Less than a year into his new role, Carlyle CEO Harvey Schwartz is fighting to transform a business that hasn’t quite kept up with peers.
The firm announced his most recent directive this week, telling shareholders that it’s pulling back from future U.S. consumer, media, and retail investments, which no longer have a place within Carlyle’s buyout strategy.
The change will result in terminations or relocations for around a dozen dealmakers, though the consumer team will retain some talent in a portfolio oversight capacity.
Carlyle is yet to find steady footing after co-founders David Rubenstein and Bill Conway stepped back from their leadership roles in 2018.
A pair of hand-picked successors didn’t last long: Glen Youngkin left the firm in 2020 on his way to the Virginia governorship, while Kewsong Lee was abruptly ousted in 2022 after reportedly failing to seek the counsel of Rubenstein and Conway as frequently as he should have.
Conway then stepped back into an interim CEO role, though, after becoming frustrated with the CEO search process, was said to have spent his time wandering around the firm’s Manhattan office jokingly asking younger employees if they wanted to take over his job for him.
More than half-a-dozen candidates turned down the role, some of which reported that they’d been asked whether they could oversee a sale of the firm should they take the job.
The search eventually landed on Harvey Schwartz, former Co-Chief Operating Officer of Goldman Sachs, who had departed after losing out to David Solomon in a bid for the top job. He had spent the interim five years practicing guitar, karate, and meditation in San Diego.
A Bad Fundraising Environment Made Worse
The revolving door did not help the firm’s fundraising efforts. Limited partners made their disapproval known and expressed concern over Carlyle’s ongoing ability to properly manage their capital.
The upshot was an embarrassing shortfall for an eighth flagship buyout fund, just months into Schwartz’s tenure.
In 2021, Carlyle had set out with a $27 billion target for the fund. Months of limited traction then prompted a cut to $22 billion. Even that proved too difficult, forcing a six-month fundraising extension that ultimately secured only two-thirds of its goal. That was despite a last-ditch Carlyle effort to help Fund VII investors sell their stakes in order to reallocate to Fund VIII.
The firm’s total fundraising declined by 48% year-over-year through March and drove a downward revision to 2023 guidance.
What’s Wrong With Consumer?
In his first week on the job, Schwartz held a firm-wide virtual town hall meeting. His message to employees: a core focus on growing the firm. Attendees quoted Schwartz as saying “You want to have some fun, and growth is fun.”
Not long after, the fall-out from the unexpectedly low asset base started working its way through the firm.
By August, Schwartz had tasked himself with a “line-by-line review” in an effort to salvage falling margins. Sources close to the matter say he has been actively soliciting feedback from investors and business heads to determine where he can reduce headcount.
Discussing this week’s consumer decision, Carlyle's Americas private equity co-heads Sandra Horbach and Brian Bernasek cited “increasingly challenging investment trends in this space." The reality is that this move was probably more focused on cost-cutting than any reaction to a secular shift in the industry.
Carlyle plans to continue its consumer investments in Europe and Asia, geographies that happen to have their own dedicated funds less impacted by fundraising shortfalls.
Under pressure to realign capacity with less money to put to work, Schwartz appears to have made the calculus that it was cleaner to simply cut an entire team than to try and slim down across the board.
And, in a headline few saw coming, the final nail in Carlyle’s consumer coffin may have been hammered by Kim Kardashian. She partnered with Jay Sammons, Carlyle’s former global head of consumer, on the 2022 launch of her consumer-focused fund SKKY Partners. Carlyle never found a permanent replacement.
Kardashian and Sammons appear not to have been put off by any challenging investment trends in the space.