Harvey, today you announced a number of
strategic updates to investors. Your stock is up the most.
It's been since 2022. What is the biggest change that
investors need to know about the future of Carlyle today?
So great to see us finally. I think the movement in the stock, which
you point out, is much more about seeing the momentum in the franchise.
So coming into the fourth quarter, the team really came together and whether it
was record free fund raising, the momentum coming into 2024.
And then of course, on the call, we outlined some strategic initiatives and
for the first time, financial targets for 2024, which, you know, have very
significant upward trajectory. We'll talk about those initiatives.
But you can also say you passed your first year on the job.
The grace period is over. What's the mix anniversary yesterday and
what is now? You're looking into year two and a lot
of people think of this as a make or break year.
What is the biggest challenge for you as you enter this year?
So 2023. As a new CEO coming in, it really was
about investing time with my teams and spending time with our investing clients
around the world. I think I met with over 300 LPs in the
first year and I was here and with respect to my teams, it was really about
me getting to know them, but more importantly, them getting to know me.
2024 is really about focus on our priorities, excellence of
execution, and more teamwork. If we do, those three things will exceed
our targets for this year. Part of the changes that you made, these
financial initiatives, as well as some strategic updates you've made, means
you're going to change the way you pay your dealmakers.
You've also announced a $1.4 billion buyback plan.
How does this change incentives for the people who work at Carlyle and the
people who invest in Carlyle? So when I showed up here, one of the
first things the senior investor said is we would like even more alignment with
our investors. So this is about with our investing
clients. This is really about alignment across
our stakeholders. So it's our senior investors are
investing clients and our shareholders. And as I said earlier, it really is a
win win win because our investing clients get more alignment with our
investors. Our investors get even more pay for
performance, and our shareholders get an increased steady stream of fee related
earnings. Most investors would recognize it's a
tough job. Carlyle's founders, including David
Rubenstein, who is a contributor to Bloomberg TV as well, has been famously
involved in the succession plan of Carlyle, and they remain large
shareholders of the firm. How involved are they in the day to day
operations? So when I met with the founders before I
took this role, I was very clear with them that I wanted them very involved in
the business. Carlyle is an iconic brand.
A They create an amazing culture here. Getting to know this company over the
past year has been an extraordinary privilege for me.
But having really their history, their connectivity with clients, their
investing experience as much, we'll take as much as we can
get at Carlyle. So record fee related earnings, as you
have said. But even in the last year, there was a
36% rise in Carlyle stock last year. Rivals Blackstone areas where 70% or
more. How do you keep up?
How do you get Carlyle stock price to start to match your rivals?
So I think about the stock price really as an output.
It is about, again, what I said, focus on priorities, deliver performance.
If we do all those things, the stock price is going to follow.
How do you think about some of these areas that have been very hot button
issues across Wall Street? Take private credit, for example.
On one hand, it is a big place for Carlyle to be bringing in new money.
You've shown that in the fourth quarter. On the other hand, there are a lot of
questions about the industry at large that a lot of money is flowing in and
whether there's enough opportunities to put that money toward.
How do you address those concerns? So I think there's really two questions
that have come up around credit. One of them, I think, really relates to
systemic risk. And I think a lot of those discussions
are sort of misunderstood. If you think about what we do as capital
providers and how we provide that capital.
And then you have a discussion around systemic risk, it really doesn't have
the three core characteristics. We don't have leverage.
We don't use significant leverage. There's not concentration risk and
there's not interconnectivity in what we do.
So I think the systemic risk discussion that's a bit overblown and things in
terms of deploying credit, it's our responsibility first and foremost to our
investing clients to deploy that credit in the most thoughtful way possible.
And that's what having 20 plus years experience in the credit business.
There is a risk of a bubble. I think whenever you see a lot of
capital moving into a space you have to worry about at the margin how that
distorts the opportunity set. But that's where the investing teams
really have to do their best work. They have to pick their credits, they
have to deploy that capital and they have to perform.
You know, we're sitting here on a week to where you're seeing fears about
regional banking come up once again in the market.
