In the latest Reuters Newsmaker interview, Carlyle Group CEO Kewsong Lee discusses how he's helping reshape the "modern" private equity firm
As CEO of the Carlyle Group (CG), one of the world’s largest publicly-traded private-equity firms, Kewsong Lee oversees more than $270 billion in private assets, and is re-shaping the company into what he calls a “modern” private-equity firm — one that drives growth and performance through more efficient management strategies and a company-wide culture of sustainability, particularly when it comes to implementing Environmental, Social, and Corporate Governance (ESG) policies and procedures.
In a recent Reuters Newsmaker interview, Lee discussed his management philosophy, the future of private equity, and why he thinks incorporating ESG principles into CG’s culture is a winning long-term growth strategy. Indeed, CG’s own stock is up 96% over the past 12 months, an indication that many investors support Lee’s efforts to push CG’s portfolio toward sustainable, long-term growth.
“We’re building businesses, and I like to focus on things we can control,” Lee says. “Those are the value-creation levers to drive the top line, to make real structural improvements at companies, and to make these companies better so that they perform— and if they perform, the investment returns will be there.”
Driving performance is of course Carlyle’s main goal, but it matters to Lee how growth is achieved and what values are reflected in the company’s investment and management decisions.
For example, Lee says CG has been investing heavily in its digital infrastructure in order to improve its e-commerce capabilities and use machine learning to shorten customer response times and lower costs. The firm is also “restructuring and making fundamental changes to supply chains, and making companies more ESG-friendly,” Lee explains.
Beyond interest rates and cost of capital — the traditional metrics of private equity — Lee says CG’s larger project is to work in partnership with the management of companies in which it invests to create a solid foundation for long-term growth. For example, CG recently partnered with fellow private equity giants Blackstone and Hellman & Friedman to buy a majority stake in Medline Industries, one of the world’s largest medical supply manufacturers and distributors. The deal is expected to close in late-2021, but Medline’s management will not change. Indeed, the company will still be run by the Mills family, which plans to work with CG and its other partners to expand the company’s product offerings, accelerate international expansion, and strengthen its global supply chain.
“Medline is a great company, with solid cash flows and real growth prospects, and we’re very aligned with the family and management there in terms of what needs to happen,” says Lee. However, Medline is not a standard private-equity deal, Lee insists—rather, it is an example of a new kind of deal-making that prioritizes the power of healthy partnerships and strategic long-term decision-making.
“People have to understand that the way private equity has evolved, it’s a very different type of industry right now,” Lee explains. “Here at Carlyle, we are a modern-day version of private equity. We’re more global, we have more diverse thinking, and we have many more value-creation levers. It’s not just about debt, financial leverage, and purchase price — it’s about how you work with companies to drive value and make them better.”
The ESG imperative
One way CG is trying to build “better” companies is by integrating sustainable ESG principles of corporate governance into the everyday fabric and culture of the companies it supports. “Everybody is talking about ESG these days, but for us it’s not a topic or a product or a metric — it’s a mindset,” he says. “ESG has to be cultural if you want to do it the right way.”
To do that, he explains, you need to embed a view from the very beginning that if you push ESG initiatives, you are helping your companies get better. For example, CG gave itself the goal of ensuring that 30% of its board were people from diverse backgrounds. In fact, 60% of its board hires in the past six months have been people from diverse backgrounds. Once established at the top, says Lee, ESG principles can be more easily integrated into day-to-day operations.
“ESG is also about hard work at each company, at a granular level, to drive operational changes that are ESG-friendly, climate-friendly, and sustainable,” Lee explains. “For instance, it’s repurposing supply chains to ensure sustainability; it’s reformulating products so that we’re more eco-friendly; it’s figuring out how to align company performance with ESG-friendly [tactics] like using less water or reducing greenhouse emissions.”
Finally, successful ESG-friendly governance also requires that incentive structures and compensation be tied to ESG targets — something Lee says CG has been doing for several years. In the larger corporate picture, Lee says that companies and their stakeholders need to be encouraged to invest in renewable energy and develop sustainable ecosystems around alternative energy sources. “We have to invest in traditional companies to provide the capital for them to transition to carbon neutrality,” Lee says.
As for future prospects for private-equity investing, Lee sees opportunity just about everywhere, particularly in places where traditional industries and technology intersect.
“You can’t ignore all the trends that are happening in tech and healthcare, but you also have to look at the convergence of industries, and how tech is cross-cutting across everything,” Lee says. “So, it’s healthcare and technology; it’s technology and financial services. I call it the five Cs — e-commerce, cloud, collaboration, cyber, and cashless. Those are the trends we are seeing across industries that are quite interesting.”
Different regions, too, are offering investors attractive opportunities as well, notes Lee, particularly in China, India, and Japan. Further, private equity is a much more attractive asset class now than it was in the past, he says, because “folks are starting to understand that as an alternative to liquid fixed income, there is an illiquidity premium that offers better rates of return with slightly longer duration.”
Ever the optimist, Lee says he is not overly concerned by various tremors and rumblings of the current market, including the crisis enveloping China’s biggest property developer, Evergrande, and efforts by U.S. Democrats to raise corporate tax rates.
“When things like taxes and regulatory policies change, people talk about the negative implications,” says Lee. “But keep in mind that it also creates change, it creates companies that get divested, and behaviors change. It’s just as much of a way to create opportunity as anything else.”