Revenge of the founders: A generational struggle on Wall Street

Firms like Carlyle have sought to convince outsiders that they would cede control to a younger class of executives

In early August, Kewsong Lee, the chief executive of the Carlyle Group, got on a videoconference call with two of the private equity firm’s board members. They told him that Carlyle’s septuagenarian founders were planning to play a more active role managing the firm.

Two days later, Carlyle stunned Wall Street: Lee was stepping down. So sudden was his resignation that the company didn’t have a successor lined up.

The chief executive’s departure — which people familiar with the matter said arose from differences over how to run the firm and after Lee was perceived to criticize the firm’s three founders — was a startling display of a generational power struggle in one of the most lucrative, powerful and secretive corners of finance.

Elite firms like Carlyle, Blackstone and KKR, which have become publicly traded companies in the past 15 years, have sought to convince outsiders that they were in the process of ceding control to a younger class of executives and making their firms less like clubby partnerships. But, as the clash at Carlyle shows, there is little to stop their founders from clawing back power.

Private equity firms’ core business is raising funds from outside investors like pension funds for police, teachers and other workers, which they then combine with huge amounts of borrowed money to buy up thousands of companies, including restaurant chains, hotels, nursing homes, toll roads and manufacturers. But Carlyle and its peers have expanded into a variety of other Wall Street businesses.

The industry says it owns companies that collectively employ 12 million U.S. workers, or about 7 percent of the labor force. That has given it political sway. Just this month, it pressed lawmakers to remove a provision that would have narrowed a preferential tax treatment for private equity executives from the Inflation Reduction Act.

Private equity firms have showered riches on their top executives, dwarfing the huge amounts that better-known bank chiefs like Jamie Dimon of JPMorgan Chase typically pocket. Earlier this year, for example,  Lee was negotiating a five-year, $300 million package, according to three people familiar with the talks.

In recent years, even as leading private equity firms have taken steps to advance the next generation, their founders have either kept the chief executive post for themselves or retained their grip on their companies’ boards, raising questions about the younger leaders’ power and autonomy.

“It’s sort of amazing, given private equity’s power, given their influence in D.C. and the way that they’ve become fully adult in that arena, that it is still a first-generation business in many ways,” said Victor Fleischer, a law professor at the University of California, Irvine, and an expert on private equity.

Leigh Farris, a Carlyle spokeswoman, said, “Looking ahead, the firm is executing on the vision and strategy approved by the board and well positioned for the future. The search is underway for a new CEO who will drive Carlyle forward, building on the firm’s strengths and continuing to deliver value for our investors and shareholders.”

Lee jumped to Carlyle in 2013. The founders were getting ready to step back, and Lee quickly emerged as a leading contender to take the helm. Lee’s vision was to accelerate Carlyle’s transformation into something more than an old-school buyout firm. He set out to expand further into areas like insurance, lending and investing in private technology companies.

Only after announcing  Lee’s departure did Carlyle hire an executive recruiting firm to begin the search for his replacement. In the meantime, William Conway, one of the company’s founders, remains Carlyle’s interim chief executive.