'No cost is sacred.' Sorry times in private equity at Carlyle
If you want to occupy the most prestigious of careers in financial services, there are some things you can do. First, you must get a job at Goldman Sachs, working in M&A or capital markets. Then you must move to private equity, where you must work for one of the mega private equity funds. Stay for a decade. Collect the carried interest. Happy days.
Or not. Now that private equity firms can't exit their investments - except by selling them to themselves in the form of secondary investments, the path isn't so assured. And now that Carlyle, one of the most prestigious places to work in the private equity industry, is cutting jobs, the path may actually come to a precipitous end.
Carlyle declined to comment on its job cuts for this article, but the Financial Times reported this week that jobs there have been cut in US investment teams and that staff in Europe and Asia have been 'affected.' One London junior told us he hadn't seen much sign of people leaving yet, though.
This isn't the first time Carlyle has said goodbye to staff. In 2019, Zeina Bain, one of the fund's most senior investment executives in Europe, left after a spate of poor investments, including the 2013 purchase of minicab firm Addison Lee. However, Carlyle's recent history has been one of hiring and growth. Between 2019 and 2023, headcount at the firm rise 24%, to 2,200 people.
"Most funds try to be very discreet when making cuts to their teams," says Charlie Hunt, director of the UK at search firm PER in London. "This isn't the sort of industry where firms cuts x% of their teams each year... Staff exits tend to be managed discreetly with the aim of amicable departures."
Carlyle's cuts are being led by an ex-Goldmanite on the prestigious pathway, even if he didn't go the usual route of a few years in M&A followed by a move to private equity as an associate. Instead, Carlyle's new CEO, Harvey Schwartz, spent 26 years at Goldman, firstly in commodities sales, then running the trading business, then as CFO, then as co-president. Schwartz only left Goldman after David Solomon beat him to the CEO job there; he joined Carlyle in February 2023.
Goldman Sachs has a long history of culling underperformers, and Schwartz is a known bruiser. After speaking to people who'd worked with him at Goldman, the Financial Times described Schwartz in February as a "streetfighter" who's quick to sideline people who aren't doing well. This is the approach he's bringing to Carlyle, and it appears to be shared by John Redett, Carlyle's new CFO, an insider promoted into the role by Schwartz in June. Speaking to investors last week, Redett said there's "no such thing as a sacred expense" as Carlyle looks to cut costs under its new management team. Schwartz confirmed this. "There's nothing sacred," he reiterated. "We're going to be exceptionally disciplined."
So far, Carlyle has cut $40m from its cost base, and this is only the beginning. Schwartz stressed that the firm is in the "early innings" of its expense review; Redett says they've only "just started the process."
Given that over 50% of costs at Carlyle are related to employees, it's inevitable that cost discipline means either lower pay or lower headcount. Schwartz said that cash compensation spending alone fell $30m year-on-year in the third quarter, implying that 75% of the cost savings so far involve human beings. Salaries and bonuses are down.
At the same time, there are signs that Carlyle - like Apollo and Goldman Sachs' asset management business, wants to steer pay away from cash salaries and bonuses and towards carried interest, which is only paid once every seven years or so, and only when returns beat a predefined hurdle rate. "We're very aware of what our competitors have done on the compensation front. And I would just say it's part of the overall expense review going forward," said Redett euphemistically. This is a mixed blessing for employees. Carried interest payments, which are taxed as capital gains rather than income, can be a great thing, but only if funds actually turn a profit....
In the meantime, Carlyle is still hiring, just not in private equity. Its new areas of focus are private credit, wealth and insurance. It's all about maintaining "best-in-class talent" across the platform, but it won't be hiring in areas like capital markets either. "We don't want to be the biggest in the world here in capital markets," said Schwartz definitively when asked if talent would be added there.
Are private equity careers are best avoided now? We've been saying for a while that private credit is the better bet. However, headhunter say there's still plenty of hiring at other private equity funds, particularly in areas like ESG. "Private equity is usually a secure industry to work in, unless you’re not performing well and then you’re asked quietly and nicely to find a new home," says Bob Kondal at search firm Melrose Partners. It's bad, but not that bad.
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