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Can Harvey Schwartz revive private equity pioneer Carlyle?

In December, a group of about 100 former employees of Carlyle Group gathered at the law firm Latham & Watkins in Manhattan just before the Christmas holidays for a party among old friends.

In earlier years, the unsanctioned gathering was frowned upon by the buyout group’s previous chief executive.

But at Latham’s offices, Harvey Schwartz, a former Goldman Sachs banker who took the helm of the private equity firm a year ago, and two of its three billionaire co-founders, David Rubenstein and Daniel D’Aniello, were very much in evidence.

Officially, it was an opportunity for Carlyle’s growing diaspora to congregate before the holidays. Unofficially, it was a charm offensive — or what one attendee called “propaganda” to try and “change the narrative” around Carlyle’s fortunes.

The firm is battling lacklustre fundraising and undergoing a cost-cutting drive as it seeks to stem the fallout from a fumbled succession from Rubenstein, D’Aniello and William Conway, who co-founded the organisation more than three decades ago. 

Rubenstein had an unorthodox call to arms. He invited the alumni huddled together to think about Carlyle like their alma mater. “You want the brand to always be improving so that years from now people will say — you worked at Carlyle,” he said. 

Rubenstein noted that in the decades since he graduated from Duke University in 1970 its prestige had soared. Acting as emissaries of Carlyle’s brand would similarly fuel their collective prospects, he said.

Schwartz, meanwhile, signalled he was working in harmony with the group’s billionaire founders, unlike his predecessor, Kewsong Lee, who clashed with them before abruptly resigning in August 2022. 

“His narrative was Carlyle is back,” said one attendee.

Some came away feeling better about Carlyle after a stretch of turmoil that has raised troubling questions about the direction of one the pioneers of the $8tn private capital industry. Weeks before the gathering, Carlyle had executed the first round of lay-offs in its private equity unit since the 2008 financial crisis as it struggled to raise new money from investors.

“I walked away feeling positive . . . Nobody wants the firm to take a beating and everyone recognises it’s been a tough stretch over the last couple of years,” one attendee told the Financial Times.

“My view is that Harvey is somewhere between 100 and 200 times better than I imagined someone could be,” Rubenstein told the FT.

But others acknowledged that as Schwartz enters his second year running Carlyle, his revamp of the near $400bn in assets investment group remains in its early stages. 

“He’s got to deliver and he has a lot of wood to chop . . . People are waiting to see Schwartz’s actions,” said one former employee.

While Schwartz has promoted from within, he has also hired confidants from his decades at Goldman Sachs, including new investor relations head Jeff Nedelman and Lindsay LoBue, who will focus on strategic initiatives. 

They have been tasked with figuring out how to expand the business while fundraising for large leveraged buyouts remains difficult.

Schwartz has prioritised growth in areas such as tapping wealthy individual investors, expanding its credit and insurance-related assets and increasing overall headcount. But he has offered few clear financial goals, causing impatience among investors.

“The transparency is still more opaque than we think investors would like to see,” said Michael Brown, an analyst at Keefe, Bruyette & Woods. “We would like to have seen or see some financial targets to have some real guardrails in mind about what management believes the right growth potential is.”

On a November earnings call, Schwartz called for time, stating that he was overseeing a “surgically methodical process” to set the foundation for growth.

But there is a risk Carlyle may fall further behind rivals such as Blackstone, Apollo and KKR, which have all recorded soaring assets and public market values in recent years.

While Blackstone was recently added to the S&P 500 index and KKR and Apollo hope to soon follow suit, Carlyle’s market capitalisation of less than $15bn is too small for it to qualify.

CT Fitzpatrick, chief investment officer of Vulcan Value Partners, a large Carlyle shareholder, commended Schwartz’s deliberate approach.

“We would have been concerned if he would have tried to do something abruptly,” said Fitzpatrick, who expects “concrete direction coming from the company over the next 12 months”.

Schwartz has begun to act on obvious changes, such as streamlining the group’s duplicative operations to cut costs and improve its margins that have badly lagged those of its peers. Last quarter, Carlyle earned a 37 per cent margin on its fee revenue, while Blackstone earned 57 per cent.

“He has made a lot of progress in doing things that I and my co-CEO Bill Conway should have done,” said Rubenstein. “He has focused us on where our strengths are and where our weaknesses are.”

But some efforts have aggravated insiders. Last quarter, Schwartz outlined $40mn of annual cost cuts, which come from savings generated by the group’s recent lay-offs, according to people familiar with the matter.

Carlyle has also tightened up many non-compete agreements to make them more restrictive for senior employees if they chose to defect to rivals, the people told the FT. Carlyle declined to comment.

The cost cuts play to Schwartz’s experience of reining in Goldman’s finances in the years after the crisis. But it is less clear whether he can turn the tide on fundraising for Carlyle’s buyout business, which continues to be its largest source of overall profits and revenue. 

The group raised about $15bn for its latest US buyout fund, far less than the $27bn its former chief Lee had hoped for when launching the fundraising. After Lee’s departure, Carlyle raised less than $1bn, according to filings.

Private equity investors blame some of Carlyle’s fundraising trouble on poor performance, not just leadership turmoil and the departure of a number of senior dealmakers in recent years including Peter Clare, the unit’s former chief investment officer.

The predecessor 2018-era US buyout fund has returned about 11 per cent of investors’ capital and posted a net annual gains of just 8 per cent. Carlyle is raising new funds in Europe and Asia where predecessor funds have also posted net annualised returns of 10 per cent or lower, according to filings, though the funds still have a handful of years to run.

Schwartz has been clear that as he forges his strategy, he believes Carlyle’s stock is undervalued. At a recent conference, he played stock analyst, stating that he had valued the company on a piece of paper when considering the job.

Carlyle sits on billions in cash and potential performance fees and its balance sheet carries low-cost debt, he said. “It’s very hard not to look at the Carlyle brand . . . and think there’s a huge value opportunity there,” he said.

The forthcoming year will test whether Carlyle’s brand retains the allure Schwartz is banking on, particularly if he pins himself to specific financial goals. 

“It’s a make-or-break year for them,” said one large Carlyle fund investor.

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