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When David Rubenstein, a co-founder of Carlyle Group, began writing a book about the best investors in the world and what made them tick, he picked more than a dozen subjects to profile. Among them are Stan Druckenmiller, Marc Andreessen, Sam Zell, Larry Fink and Dawn Fitzpatrick.
What he may not have realized at the time was that he and his firm would themselves become subjects of fascination, especially as the recent behind-the-scenes machinations at Carlyle have become the white-hot topic of the moment on Wall Street, in Washington and beyond.
Just four weeks ago, Carlyle’s chief executive, Kewsong Lee, known as Kew, suddenly stepped down, setting off a bomb in the private equity world. Wall Street has been aflutter with speculation about what happened leading up to Mr. Lee’s early departure — and what will happen next to the firm. None of the company’s founders or executives have spoken in great detail about Mr. Lee’s exit.
Until now. Rubenstein, over two conversations that spanned about an hour each, talked with DealBook in a wide-ranging discussion that touched on everything from Mr. Lee’s departure to carried interest tax treatment. And of course he also mentioned his new book, “How to Invest: Masters on the Craft,”a fascinating tour through the brains of some of the most successful investors. The book, from Simon & Schuster, will be released on September 13.
This interview has been condensed and edited for clarity.
What really happened with Kewsong?
In the context of looking at Kew’s contract for the subsequent five years, the independent directors reviewed his compensation request and were unwilling to go to the level that he thought was appropriate. And therefore, there was stalemate.
But it sounds like this was about a lot more than money. A lot’s been made of a breakdown in the relationship between the founders and Kewsong.
In the case of private equity firms, the founders of these firms for whatever reason — maybe God loves them — they live to be older than maybe you might want them to live. The founders of Carlyle own more than about a third of the company. So if you are the new C.E.O. of an organization and the people that built it own a third of the company, you’d say, Well, why would you not spend time listening to them? Or at least asking their advice? We are the biggest shareholders. Why was Kew unwilling to recognize that? I don’t know. He would spend a lot of time talking to somebody that would own 1 percent of the company or 2 percent of the company or 3 percent. But we owned 35 percent.
He wasn’t talking to you?
I would say we were talking in a civil way, but I mean, he wasn’t briefing us every day on what he was doing — or regularly. We weren’t as well-informed as you might expect the biggest shareholder to be. On the other hand, we’re big boys. We can always call and ask if we needed something, but we thought, You know, we want to let him run the company. That was his job. It might have been handled differently if the stock had gone to $90. (The stock is $32.66 and has underperformed compared with its peers.) Then I guess people would say, “Well, what can we do if the stock’s $90? We’ll just be quiet. We’re making a lot of money this way.”
The news of Mr. Lee’s departure caught Wall Street off guard. Were you surprised at the abruptness? Is it fair to say this was not a standard transition?
I was not surprised, because I’ve been involved and I knew what was going on. But I would say we recognized the market would think it was abrupt. You can’t make everything work perfectly in life. And we didn’t have a perfect No. 2 there. That was one of the concerns that the board had had for a long time, which is that there should be a person groomed to be a successor. And there wasn’t one groomed.
Why do you think leadership transitions inside private equity firms are so difficult? There were a number of people at Carlyle who were hired and tapped to eventually take over, and for whatever reason, they didn’t.
I guess the founders have this proprietary sense. They built these firms from scratch. They’re still involved, and they think they can still add value. And the investors seem to feel that they’re adding value. None of the investors that I can see in these publicly traded private equity firms are saying, “Any time you hit the age of 70, you should get out of the firm completely.”
Are you hoping the next C.E.O. of Carlyle is super collaborative with you — is that one of the criteria for you?
Not super collaborative with us, but super collaborative with all the employees in the firm and the investors. Collaboration is a gene that some people have and some people don’t have.
Would you ever sell the firm?
Well, it’s a publicly traded firm. It’s not a decision for the founders necessarily. It’s a board decision. But, I don’t have any expectation of that occurring in the near future. The board is focused on one thing, which is getting a good replacement. And that’s the focus. I should also point out it’s not easy to sell — not that we’re trying to — a private equity firm, because under the partnership agreements, when investors go in these partnerships, if there’s a change of control, they have the right to get out of the fund. So if you were to sell control of your firm in a private equity context, you’d have to get all of your limited partners in all of your funds to agree to that, and imagine how hard that would be.
There have been reports that Mr. Lee and others inside Carlyle were frustrated that you set up a private family office, contending that it takes away resources from the firm or that investing outside of Carlyle presents a conflict.
I didn’t invent the family office for private equity founders. I may be one of the last ones that created a family office. I have done this with my children. Nobody in the firm has complained to me that it was taking away resources from the firm. I’ve seen things that come along to the family office that might not work for us, and then I’ve referred them to Carlyle.
Let’s pivot the conversation to a headline in recent weeks. Senator Kyrsten Sinema managed to remove plans to end the carried interest loophole from the Inflation Reduction Act. What do you think happened?
I just can’t resist repeating that most of the carried interest in America is paid by the real estate industry, because real estate is a bigger industry than private equity and real estate is in every congressional district.
Do you support the carried interest tax treatment?
I don’t collect any carried interest the way Carlyle is structured now. I make my money investing in my funds.
But you used to —
Many, many, many years ago. But Carlyle, since we’ve been a public company, I’m not really a beneficiary of it. I don’t have carried interest in any funds. I put money in the funds. I get the returns on that, but I don’t get a carried interest from the funds. I get my dividends, and so I don’t have a vested interest in it at this point, to be honest. I do understand the logic behind supporting it and logic behind opposing it.
I’m curious if there is a lesson that you learned while putting your book together that was helpful during the past month navigating the management challenges at Carlyle?
Remember, the book is about great investors, not great managers of companies. I think investors prefer to just focus on investments and not deal with all the meshugas of having to run a company.
What was your biggest surprise after spending so much time with these folks?
I do think that people would be surprised that these individuals are relatively humble. They have a certain amount of humility because they realize the markets can make you and break you.
How do you think luck plays into all of this?
Well, you know, you can spend all your life saying these people are lucky. These people are lucky. But if you’re lucky for 10, 20 and 30 years, maybe it’s not luck.
Are there any young talents who you think will be the next big investor?
I think, by my standards, he’s young — and he is relatively unknown to people outside of the investment world — but a guy named Orlando Bravo. He’s come out of nowhere and he’s built, I think, the best business doing technology buyouts or enterprise software buyouts. And he’s just made a spectacular fortune.
The people you interviewed for this book are very talented. Do you think they were born with it or they learned it?
I don’t really think anybody is born with it. There’s no doubt that if your father and mother are Ph.D.s in physics and math, you’re probably going to be pretty good in physics and math, and so forth. And as I point out in the book, most of these people are pretty good in math skills, even though they might not be as good as Jim Simons. Very few of the greatest athletes we’ve ever produced in this country have produced children who also are great athletes. Very rare.
What do you think of the high fees these investors charge?
If your fees are so low, people might assume there’s something wrong with it. And it’s amazing how, if you have a good track record, you can charge almost anything.
Given the talents of those you profiled, do you think their talents are best put to use investing?
Would the world be better off if Warren Buffett was a schoolteacher? I don’t know. And I can’t say that everybody is perfectly compensated. Maybe people that invest money should be paid a lot less than grade schoolteachers. Generally, if you want to go into the investment world, you presumably want to go because you think you’re going to make more money than being a schoolteacher. Is that a bad thing? I don’t know.
What do you think? How do you think the Carlyle Group handled its leadership transition? Let us know: email@example.com.