(Bloomberg) -- When Carlyle Group Inc.’s new chief executive officer, Harvey Schwartz, sets his agenda on Mondays, he confers with the firm’s founders.

To help court clients, he ropes in David Rubenstein, the globetrotting founder known for his salesmanship. When he discusses markets with partners, he invites Bill Conway, the founder who led investments.

Since taking over Carlyle a year ago after an acrimonious leadership shakeup, Schwartz has made clear that the first step to restoring the $426 billion alternative-asset manager to its former standing is to make peace with its past. That’s a contrast with his predecessor, who sidelined the founders, ended up in a power struggle and left the firm hunting for a new CEO.

While executives credit Schwartz for earning the founders’ trust, some fret that the new boss may be building consensus at the expense of making more dramatic changes at a private equity giant that has fallen behind.

This story is based on conversations with more than a dozen current and former Carlyle executives, who asked not to be identified describing life inside the firm.

Carlyle was a Washington powerhouse in its heyday, attracting investors with winning bets on government contractors and its prominent connections, with advisers including George H.W. Bush. It has been weakened by failed leadership handoffs, becoming fragmented and less profitable than major rivals. While shares of giant US alternative asset managers have tripled, quadrupled and even septupled in the past decade, Carlyle’s has climbed just 36%.

The former Goldman Sachs Group Inc. president spent his first year cementing ties with the founders who collectively control more than a quarter of Carlyle’s stock. He has assured staff that the market will come to recognize the value of the firm’s brand – and that the founders’ involvement can contribute to that.

While getting to know Carlyle’s businesses, he asked division heads to cut costs and tied rainmakers’ pay more closely to investors’ returns. But he has held off on articulating his overarching vision for Carlyle, publicly embracing a buzzword to describe how he will seek changes: “methodically.”

Privately, the CEO told acquaintances that going faster would risk doing more harm than good at a company that has been strained by leadership strife, said people familiar with the matter.

For now, Schwartz has given staff only broad strokes. He said that the buyout arm, the firm’s biggest driver of profits, must improve performance. Two of its four flagship buyout funds trailed peers’ returns based on a key metric. To show that Carlyle can compete in an industry that has expanded beyond buyouts, he also flagged areas where the firm can be much bigger, such as credit.

Unlike decades ago, when Carlyle and other pioneering alternative-investment firms made fortunes in overlooked corners of the market, the industry is now crowded and fiercely competitive. And as Schwartz continues to make his mark on the franchise, he won’t just have to sell his changes to shareholders. He will have to bring along the firm’s complex federation of groups built and rebuilt by past leaders — and make sure the founders are on board, too.

Success would reestablish Carlyle’s place among the most elite tier of alternative-asset managers and save the founders’ legacy – while sealing his own.

“In a world where private equity is more challenged, it’s going to be important for Harvey to communicate what are some things they’re doing to drive growth,” said Goldman analyst Alex Blostein, who recommends buying the stock. “The market wants answers.”

Complicated Relationships

Schwartz, 60, is no stranger to navigating complicated relationships. Growing up, his mother had bipolar disorder and his father suffered from schizophrenia. One of his coping mechanisms was working out at the gym.

The Rutgers University graduate headed for Wall Street and ended up on Goldman’s trading desk. He climbed the ranks to become finance chief and then shared the firm’s No. 2 perch as co-president alongside David Solomon. Both would vie to become CEO.

Meanwhile, Carlyle’s three founders — Rubenstein, Conway and Daniel D’Aniello — were turning to succession planning after taking the company public in 2012. Rubenstein, looking for candidates who could be groomed for the role, tried to entice Solomon to defect, arguing he would never make it to the top of Goldman. By 2014, a different leadership team was taking shape at Carlyle as the firm installed Mike Cavanagh from JPMorgan Chase & Co. as co-president alongside longtime insider Glenn Youngkin. But Cavanagh left a year later.

Carlyle soon put forth another combination, pairing Youngkin with decisive dealmaker Kewsong Lee as co-CEOs. But Lee amassed power and Youngkin moved on, eventually becoming Virginia’s governor. As he gained sole control, Lee made rapid changes and acquisitions while rebuffing the founders, and some executives felt discouraged from talking to them. Earnings improved but the board’s confidence didn’t. Lee soon left, too. A spokesperson for Lee had no comment.

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

As Solomon rose to the top of Goldman in 2018, Schwartz exited the bank. By the time Schwartz arrived at Carlyle in 2023, the company had been through a decade of succession misstarts. Investors were voting with their money.

The founders told Schwartz the firm was his to shape. 

“I’m going to do everything I can to help him be successful — and including staying out of his way if that’s the right part of the solution,” Conway said on a conference call after Carlyle announced the CEO’s appointment.

Yet Schwartz asked them to stay involved.

He told Rubenstein, the former Carter administration official who owns the Baltimore Orioles and hosts a Bloomberg talk show, that he was concerned that the billionaire wouldn’t spend enough time on Carlyle. Rubenstein restructured his affairs to make more time for the firm.

Schwartz changed the format of a periodic call on the investment climate. Instead of having teams present their accomplishments, all partners are now encouraged to talk about market themes, with Rubenstein and Conway chiming in. Schwartz also requested weekly 30-minute calls to update the founders on key decisions, restoring another routine that was lost over the years.

