Friday, November 6, 2009

The Carlyle Group's Hiring & Firing

The Carlyle Group grew from $6 billion under management in 1999 to $91.5 billion in 2008. With such growth, new employees were needed. Lori Sabet found them. She shared her experiences in a FINS interview.

KS: You have a reputation for hiring from the government. How does that skill-set in particular make sense for you?

LS: There are very few [employees] who fit that bill. In the early days, we saw the benefits of how someone who understood how government worked could benefit the firm. But in the beginning of this century, we shifted away from people who had experience in government to people who had experience in operations, with the goal of bringing more value-add to the transactions. So, it's almost nil these days.

Translation: We already have a full red and blue stable, including offspring. Last year, Carlyle employed an Axelrod and Frist.

The last year has been tough for the private equity underwriter (PEU). It fell to $86 billion in 2009, as asset write downs and affiliate bankruptcies took their toll. Carlyle lost:

Hawaiian Telecom

IMO Carwash

Stallion Oilfield Services
Carlyle Capital Corporation

BlueWave Partners
American Achievement (currently teetering)
Questions came regarding the hard times.

KS: Carlyle had a 10% staff cut last year. How is morale?

LS: We spend a lot of time talking about morale at all different levels. And we decided that after the [layoffs], we needed to talk to the employees more and tell them what's going on. People were scared; some were thinking there was going to be another round.

Chris Ullman* did a great job of organizing town-hall meetings where people could submit questions and started an [internal] blog where people could submit questions. We also have more partner meetings than we used to.

Our turnover is relatively quite low and I don't think it's because people settle. It's because they believe in [Carlyle] and they want to be here.

*VP of corporate communications & ex-SEC spokesman under Bill Clinton/Arthur Levitt
The axe came down on the Axelrod, at least the name disappeared from Carlyle's website after their forced reduction. The Frist is still gainfully employed.

KS: Any change in the compensation structure in light of the crisis? Are you offering different incentives?

LS: The distribution of the incentives has changed. The carry is not paying out at the rates that it was. And, at the same time, last year the cash went down. As a result of the downsizing and taking the opportunity to streamline the firm and how we do things and in light of the performance of our funds, I'm hopeful that the numbers will look better this year than they did last year.

The carry is what it is right now; there aren't a lot of exits.

You have to believe in the private-equity model of compensation to be in private equity. Four or five years ago, the compensation on the carry side was significantly higher than what it is right now. If people don't believe in it or cannot invest for the long term, this is the time when you will see them start to leave.

The carry is what it is right now, until taxpayers provide more subsidies like the $4.9 billion for BankUnited. I'm sure neither Lori or David Rubenstein will make no apology for that.

The "Carlyle One" culture is coming. Does Carlyle want to be the one stop shop for Uncle Sam's gargantuan wallet? Maybe it's the one source for unethical behavior?

Carlyle and energy partner Riverstone Holdings paid $50 million to weasle out of a "pay to play" pension fund investigation. The spat of insider trading arrests on Wall Street "involved the private equity boom in 2007." Without the carry, what might people do to make money? It seems just about anything.