Gloves Off for Harvey Schwartz

The grace period is over for Harvey Schwartz. The Carlyle Group’s chief executive officer seemed prepared for this moment when he jetted down to Washington this week to mark his first anniversary at the helm. I took a train down right after him.

Schwartz put up some record numbers in his first year and finally set a number of strategic targets that Wall Street has been yearning for—plus led a pay revamp for dealmakers and a $1.4 billion buyback plan . Investors bid up Carlyle’s stock this week to levels not seen since early 2022, before succession problems began to weigh on the firm’s performance.

But Schwartz’s challenge is still real, and a key investor question is: How is he going to compete?

While Carlyle shares rose roughly 36% last year, rivals such as Blackstone Inc. and Ares Management Corp. were up more than 70%. Schwartz is going to have to find a way to fill that gap. Blackstone was recently added to the S&P 500 index, which makes it easier for fund managers to pile into the stock, and KKR & Co. and Apollo Global Management Inc. could soon to follow. But as the Financial Times pointed out this week in a profile of Schwartz, Carlyle is still too small to join that club. (Its market value ending the week was less than $20 billion, while Ares has jumped past $40 billion.)

Half of the analysts who cover Carlyle keep a neutral rating on the stock—meaning Schwartz is going to have to sway them to his side. Some of those same analysts raised price targets for Carlyle’s stock this week while keeping some warnings about the broader ability for private equity giants to sell assets and rake in greater profits this year.

Speaking to Bloomberg in his first television interview since taking the role, Schwartz set his goals for Year 2 as CEO: “Focus on our priorities, excellence of execution and more teamwork—if we do those three things, we’ll achieve our targets for this year.”

“If we do all those things,” he said, “the stock price is going to follow.”

Addressing concerns about private equity performance broadly, Schwartz sees plenty of growth potential. “It’s about the trajectory of this industry,” he said. “I think it’s early days for private capital managers, and I think we’re all on a pretty steady growth path.”

Of the Gods

Ares, Apollo and KKR are among private credit giants whose stock prices hit records this week. Each firm delivered better earnings numbers than analysts expected.

Ares is on the brink of raising the largest direct-lending fund ever, according to Bloomberg’s reporting, and Apollo set a goal to double its credit origination . (The firm is already creating $100 billion of loans a year and wants to make that closer to $250 billion in five years.)

Mike Arougheti, the CEO of Ares, contested the idea that the industry is in any sort of bubble. “For all of the attention private credit is getting, there’s just not enough private credit in the market to satisfy the private equity that’s already been raised,” he told me in an exclusive television interview.

There’s about $1 trillion of so-called dry powder in buyout funds across the industry, and he calculates only about $200 billion of unused private credit set aside to help finance those deals. “The reality is that the private credit markets, even though they’re having a moment, are still massively undercapitalized relative to the amount of the institutional equity that needs some form of private credit,” he said.

What's more is that as more regional banks are sinking under the weight of risky loans and suppressed margins from lending, firms like Ares are key targets to pick up those assets. I pressed Arougheti on whether he would buy some of the loans being considered for sale by the embattled New York Community Bank.

"I can't comment on that specifically. But as you know, earlier last year, we executed on a major portfolio purchase from PacWest," he said. "I think given our capabilities in private credit... we are a natural partner for any bank that's looking to reposition its asset book."

The weaknesses in the regional banking system have given a fresh narrative to the private credit giants -- which I've always seen as getting a more rapid raise out of the ashes of 2008 when larger banks became far more constrained. The regional banking "crisis" of 2023 adds more fuel to that fire. As Arougheti puts it:

"These isolated instances like New York Community Bank are going to be resolved with a combination of private markets partnership and bank capital... It is a commentary, I think, on the fundamental difference in the structure of a bank balance sheet and the structure of an unlevered, private fund. And when you go through this amount of rate hikes so rapidly it exposes those weakness... So I actually think this is going to help advance the narrative of the importance of private markets."

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