When former JPMorgan Chase & Co. (JPM:US) executive Mike Cavanagh arrives at Carlyle Group LP (CG:US) this summer, he’ll be asked to expand a firm that’s fallen behind rivals even as it delivers some of the best returns in private equity.
Carlyle, the second-largest manager of alternative investments such as private-equity funds and real estate, has increased its assets at a 13 percent annual rate in the past two years, the slowest pace among peers, according to calculations by Bloomberg. Blackstone Group LP (BX:US), the largest private-equity manager, expanded at a 26 percent pace, the same as KKR & Co. and Apollo Global Management LLC (APO:US) grew at a 46 percent rate.
Cavanagh, 48, until today co-chief of investment banking at JPMorgan and a close deputy to Chief Executive Officer Jamie Dimon, will need to find ways to further diversify Carlyle from private equity and expand assets. He will share a co-president role with Glenn Youngkin, a 19-year veteran of the firm, Washington-based Carlyle said in a statement.
Youngkin, 47, who became chief operating officer in 2011, has spent the past three years deciding which businesses Carlyle should enter and which it shouldn’t, a role Cavanagh will share as the firm’s founders seek ways to give more daily responsibilities to deputies. The move puts two executives in their late-40s in charge of running the buyout firm underneath its three billionaire founders, Bill Conway, Dan D’Aniello and David Rubenstein, who are in their mid-60s.
Cavanagh “will help ensure that Carlyle continues to innovate and grow for another quarter-century,” Conway and Rubenstein, the firm’s co-CEOs, said in the statement. The executives, who started Carlyle in 1987 with D’Aniello, expect Cavanagh’s hire to “enable fresh perspectives in an environment that embraces change.”
Carlyle fell 1 percent to close at $31.35 in New York as JPMorgan declined 0.2 percent to $60.93.
Carlyle’s stock has trailed rivals, gaining 2.1 percent in the past 12 months, compared with 67 percent at Blackstone, 42 percent at Apollo and 24 percent at KKR. Blackstone, Apollo and KKR are all based in New York.
Adena Friedman, Carlyle’s chief financial officer, said on a February call with investors that expenses have increased as the firm hires for fundraising and makes strategic purchases to boost revenue. Carlyle last year agreed to acquire Diversified Global Asset Management Co. to broaden its hedge-fund offerings, bought Metropolitan Real Estate Equity Management LLC as a property fund-of-funds operation, and added the remaining 40 percent of Dutch investment manager AlpInvest Partners NV.
“We should expect the fact that our expenses will grow,” Friedman said on the Feb. 19 call. “But so should our revenues. When we make investments in new initiatives and new funds, we do try to make sure that we do it properly, but it should result in revenue growth for us.”
Even with recent acquisitions, Carlyle relies more on leveraged buyout profits, which are produced in lumpy intervals, and less on predictable management fees than its peers, according to Morgan Stanley analyst Matt Kelley in New York. Public investors put a higher value on stable fees, which can keep analysts and investors “on the sidelines,” he said in a January note to clients.
As a result, Carlyle plans to start three new investment strategies a year on average, Youngkin said in November at the firm’s first investor day. Rapid expansion is “part of the game” that Blackstone, Apollo and KKR are also engaged in, said Youngkin, who until now has largely overseen the rollout of new business lines.
Cavanagh and Carlyle began talks over a potential role in the second half of last year, according to a person familiar with the discussions, who requested anonymity to discuss private plans.
“It’s a great hire for Carlyle,” Chris Kotowski, an analyst at Oppenheimer & Co. in New York, said of Cavanagh’s move in a telephone interview. “He’s an incredibly competent and versatile manager.”
Chris Ullman, a Carlyle spokesman, declined to comment on Cavanagh’s role beyond the statement.
Carlyle said Cavanagh will be a member of its executive group, currently a six-person committee that makes strategic decisions for the firm. He joins the three founders, Youngkin, Friedman and Jeff Ferguson, the company’s general counsel.
Carlyle earlier this month hired former General Motors Co. CEO Dan Akerson as vice chairman of the board, under Chairman D’Aniello. Akerson was head of global buyouts and co-head of U.S. buyouts at the firm before joining GM in 2009 after its rescue by the U.S. government.
In November, Carlyle looked outside the firm for a deputy chief investment officer under Conway, hiring Kewsong Lee from private-equity firm Warburg Pincus LLC. Lee had been at New York-based Warburg Pincus for 21 years and was instrumental in dozens of deals, including the buyout of Neiman Marcus Group.
Earlier in the year, Jacques Chappuis left Morgan Stanley to run Carlyle’s funds-of-funds business. Chappuis was hired to expand the solutions group in the same way Mitch Petrick, who joined the firm from Morgan Stanley in 2010, was asked to build Carlyle’s Global Markets Strategies unit, which manages more than $35 billion in hedge-fund and structured-credit investments.
As of Dec. 31, the buyout firm had invested in more than 470 corporate transactions, returned an average of 30 percent annually to investors, and oversaw almost $189 billion.
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