March 2, 2013
Interviewed by: David Snow
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Glenn Youngkin: Building and Buying at Carlyle

In the second segment of a fascinating, in-depth interview, Glenn Youngkin, Managing Director and COO of The Carlyle Group, describes the firm’s unique approach to growing, scaling and keeping team members focused. Addressing the firm’s recent acquisitions of AlpInvest, NGP and Vermillion, Youngkin tells how Carlyle assess the ability to add investment capabilities via smart hires versus outright platform acquisitions. Also discussed: why scaling maters in alternative investing, the genius of the multi-fund construct, how the “One Carlyle” culture keeps professionals from “being stuck in silos,” and what the next strategic focus will be for the firm.

In the second segment of a fascinating, in-depth interview, Glenn Youngkin, Managing Director and COO of The Carlyle Group, describes the firm’s unique approach to growing, scaling and keeping team members focused. Addressing the firm’s recent acquisitions of AlpInvest, NGP and Vermillion, Youngkin tells how Carlyle assess the ability to add investment capabilities via smart hires versus outright platform acquisitions. Also discussed: why scaling maters in alternative investing, the genius of the multi-fund construct, how the “One Carlyle” culture keeps professionals from “being stuck in silos,” and what the next strategic focus will be for the firm.

David Snow, Privcap: You are a former Mackenzie professional; so I’m interested in your view of Carlyle as a large, not just private capital firm, but as a large organization what is unique about the way that Carlyle has grown and you know, that stands out among other large groups of people?

Glenn Youngkin, Carlyle:   Yeah, that’s a great question. I’d say there’s three or four things that I am constantly drawn back to that scale facilitates. So first of all, in the alternative asset management field, scale matters more than most people might think. It gives us the ability to have a global footprint that otherwise we wouldn’t have. We have deep, deep industry teams that otherwise, we might not be able to have. We may have one person covering six industries or three industries as opposed to one. We have the financial resources to actually launch funds. So scale matters because it provides all of those things that I think if we were half the size, we might not be able to do, but it’s actually balanced with the second big attribute that I think makes us unique or distinguishes us, which is the way the firm’s constructed, and we touched on it earlier which is that, you know, the multi-fund model which just felt natural when we were building the place, actually counterbalances some of the potential negative factors of scale.

First and foremost, it gives our fund teams focus. So our South America team, and I don’t pick on them because they need to be picked on, but they’re really good at what they do, but I spend a lot of time with them, our South America team knows that they’re responsible for investing in buyouts and growth capital in South America. They don’t get terribly distracted by trying to do a real estate deal or trying to do a deal in the United States, and on top of that, however, they run the fund, and so it really appeals to an entrepreneurial spirit of somebody who wants to grow and build a business.

So the fund construct really helps in that situation, and it also enables the firm to scale further, and there’s a real distinct difference between asking 30 people to run a $5 billion fund, and then giving them a $10 billion fund and saying to the same 30 people, “Okay, just do more of what you’ve been doing,” and as we grew from $50 billion to $150 billion, the number of funds at work went from 50 to 150, and so what we also figured out was that the scalability of our model was enhanced by the multi-fund construct. We could actually grow our business without actually overburdening the investment teams.

Third big thing that I think kinda comes into that mix is just people and culture. We’ve been amazingly blessed to attract new people to Carlyle cause a lot of these expansions have been hired from the outside or built with people who’ve been hired from the outside, and we have sometimes been lucky and sometimes through our process been good at bringing in just spectacular people who fit the culture, which is the kinda unifying piece behind this. You know, “One Carlyle” you know which is a daily mantra around the place, actually is our culture so that we don’t get stuck in the silos of each fund, but everybody recognizes that they’re better off if they work together as a group, and then I guess the last thing I’d say, David, is that’s resulted in pretty good performance over a long period of time. One of the most satisfying things was when [0.26.00] we filed our S-1 when we first went public in-, we filed the S-1 in September 2011, one of our larger competitors rang David up and said, “You know, I was just looking through your S-1, and you guys have been incredibly consistent for a long time.”

