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PE Panorama: Carlyle’s succession issues underscore industry inertia

By Paul Mackintosh   
August 22, 2022

The departure of Kewsong Lee as chief executive of private equity firm Carlyle Group Inc. will undoubtedly raise questions about what happened. The company said on August 7 that Lee and its board “mutually agreed” that his five-year contract would not be renewed at year-end.

Less than ten days later, his name has already been removed from the “Our Leadership Team” section of Carlyle’s website, with no indication of a replacement. William E. Conway, Jr., one of the three co-founders still listed on the board of directors, is also listed as interim CEO and non-executive co-chairman.

Carlyle had US$376 billion of assets under management as of end-June. Lee has been credited with much of the company’s growth over recent years, but his exit is hardly likely to address its persistent share price lag versus listed rivals. Carlyle’s shares fell to $34.12 on news of his departure. The share price has since somewhat recovered but is still well short of the year’s high of $55.57 reached on January 4.

According to a Reuters report, Conway and the other two co-founders of Carlyle - David Rubenstein and Daniel D'Aniello - who control some 26% of the group between them, believed that some of Lee's decisions had antagonised its partners, specifically linking compensation to group performance rather than their specific funds, and removing the co-head structure from some units.

Then there's the question of Lee's own compensation. According to several news reports, including the Financial Times, the proximate cause of his exit was the co-founders’ refusal of his request for a $300 million compensation package - high, but apparently still somewhat below the industry average in private equity.

Can Carlyle really move out of the shadow of its co-founders and progress to a true multi-generational firm? It certainly isn't the only private equity major struggling with succession issues.

Look at rivals Blackstone, where Stephen Schwarzman still holds a presiding role, and Apollo, where Leon Black’s departure after revelations of his ties to Jeffrey Epstein was followed by a public power struggle between remaining co-founders Josh Harris and Marc Rowan.

The controlling stakes and influence, not to mention the immense wealth, that such founders have built up while heading their businesses make some of them far more difficult to remove than the typical listed company CEO. And at Carlyle, as elsewhere, we're clearly looking at an effective veto by remaining founders over the actions of their successors.

What is all this going to do to the future of Carlyle, and the market’s assessment of corresponding risk factors?

Well, those who live by the private partnership structure die by it, and in some cases apparently hang on white-knuckled to the bitter end. Any curious souls still searching for an explanation for any discrepancy between listed private equity firms’ net asset value and their stock price probably need look no further than this. Good luck to anyone trying to convince the founding partners that they're the problem.