR & Co. By the time Mr. Lee became CEO, Carlyle’s assets were already 45% of Blackstone’s and 78% of Apollo. KKR would soon surpass it too.
Mr. Lee’s job was to simplify, modernize and take the business in new directions. That required divesting some of Carlyle’s Subscale businesses and consolidating others. He also sought to change the company’s culture by urging its investment professionals to be more collaborative, and focused his efforts on growing fee-generating companies.
As a seasoned investor, Mr. Lee had good instincts when it came to putting Carlyle on a stronger financial footing: The company’s shares continued to underperform those of its peers, but Mr. Lee managed to close the gap significantly by Carlyle shares, including dividends, have outperformed the S&P 500 during his tenure.
In the second quarter, assets under management in Carlyle’s credit segment nearly doubled year-over-year to $143 billion, surpassing the company’s private equity segment for the first time. Fee-related revenue increased 65% to $236 million.
He was handsomely paid for his services. He earned $42.3 million in 2021, according to a securities filing. While that may sound high, it’s not very high by private equity standards. Blackstone CEO Stephen Schwarzman made $160.3 million that year. KKR reported paying co-CEOs Joseph Bae and Scott Nuttall $559.6 million and $523.1 million in compensation, respectively.
Still, the many changes he made often did not endear him to his peers, and a number of longtime investment professionals left the firm.
According to a person familiar with the search criteria, the board now wants someone with a track record of leading a global company to continue executing the strategy.
Some investors and analysts questioned the abrupt change on Monday.
“While Conway is an able leader and is well known to investors, this news will likely cause some investors to question Carlyle’s ability to truly transform into a more collaborative and balanced business mix, which will be key to his valuation.” catching up with comps,” Autonomous analyst Patrick Davitt wrote in a research note Monday.
The fact that the firm appears to be looking outside for a successor suggests it has a less experienced bank than many of its competitors, he wrote.
write to Miriam Gottfried at [email protected]
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Appeared in the August 9, 2022 print edition as “Carlyle’s Board Declined Talks on CEO Extension.”