(Bloomberg) -- It was 8 a.m. on a Monday in August, and Carlyle Group’s silver-haired founder Bill Conway faced his Zoom camera, ready to address 1,900 employees around the world.

It had been 10 hours since Carlyle’s chief executive officer, Kewsong Lee, was abruptly pushed out the door by the company’s board. Conway, 72, found himself cutting short a semi-retirement to take charge once again. His message: Everyone should feel connected and empowered to do their jobs. Carlyle is bigger than any one person.

Conway’s tone contrasted with that of Lee, whose high-octane motto had been “Think bigger, move faster, perform better.” It wasn’t lost on Carlyle’s staff that Conway was speaking from Washington, where Carlyle’s founders had started the firm in 1987. Lee, 57, had run it mostly from New York. 

That day, as the stock was sliding into a 7% drop, Conway walked the firm’s hallways in Washington while co-founder David Rubenstein checked in with executives. Staffers held back-to-back meetings and phone calls to deal with the fallout and assuage pension funds and other clients.

Many of Carlyle’s employees expressed shock -- and some relief -- to one another in calls and texts. Lee, in his aggressive attempts to expand further beyond buyouts and develop new sources of revenue, polarized executives and fueled insecurities. That wound up pitting veterans against the new guard, private equity against credit investing, and Washington against New York. 

With Lee’s exit, those fault lines have been laid bare. Now, the company faces the arduous task of finding a leader who can unite those dueling factions and resolve an identity crisis that’s been brewing for years. 

Carlyle’s next leader will also need to help the firm regain assets and clout lost in recent years to rivals like Blackstone Inc. and KKR & Co.  And they’ll have to accomplish that under a public microscope -- winning the trust of founders who loom large at the firm -- while sticking to the strategy Carlyle had put in motion.

This account is based on conversations with current and former Carlyle employees and others close to the firm, who spoke on the condition they not be named because they are not authorized to speak on behalf of the company. Representatives for Lee and Carlyle declined to comment. 

Growing Rivalries

Carlyle was once the envy of the buyout world, as its politically connected founders parlayed knowledge of Washington into wealth and power rivaled only by Wall Street’s most elite dealmakers. That status has eroded over the years. 

Since taking charge as sole CEO in 2020, Lee sought to diversify Carlyle’s revenue, unhook profit from the market’s boom-and-bust cycles and further elevate the stock. His style left staffers of two minds.

Lee’s supporters inside Carlyle say the founders should have stayed the course and given him more time to execute his agenda. Carlyle’s shares have advanced more than 50% since Lee became sole CEO, even including the recent selloff. That compares with a 4% gain from the time of the initial public offering in 2012 to January 2018, when the founders ceded control.  

Lee embraced his role as a CEO of a publicly traded company, but that proved to be a misstep. Even as the firm’s three co-founders pared back their roles, they had seats and wielded influence on the company’s board. That meant Carlyle retained the feel of an old-school partnership, rather than a publicly traded money manager. What’s more, a significant portion of the founders’ wealth is tied up in Carlyle’s stock: they own more than 25% of the firm.

Other insiders fault Lee for icing out the founders and not harnessing their expertise more. He gradually took over relationships with big investors in the firm’s funds, eschewing any involvement from Rubenstein, the former Carter administration official who’d spent decades globe-trotting and reeling in piles of cash for investments. 

Then this year, Carlyle broke with its longtime tradition of hosting an investor conference in Washington, where the founders were usually the main attraction for pensions and institutions. Lee had floated the possibility of holding the event in New York in the past, only to drop it after the founders made their lukewarm feelings known.

This year’s event in September was moved there for the first time, with no formal speaking roles originally planned for the founders. Meanwhile, his staff and Rubenstein’s didn’t always coordinate public appearances ahead of time, sometimes leaving the pair to compete for attention on conference agendas or television.

When Carlyle moved into Manhattan’s One Vanderbilt -- a move that marked the CEO’s attempts to bolster the firm’s presence in New York -- Lee green-lit plans to put the founders’ offices on the 32nd floor, six stories below the executive suite. They were rarely seen stopping by.

Mounting Tensions

Carlyle’s latest earnings call on July 28 added to the frictions.

On the call, Lee aggressively touted his achievements in expanding in credit and in broadening the firm beyond its traditional focus on private-equity deals. He assigned a company spokesperson to try correcting any media references to Carlyle as a “buyout firm.” 

Relations had been deteriorating between Lee and leaders including Pete Clare, a Carlyle veteran close with the founders who serves as investment chief for the private equity business. Private equity staffers complained to colleagues that Lee wasn’t giving them recognition they deserved, even as their profits powered the firm’s push into credit. 

In recent weeks, Rubenstein had rallied the board to his side just as Lee’s five-year contract was set to expire. He and Conway had grown frustrated and decided to get more involved after watching fundraising slow and staff leave. 

Lee asked for a package more commensurate with what rival firms paid their leaders, people with knowledge of the situation said. But the founders didn’t want to negotiate, and decided they’d had enough.

Lee’s departure unfolded quickly in the first week of August, when board members decided they had lost confidence in his leadership. A late-night press release on August 7 announced Lee would step down, with Conway temporarily taking over as CEO. 

Chief Financial Officer Curt Buser later expressed concerns to colleagues that the business-as-usual earnings call was so quickly followed by Lee’s resignation. Buser worried that the timing made it clear that Carlyle lacked an orderly transition plan. In recent months Buser had considered leaving, but made it clear he would only do it at the right time for the firm. 

Succession Failures

Lee’s exit may look like a win for Rubenstein. But he and Conway are coming back into play at a more challenging time for the industry. Investors are more cautious about parting with cash at a moment when rising interest rates and volatile markets are making it harder for private equity firms to generate the same big windfalls. 

In recent years, Carlyle has been slower than rivals such as Apollo Global Management Inc. to get into insurance and behind Blackstone when it came to making a push for retail investors. Even credit-heavy Ares Management Corp., with fewer assets under management, firmly surpassed Carlyle’s market capitalization last year.

The founders have long spoken openly of the need to identify someone who can usher Carlyle into an era that doesn’t involve them.

“We began to feel at some point that it’s time to hand over the reins to younger people,” Rubenstein told Bloomberg Television in 2017 of his decision then to step back. “It’s not clear that people who are 68, 68 and 71 are the best leaders of the future.” 

They have now failed two succession attempts. In 2014, Carlyle brought in Mike Cavanagh from JPMorgan Chase & Co. as a potential successor. He left to join Comcast Corp. a year later, where he serves as finance chief. The pairing of Lee and Glenn Youngkin, who ran the firm together before Youngkin left in 2020 to go into politics, also didn’t pan out.

On a recent podcast interview with executive search firm Russell Reynolds Associates, Lee alluded to the challenges of pushing the firm in a new direction. 

“The hardest thing, but the most fun and the most enduring thing that’s going to happen at Carlyle is the change of culture that is occurring,” he said. “I keep saying, you may not like change but you’re going to like obsolescence even less.” 

Carlyle hired that very search firm to help find Lee’s replacement. 

©2022 Bloomberg L.P.