Carlyle’s board met the CEO’s first contract proposal with silence

As Kewsong Lee’s five-year contract came to an end, the Carlyle Group chief executive’s advisers worked with representatives of the buyout firm to prepare an initial proposal for a new deal.

Submitted last spring, the contract proposal never received a response from Carlyle’s board, according to people familiar with the matter.

Carlyle said late Aug. 7 that Lee, who has been chief executive since 2018, was leaving the company effective immediately. William Conway, a co-founder and former co-CEO of the company who was also its chief investment officer, will serve as interim chief until a permanent replacement is found.

The precise reasons behind the board’s reluctance to deal with Lee are not entirely clear, but his sudden departure without a successor has had the effect of exacerbating one of the company’s perennial problems: the underperformance of price of its shares.

Carlyle shares fell more than 6% on August 8 to close at $35.29.

The surprise late-night announcement on Aug. 7, which came after The Wall Street Journal began investigating the matter, is a rare case in which a chosen successor has been shown the door to hand of the founders of a private capital company.

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When Lee took over at Carlyle, its stock had consistently underperformed peers and the broader market since its initial public offering in 2012. That was largely because he was slow to launch businesses that they generate the steady, predictable management fees that shareholders appreciated, such as credit and insurance, which remain too concentrated in the volatile private equity business.

Carlyle’s growth in assets under management also lagged its peers. At the end of 2012, Carlyle managed about $170 billion, about 80% of Blackstone’s total and far more than Apollo Global Management or KKR.

When Lee became CEO, Carlyle’s assets were 45% Blackstone’s and 78% Apollo’s. KKR would soon overtake him as well.

Lee’s job was to simplify and modernize the business and take it in new directions. This required divesting some of Carlyle’s subscale businesses and consolidating others. He also sought to make changes in the firm’s culture, pushing his investment professionals to be more collaborative and focused his efforts on growing fee-generating firms.

A seasoned investor, Lee had good instincts when it came to getting Carlyle on a stronger financial footing: the company’s stock continued to underperform its peers, but Lee managed to close the gap significantly, with Carlyle shares, including dividends, outperforming 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, outpacing the firm’s private equity segment for the first time. Fee-related income increased 65% to $236 million.

He was well paid for his services. He earned $42.3 million in 2021, according to a securities filing. While that may seem steep, it’s not very high by private equity standards. Blackstone CEO Stephen Schwarzman earned $160.3 million that year. KKR reported paying co-CEOs Joseph Bae and Scott Nuttall compensation valued at $559.6 million and $523.1 million respectively.

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Still, the slew of changes he implemented often did not endear him to his colleagues, and a number of longtime investment professionals left the firm.

The board now wants someone with a track record as a leader of a global company to continue executing the strategy, according to a person familiar with their search criteria.

Some investors and analysts questioned the abrupt change on August 8.

“While Conway is a capable leader and well-known to investors, this news will likely lead some investors to question Carlyle’s ability to truly transform itself into a more collaborative and balanced business mix, which will be key to its valuation keep up with compensation,” Autonomous said. analyst Patrick Davitt wrote in a research note on Aug. 8.

The fact that the company appears to be looking for a successor abroad suggests it has a less experienced bench than many of its competitors, he wrote.

Write to Miriam Gottfried at Miriam.Gottfried@wsj.com

This article was published by Dow Jones Newswires, a service of the Dow Jones Group



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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!