Business

Harvey Schwartz Takes the Helm of Carlyle Group Amidst Challenging Legacy

At Carlyle Group Inc., a new era dawns as its freshly-minted CEO, Harvey Schwartz, meticulously orchestrates his plans for the $426 billion alternative-asset manager's resurgence. Each Monday, as he drafts the week's agenda, he does not shy away from consulting the very founders of the firm.

David Rubenstein, the globetrotting founder, is renowned for his prowess in wooing clients. Bill Conway, another founding maestro, who's adept at leading investments, is also part of Schwartz’s inner sanctum. This practice marks a stark departure from the strategies of his forerunner, who distanced the founders, leading to a toxic power struggle and subsequently, an arduous search for new leadership.

Schwartz, having taken the reins just a year prior after such leadership tumult, believes that reconciling with Carlyle's illustrious past is paramount to reinvigorating its status.

Though Schwartz has gained the founders’ trust, there remains a palpable concern that consensus-building might be coming at the cost of more radical reforms that Carlyle needs to stay apace in the high-stakes private equity environment.

This account is woven together following confidential discussions with over a dozen Carlyle executives, who have chosen to remain anonymous while divulging details about the internal dynamics of the firm.

During its prime, Carlyle was a titan in the capital city, drawing investors with its astute bets on government contractors and leveraging high-profile advisors such as George H.W. Bush. However, a succession of failed leadership handovers has diminished the firm, splintering it and stripping it of the luster it once held alongside behemoths whose shares have skyrocketed. In stark contrast, Carlyle's shares have witnessed a modest 36% increase.

Schwartz, previously the president of Goldman Sachs Group Inc., devoted his inaugural year at Carlyle to strengthening bonds with the founders who control a substantial stake in the company. He has reassured staff about the intrinsic value of Carlyle’s brand and is convinced that the founders' engagement will enhance this value.

As he acquainted himself with the diverse segments of Carlyle’s businesses, Schwartz asked division heads to initiate cost-cutting measures and has intricately linked rainmakers’ compensation with the returns provided to investors. Yet, he has refrained from proclaiming a comprehensive vision for the enterprise, privately labeling these upcoming changes as "methodical."

Schwartz believes that hasty decisions could inflict more damage on an already strained company, a sentiment shared by those privy to his strategy. For the time being, only the broad outlines of his vision have been communicated to the staff. A notable focus has been on enhancing the performance of the buyout branch – Carlyle’s primary profit engine. Here, Schwartz seeks improvement as two out of four flagship buyout funds lag behind their peers.

The new CEO has also highlighted areas ripe for expansion, such as the credit sector, to ensure Carlyle remains competitive in a field now bustling with players and intense rivalries.

Schwartz will not only need to make shareholders buy into the new vision for Carlyle but also must navigate through the firm’s intricate web of factions that were developed and restructured by predecessors. His success could reestablish Carlyle's elite status and simultaneously preserve the legacy of its founders and cement his own.

"In a world where private equity faces numerous challenges, it will be imperative for Harvey to clarify the initiatives they are driving for growth. The market is seeking answers," states Alex Blostein, an analyst at Goldman, who has placed a buy recommendation on Carlyle's stock.

Navigating Complicated Relationships

Schwartz, 60, is a seasoned navigator of complex relationships. His personal life was shadowed by his mother's bipolar disorder and his father's schizophrenia, which led him to find solace in the consistency of gym workouts.

A graduate from Rutgers University, Schwartz embarked on a career that would lead him to the trading desks of Goldman Sachs. His ascent was steady, seeing him reach the role of finance chief and later, become co-president alongside David Solomon, both contenders for the bank's top position.

Carlyle's trio of founders – Rubenstein, Conway, and Daniel D’Aniello – embarked on succession planning post the firm's IPO in 2012. Rubenstein, in search of potential leaders, attempted to lure Solomon away from Goldman, suggesting that the summit at Goldman was beyond his reach. However, by 2014, Carlyle was cultivating a different leadership duo with Mike Cavanagh of JPMorgan Chase & Co. and Carlyle's own Glenn Youngkin at the helm. This pairing was short-lived as Cavanagh departed within a year.