The CEO has kept the firm’s annual investor meeting in Washington, where the founders are based. His predecessor had moved it to New York in 2022, but attendees asked that it return to its traditional stronghold. At the latest event, Rubenstein interviewed George W. Bush on stage.

And when Schwartz sought to shift some of the founders’ handpicked hires into smaller roles, he consulted with them first.

Within the company’s ranks, Schwartz’s entreaties to the prior generation have drawn mixed reactions. Some worry it’s preventing a full handover to a new generation, while others see Schwartz as shrewd — ensuring he will have support once he’s ready to make bigger changes.

“He has my complete confidence,” Rubenstein said in an interview. As co-chairs of the board, he and Conway would speak up if they disagreed with the CEO. That said, “we’ve never questioned his leadership or strategic priorities for the firm.”

Cold Calls

Schwartz’s balancing act is on display at every turn.

The broad-shouldered, 6-foot-4 CEO tries to stand in ways to avoid intimidating people. He doesn’t hunch over the table at meetings. He often tries to break the ice with a joke or a personal anecdote.

Yet as he dug into the firm, the harder-edged side of his personality revealed itself. In his first earnings call, he repeatedly stressed the need for “discipline.” In leadership meetings, he has called out teams that hadn’t performed well enough and noted whether a client was feeling neglected. He rattled some subordinates by calling on them to weigh in, without warning, in front of a group.

He has given underlings leeway to devise ways to turn things around. When he asked division heads to whittle costs, he let them figure out the details. Some pushed out underperformers and cut headcount.

He also blessed major changes at the group behind US buyouts. Leaders there dismantled a team that made bets on consumer companies. And dealmakers decided to pull back from taking minority stakes and focus on controlling bets in which they had more sway.

He has augmented his inner circle with Goldman alumni. He hired Lindsay LoBue as deputy operating chief, to work for a period under Chris Finn, an internal power broker who has the founders’ ears. He later orchestrated a handover, and is shifting her into the top operations job.

Jeff Nedelman, another Goldman alumnus, has been helping the CEO strategize changes to Carlyle’s fundraising apparatus. Executives have concluded that the salesforce is too fractured and needs to coordinate more to cater to clients.

Schwartz is also seeking to further expand the client base beyond large institutions. Individual investors are typically more interested in funds offering some rights to cash out in emergencies. Carlyle has been a small player in those sorts of retail products.

Underscoring the importance of the private wealth channel, the CEO sat next to the sales team one day, cold-calling financial advisers to pitch products.

Strategic Vision 

Some employees suspect that Schwartz, hired to be an operator and not an investor, is cleaning up Carlyle for a sale. That could deliver a quick bump to shareholders who have long waited for the stock to close the gap with rivals.

Investment bankers have made such a sport out of pitching clients on buying the firm that one senior Wall Street executive calls it the most-shopped company on the block.

“There is no such thing as an investment banker who is not looking for a fee,” Rubenstein said. “We’re not interested in selling the firm.”

John Redett, the new finance chief, also batted back the notion of going private. “We see a clear path to drive shareholder value and significant benefits to being a public company,” he said in an interview.

Last month, the firm posted a record profit margin for the fourth quarter and laid out financial targets, projecting fee-related earnings would jump almost 30% this year. While that helped lift the stock, some shareholders would rather see Schwartz don the mantle of acquirer and accelerate Carlyle’s transformation. Under the last CEO, for example, it ramped up acquisitions to boost its credit arm.

“People are disappointed he hasn’t talked more about doing deals,” said Patrick Davitt, an analyst at Autonomous Research. “Some investors feel it would be easier to change the narrative quicker to find something inorganic.”

Carlyle executives have concluded the market will reward it more for growing than buying business lines. In one of the clearest signals of how Carlyle intends to use its corporate cash, the firm kicked off this year by increasing its capacity for buying its own shares to $1.4 billion.

Balance of Power

Meanwhile, Schwartz’s focus on growing existing groups is shifting the balance of power in certain business lines.

He has been spending more time than predecessors with the secondaries arm that buys and builds portfolios, which he sees as critical to reaching more individuals. Long the smallest of Carlyle’s three units behind the buyout and credit divisions, the business is seeking cash for its latest flagship strategy. It now expects to surpass its last $10 billion fundraising round by about a third.

Elsewhere, Schwartz has given more authority to Marcel van Poecke, a longtime oil-and-gas dealmaker who was sidelined under the previous CEO as the firm ramped up investing in renewables. Now the executive has a key role at a new platform combining traditional energy dealmaking with decarbonization plays. Goldman’s former head of commodities research, Jeff Currie, just joined the group.

Though shareholders are keen to see improvements, they also agree with Schwartz that it would be far worse to rush into bigger changes and exacerbate Carlyle’s problems.

“Investors would rather he deliver a strategy that is durable and believable, and if it takes a little longer, so be it,” said Blostein, the Goldman analyst. “He knows you don’t come to market with something that is half-baked.”

At a meeting with analysts after his first earnings report as CEO — when the stock was about half its current price — Schwartz said he understood investors’ impatience but was working at his own pace.

He then tacked on a warning: “Short the stock at your peril.”

--With assistance from Paula Seligson, Ellen Schneider and Allison McNeely.

©2024 Bloomberg L.P.