Carlyle playing cleanup after exits, industry challenges

Recent top executive departures at The Carlyle Group Inc., most notably its CEO Kewsong Lee, could cause investors to give the firm's newest set of funds the cold shoulder in an already sluggish private equity fundraising season, industry experts said.

Carlyle has suffered a slow hemorrhage of top executives in recent years, culminating in the Aug 7. departure of its CEO. Those departures haven't gone unnoticed among investors, who are watching closely. What happens next will depend on how well Carlyle demonstrates that it can stop the exodus of talent while still delivering expected returns and executing on its investment strategy, industry insiders said.

And if Carlyle fails to satisfy investors' concerns, they will demonstrate their displeasure with the one of the few practical options available to them — declining to invest in Carlyle's new funds, they added.

Carlyle declined to comment on Mr. Lee's departure and the impact on the firm. However, sources close to the firm said that limited partners were immediately informed of Mr. Lee's departure and his replacement, on an interim basis, by William Conway, co-founder, non-executive co-chairman of the board and former co-CEO.

CalPERS officials monitor "events like this closely," said Joe DeAnda, spokesman for the $459.4 billion California Public Employees' Retirement System, Sacramento, in an email.

Within the last 12 months, CalPERS committed a total of $750 million to split evenly between two Carlyle buyout strategies: Carlyle Partners VIII and Greenleaf Co-Invest Partners, P&I data shows.

Similarly, executives at the $192.3 billion Washington State Investment Board, Olympia, "carefully monitor and evaluate potential impact of departures within all of our funds for future strategy and performance," according to a statement.

The WSIB committed $300 million to Carlyle Partners VIII in June, but made no commitments to Carlyle funds in 2021, P&I data shows.

And the Florida State Board of Administration, Tallahassee, "monitors employee turnover at all our investment managers," said Emilie Oglesby, spokeswoman, in an email. "It is one of the many factors we consider when making investment decisions."

The board made two commitments totaling $300 million to Carlyle funds in 2021: $200 million to special situations fund Carlyle Aviation Leasing Fund and $100 million to opportunistic property fund Carlyle Realty Partners IX.

The current executive departures at Carlyle have not triggered a key-man provision in any of the funds in which FSB invests, Ms. Oglesby noted.

Such provisions, written into contracts, spell out that if certain key executives were to leave, investors can terminate the manager's ability to make new investments.

Larger firms tend to have tiered layers of key people and redundancy of personnel so that success is less dependent on one person's contribution, said Jess Downer, Salt Lake City-based managing principal of consulting firm Meketa Investment Group. It's not that there aren't rock stars, "but there are a lot of them."

No key-man clauses have been triggered by the executive departures at Carlyle, said sources close to the firm. And Carlyle is set up so that each fund has its own investment team, these sources said.

The board oversees a total of $253.1 billion, including the $200 billion Florida Retirement System.

If a key-man provision is not triggered, the investors' only choice is to wait until the manager returns to the market and decide whether to invest with the firm again, Meketa's Mr. Downer said. The analysis is the same as a public markets manager that experienced senior executive departures.

But with a stock or bond money manager, investors are under more time pressure to make a decision to terminate, which can occur quickly and easily, he said.

Institutional investors in alternative strategies just can't sell their LP interests as quickly or easily as they can their stock and bond shares. What's more, alternative investment managers including Carlyle are diversifying their limited partner bases across geographies and more recently, including retail investors and insurance companies — expansions that dilute institutions' clout, Mr. Downer said.

"The more diverse your LP base, the harder it is for LPs to get together" to push for changes at the firm, he said. That leaves investors with only the power to reinvest or not in the manager's new funds.

Carlyle, like most mega-firms, is already raising new funds, with big plans for the upcoming fundraising season. Carlyle executives expect to have 20 or more funds in the market in 2022, said Curtis L. Buser, Carlyle's chief financial officer, during the firm's July 28 earnings call.

Over the last few years, Carlyle has made an effort to grow beyond its buyout roots where it made its name and earned its track record. In March, Carlyle raised $2.1 billion from existing investors to help expand its insurance business, Fortitude Re, and entered into a new advisory agreement effective April 1 that is expected to add up to $50 billion in fee-earning assets under management. Also, in the first quarter, Carlyle bought a portfolio of assets from credit manager CBAM Partners, adding about $15 billion in assets under management to Carlyle's global credit business.

And Carlyle is not done. The firm is still expanding its credit, secondaries and infrastructure businesses, Mr. Lee said on the same earnings call.

That earnings call occurred just 10 days before Mr. Lee's sudden departure amid reports of a fight for control and a dispute over Mr. Lee's pay as his five-year contract is set to close at the end of the year, according to sources and Bloomberg. Still, Mr. Lee will be available as needed to assist in the transition to a new CEO, a news release said.

Other departures that came to light after the earnings call included Nathan Urquhart, partner and Carlyle's global head of investor relations, who is leaving the firm to become president at Coatue Management LLC, and Mike Gozycki, a Carlyle Group managing director, who resigned to join Capitol Meridian Partners, an investment firm founded by former Carlyle executives Adam Palmer and Brooke Coburn. Messrs. Palmer and Coburn both left Carlyle last year after 25 years at the money manager. Mr. Palmer had been head of Carlyle's global aerospace, defense and government services business, and Mr. Coburn had been deputy chief investment officer of real assets.

Mr. Urquhart's departure is not related to that of Mr. Lee, a Carlyle spokeswoman said.

"Nathan's departure was a situation of getting a great job," she said, referencing Mr. Urquhart's reported new position at Coatue Management.

Other recent departures include Jay W. Sammons, Carlyle Group's global head of consumer, media and retail who also left Carlyle this summer, Bloomberg reported.

Executive turnover is a big deal for all firms, even the largest alternative investment managers, consultants and other industry executives said. Departures of people seen as critical to an alternative investment firm "could be a significant impediment to fundraising," said Fraser Van Rensburg, co-founder of placement agent Asante Capital Group and managing partner.

However, large firms have an advantage over smaller, boutique firms when top executives leave, Mr. Van Rensburg said.

Very large firms do not depend on one individual or a small handful of individuals, he said. "There's a much broader platform that keeps the ship afloat," Mr. Van Rensburg said.

But even established alternative investment firms without recent departures like Carlyle are not expected to have an easy time on the fundraising trail.

Fundraising, in general, will take longer due to economic conditions and uncertainty whether the economy is or will be going into a recession, he said. Investors struggle to make decisions when there is uncertainty, Mr. Van Rensburg said.

There is also an "overabundanace of private equity managers raising capital," he said.

Blackstone Inc. wants to raise a total of $150 billion from major institutions over its current 18-month fundraising cycle ending around mid-year 2023, executives said during the second quarter earnings call, reaffirming a goal announced in January. TPG Inc. is actively raising several funds including its flagship buyout fund TPG Partners IX, health care-focused private equity fund TPG Healthcare Partners II and impact investing-focused private equity fund The Rise Fund III. KKR & Co. Inc. executives said in February they plan to raise capital for more than 30 strategies in 2022.

"Every LP is overwhelmed with the number of private equity fund opportunities in front of them," Mr. Van Rensburg said. And with a slowdown in transactions, alternative investment firms are distributing less capital back to investors that they could commit to new funds, he said.

Carlyle executives acknowledged the challenging fundraising environment on their second-quarter earnings call.

"The world has changed, in particular around some of the traditional private equity strategies, and that's fundamentally going to result in some of those raises taking longer in general, and maybe not raising the same amounts as they would have otherwise in a different environment," Mr. Buser said."