You're seeing the issues over right in your community bank and the the
downgrades that it's been facing. When you think about the role of private
capital where Carlyle fits into the story, how much can private capital
really start to jump in to the problems of the regional banking system?
So I think as capital providers, whether it's in our private equity platform,
credit or solutions business, I think this capital can be incredibly valuable
and has proven to be valuable in terms of solving economic problems.
And so I think when you think about banking crisis or a banking disruption,
the best way to address that is with the most efficient cost of capital.
And if Carlyle can be a provider of that capital, I think we should put that
capital to work on behalf of our clients.
Well, some of the areas, too, are kind of choppier.
Let's say commercial real estate, for example.
There are a lot of fears that the commercial real estate sector could
really be facing a significant crisis, particularly in the New York area.
Do you share those concerns? So one of the very fortunate things that
I inherited when I showed up at Carlyle is one of the best real estate investing
teams in the world. Their performance over 20 years is truly
extraordinary. When I talk to them about commercial
real estate, they really started backing away from office many, many years ago.
We don't see it as a sector where yet we see real opportunity.
So I think there's going to be challenges.
But I think this plays out over many, many years because in some respects we
can see this problem, but it's a problem that'll have to be digested by the
markets over a number of years. Yeah, let's get a little macro here,
because part of this problem is being caused on the heels of higher interest
rates and you have a market now that still expects more than five rate cuts
before the January FOMC meeting of next year.
Do you believe that those five rate cuts will come to fruition?
So we have a pretty unique perspective on this because across our portfolio
companies we have in excess of a million employees and we see the data and the
performance. I would say that if you step back and
you think about historic Fed behavior, the Fed typically either is fine tuning
or cutting dramatically or raising dramatically.
And when we look at the data from our portfolio companies and then you look at
strong GDP, unemployment numbers that are quite attractive when you see
inflation has really stopped materially and paused at this stage, I don't think
we should be rooting for five rate rate cuts.
I think that would suggest an environment that actually requires a lot
of attention from the Fed. I think we should be hoping for fine
tuning because I think the economy is in better shape than people are giving
credit for. And I think the Fed's done a fantastic
job navigating that. So what is a more realistic view of
where rates go? In our model, we would expect the base
case to be two or three cuts. The Fed, we expect to be very data
sensitive. We're watching this closely also.
But again, my crystal ball may be as good as ours and we'll see what happens.
Well, that's hard to predict. What's the risk, then, that we tip over
from a soft landing or even no landing into a recession?
What would cause the tides to turn? I think you could see if you had an
unexpected market disruption geopolitical event.
But remember, the Fed has communicated to us that they're watching this data
very carefully, and so hoping for multiple rate cuts.
I think there's a little bit of a recency bias.
I think it's the people really saying, oh, I really enjoyed that QE that we're
experiencing. I think as market participants we should
want a normalized cost of capital. And if we can get there through this
process, I think it'd be an extraordinary outcome.
And I think it actually be, I think, be great for business opportunities.
I think it'd be really good for Carlyle and I think it'd be great for our
investing clients. I think we create a lot of alpha.
I'm curious about your view of the world.
We're sitting here in Washington, D.C. today.
I have a few questions for you before we get there.
You do have a large presence internationally as well, particularly
when it comes to China at a time where there are a lot of questions about the
world's second largest economy, the strength of the economy there and its
relationship with Washington, D.C. and the United States.
How do you view those challenges and how do you navigate them as an investor?
So we represent investors all over the world.
They have different requirements. Some of those will look at China and
they'll say, you know, the risk profile doesn't look it doesn't look like it
fits our characters. Many of my clients around the world, in
touring the world last year, they really like the risk reward in China.
And, you know, you bring up China, it got a lot of attention because we sold
our position to McDonald's. I'm sure you saw it.
This was a tremendous return over a number of years and.
And the one thing I'll say about that, because it really highlights the power
of our private equity franchise. You know, people ask me this question
all the time on higher rates. What does that mean for business?
When you actually look at that transaction, it was a mere seven times
return for our investors in China, just exited right in this environment.
And roughly 80% of the value creation came just from operational enhancements.
So it's really what we do. It's about picking the right partner.
Being in China made sense and actually executing the business.