Snow: That was a generous phone call.

Youngkin: It was a generous phone call. It was a nice phone call. It’s the kinda phone call you like to get, but what it means in our mind is that the combination of the scale and the construct and the people, which are the building blocks, actually results in good outcomes. We don’t always have the best performing fund, but we’ve been consistently good.

Snow:  You mentioned, you know, growing both organically. You hire someone to start a new business line, but you’ve also acquired divisions to Carlyle and so you’ve grown both ways. I’m interested in understanding how you evaluate the opportunity to simply, you know, hire a smart team and go raise a new fund, versus acquiring a whole new group. You recently acquired Alpinvest, a big fund to funds, NGP as an energy platform and also the Vermillion Commodities Business. So again, you know, looking across all the opportunities to grow by either building or buying, how do you assess the right path?

Snow: Yeah, a lot of it has to do first with the opportunity, and we always have a long laundry list of potentials, and that long laundry list of potentials is generally created  through brainstorming, but also a lot of LP suggestions. You know, “Would you consider? Have you thought about? We’d be interest–

Snow: Potentials just to grow in general or to acquire?

Youngkin: To grow in general. You know, we would think about, you know, creating an investment capability, that’s actually the words we use. The investment capability in X and then we step back and we say, “Okay, first of all, are there investors who want us to do that in enough scale to make it work. Second of all, how would we prosecute it? Do we think we can actually grow a team internally? Do we have the skill sets, or does it make more sense to buy something,” and it is a very natural and almost business school like evaluation and where we feel like we have an edge with people and capabilities, we’ll build it, and when we feel like it’s a real stretch to execute on or it’s gonna be too slow in getting to where we wanna get to, then we’ll actually invest and buy it.

A perfect example, two very different energy ambitions, two very different executions, wonderful outcomes for both. We identified in 2009 during the financial downturn that all the banks were getting pushed out of the lending business, particular mezzanine to energy. Mitch Petrick, who now runs our GMS business, our Global Market Strategy Business, came in and he said, “I know a team at Morgan Stanley and we think that they’re a great team and in fact there’s a number of investors we think we can go to,” and we hired this team, raised a fund organically, and we were able to hit the market quickly and start investing and the team has done a great job.

Compare that to our most recent investment in NGP and we thought long and hard about hiring in a team of energy investors and raising money around them. We can raise money, we can hire in a team, but when we met the guys at NGP, it was clear it would take us years, I mean maybe never, to create the kinda capabilities that they have, that they’ve built over 24 years, and so that was an easy one, which is slow, long, hard: 5 build. Fabulous team, ready to go now: buy, and so in each case, there’ll be that analysis and some of them are very clear one way, some of them are clear the other way, and some of them aren’t so easy.

Snow:  As you look at the number of businesses that Carlyle is now in and including the recent acquisitions that you’ve made, are there any sort of big opportunities, big investment functions that are missing or you have ambitions to add on down the road?

Youngkin: I wouldn’t say, David, that there are big things that we’re quote “missing.” I think we continue to see investment capabilities that we think could offer some unique things to investors and there’s a long list of those things. So next on our list is actually international energy and we really feel that with our infrastructure and power capabilities now in place and the commodities capabilities in place in domestic U.S. oil and gas capabilities in place and mezzanine and senior lending in energy in place that international energy which has broad appeal, we think, to investors has really good opportunity sets in front of it, doesn’t have some of the international tax challenges that U.S. energy investing, primarily international investors don’t have to deal with FIRPTA issues in the U.S., offers a pretty unique opportunity, and so in the short term, that’s where we’ll probably look next, and beyond that, there’s a long list of other things to do and we just kinda get at ‘em one a time, execute well, and hopefully perform.

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