Another leadership duo emerged, pairing Youngkin with the assertive dealmaker Kewsong Lee as co-CEOs. However, Lee consolidated power leading to Youngkin's exit. Under Lee's solitary reign, rapid changes took place, distancing the founders and resulting in a mixture of improved earnings but dwindling board confidence. Lee's tenure ended shortly after, leaving no comments through a spokesperson.

Read more at: Carlyle Founders Balked at Ceding Power to Their Chosen CEO.

Schwartz exited Goldman in 2018 as Solomon claimed the CEO title. By 2023, when Schwartz took charge of Carlyle, the company was reeling from a decade of unsuccessful transitions. Schwartz was now at the helm of a firm desiring redirection.

The founders imparted to Schwartz the duty to mold the firm to his vision. "I will do everything I can to aid his success – including staying out of his way if that’s part of the solution," Conway remarked on a Carlyle CEO announcement call.

Yet Schwartz requested their continued involvement. He persuaded Rubenstein, known for his multifarious roles, including Bloomberg talk show host, to allocate more time to Carlyle. Reorganizing his schedule, Rubenstein acquiesced.

In a move to refocus on market trends rather than self-promotion, Schwartz revised the format of a routine call, engaging all partners actively, with both Rubenstein and Conway offering insights. He also reinstated weekly briefings with the founders, a practice previously discontinued.

Preserving traditions, Schwartz maintained the company’s annual investor meeting in Washington, D.C., shifting it back from New York after just one year. This decision was warmly received as evidenced by the latest meeting which featured Rubenstein interviewing former President George W. Bush.

When Schwartz proposed redefining roles for some of the founders' selected hires, he first sought their consensus. Internally, opinions vary on his charted course. Some view it as a potential roadblock to modernization, while others praise Schwartz's tactical engagement as a means to securing staunch support for future, more substantial changes.

"He has my complete confidence," asserted Rubenstein in an interview. While both Rubenstein and Conway reserve the right to vocalize any disagreement as co-chairs of the board, they have yet to question Schwartz's leadership approach or strategic priorities.

The CEO's Balancing Act

Schwartz’s balancing act is a mix of tact and authority in practice. With an imposing stature, he is known for his conscious efforts to appear less intimidating during meetings. While cultivating warmth through personal stories and humor, he demonstrates a stern disposition when required.

His call for “discipline” echoed through his first earnings call and leadership meetings, where he unapologetically identified areas and teams in need of improvement.

Offering executives autonomy, he delegated the task of reducing expenses to division heads while spurring them to innovate. This led to staff optimizations and strategic recalibrations. Major overhauls transpired within the US buyout group where teams transitioned to focus more on full-ownership deals over minority stakes.

Schwartz’s affinity for his former Goldman peers is shown through his recruitment of Lindsay LoBue and Jeff Nedelman, who are instrumental in refining Carlyle’s operational and fundraising strategies.

Ambitiously looking to diversify the company's investor base, Schwartz has highlighted the potential of the private wealth sector. This shift in strategy was underscored when he joined the sales team in reaching out directly to financial advisors, showcasing Carlyle's investment products.

Some employees speculate about Schwartz's ultimate intentions, wondering if his operational focus signals a preparation for a potential sale – conjecture sparked by frequent propositions from investment bankers eager to broach such deals.

Despite rumors, Rubenstein has outright dismissed the notion of selling Carlyle while reaffirming its independence. The firm's new finance chief John Redett echoes this sentiment, valuing the advantages of remaining public. The company recently reported a record high profit margin and ambitious financial targets, reinforcing optimism in Schwartz's stewardship.

While some shareholders urge for more acquisitions to expedite transformation, the prevailing consensus is one of patience, trusting that Schwartz’s measured approach will culminate in a robust and convincing strategy.

In his unique managerial style, Schwartz has warned investors against doubting Carlyle's potential, declaring with assured confidence, "Short the stock at your peril."

With challenges ahead and the industry landscape evolving, Harvey Schwartz stands firm, guiding Carlyle Group with a balance of reverence for its past and a strategic vision for its future prosperity.