So I think there's there's opportunities.
What about the opportunities here at home?
There have been a large, large U.S. investors, a lot of big names sounding
alarms about what's happening here, not about the economy, but about the
sustainability of what we're spending as a country, the debt load and the
deficit. How do you view that from where you're
sitting, and do you think it could spiral into a bigger problem?
So, I mean, these are all legitimate concerns.
We tend to lament a lot of things in the United States.
And I think I'll tell you, when I traveled around the world last year in a
number of geographies, I was told by our investing clients they felt a bit
overallocated to the United States, and they actually said they're going to keep
allocating more to the United States. I wouldn't bet against the United
States. Well, what about that concern embedded
with the dysfunction you're seeing in Congress alone?
How do you see kind of this gridlock impacting investors throughout the year?
So, you know, we're in an election year. And I was just talking to
one of our chief economist, Jason Thomas.
We're having a discussion about this just last week.
And I think the S&P 500 has gone through 23 election cycles.
In 23 election cycles, roughly 80 plus percent of the time, Democrat or
Republican. The S&P 500 is gone up.
I'd like to see us get through an election cycle and I'd like to see
everyone in Washington really start to come together because we do have complex
problems and and coming together is the way we're going to solve.
Well, with a constant threat here of government shutdowns, for example.
Do you think that the road ahead this year could be bumpy, particularly as we
head through the election to the election?
If it's been like the ones I just mentioned for the 23 elections since the
S&P 500. I think it's going to be good for
markets. I don't think it's great when our when
our politicians play ping pong with things like the debt ceiling, everything
else. I think we should just, you know, focus
on the business of the government. But I'm not a politician.
The election itself, obviously, this is a very unique election with two leading
contenders having served in office recently.
How do you see this really playing out? Both candidates, both leading candidates
in the Democratic and Republican Party have low approval ratings.
How do you think about this dynamic in the C-suite and the risks that it poses
into 2025? So, Carlyle, we've been doing this for a
very, very long time. We've been through complicated
elections. We've been through surprise elections.
I think we'll get through this election. And as I said, we'll focus on the
business and the priorities of the three priorities of today.
We kind of started this conversation talking about Carlyle, the future of
Carlyle. By the time you're done leading Carlyle,
what ways will you have transformed the firm?
Well, I'm not thinking about being done. I think we're just getting started.
I couldn't be prouder of my team this year, the way they really came together.
You saw it and all the growth and you see in the momentum coming into this
year. Again, this is really, as I said, if we
focus on our investing clients, we focus on performance.
Carlyle will continue to grow and we will be an incredibly important capital
provider to people benefiting from that capital.
With all of these changes, that begs the question too.
Private credit wealth channels What's the future of traditional private
equity, especially under a higher interest rate regime?
As you know, you know, you and I have chatted about this before.
I don't generally make any sort of long dated predictions.
I think the role of private equity and private capital will only grow over the
next several years. The number of companies that will want
to stay private, the wealth accumulation in the world, the actual wealth that
will move into this sector, often referred to as the democratization of
the asset class. The tailwinds in the industry.
And one of the great appeals for me actually coming in and thinking about
can I really have the impact I want to have at Carlyle is about the trajectory
of this industry. I think it's early days for private
capital managers and I think we're all on a pretty steady growth path.
You know, last word here. It's interesting.
You're talking about these share buybacks.
You're talking about also the changes you're making at the firm.
Analyst on the call earlier was almost asking, are you giving back too much
money? How are you going to keep investing back
into the firm? How are you going to keep investing back
into the firm? So in terms of how we think about
capital allocation, today was all about defining the flexibility, acknowledging
first and foremost that we think the enterprise value isn't represented.
And so we think that is the best marginal deployment of capital.
We'll put it back to the shareholder. We're not going to sacrifice growth
opportunities. And I don't want to make it too
technical, but it really just is about the efficient frontier and efficiently
allocating that capital. If we think the best opportunities in
growth where we see enormous opportunity, we'll do it.
If we think the capital flexibility provides us the opportunity returns to
shareholders, we'll do. But the balance sheet is strong and we
can do both things.
