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Amid a period of tectonic shifts in markets, the economy, and geopolitics, Kewsong Lee, chief executive of Carlyle Group , has reshaped the alternative-asset manager, diversifying beyond the company’s private-equity roots to capitalize on the explosive demand for private assets.

Lee had a long career as a deal maker at Warburg Pincus before making the jump to rival Carlyle (ticker: CG) in 2013. Since becoming co-CEO in 2018 and taking the reins solo in 2020, Lee has expanded the company beyond its roots in private-equity leveraged buyouts. He has shifted the focus from traditional performance fees to more-predictable fee-related earnings growth that analysts say drives shareholder returns.

“It’s a transformation where the numbers are clearly showing they are going in the right directions,” says Chris Kotowski, an analyst at Oppenheimer & Co. Carlyle reported record fee-related earnings in 2021 of $598 million, up 22% from the prior year’s total, and raised a record $51 billion in funds amid a banner year for the industry.

Kotowski thinks the company is still undervalued, given its progress, but Carlyle’s shares have begun to narrow the gap with peers over the past two years, returning almost 51%, compared with the group’s average of 53%. In its first years as a public company, the stock returned 14% from mid-2012 to 2018, lagging behind the S&P 500 index and its peer group’s average total return of 167.6%.

As the head of a global company with $301 billion in assets across sectors and industries, Lee has a bird’s-eye view of the issues that investors are grappling with. Barron’s spoke with him about Carlyle’s transformation, the outlook for private markets, and what the next iteration of globalization could look like. This is an edited version of the conversation.

Barron’s: How far along are you in the transformation you laid out in early 2021?

Kewsong Lee: Last year was a record year, and I’m confident this momentum is going to continue. Our strategy has been to accelerate the growth of the firm by building on the strengths of our core businesses, running them better than ever before, and forging into areas that will drive future growth, including infrastructure and renewables, insurance, and real estate credit. We will have a firm with greater diversification, more growth potential, and a recurring earnings stream that’s going to be very valuable to the market.

What do you think investors are missing?

No doubt Carlyle is great at the deal-doing business; we are great investors. But what’s not appreciated are intangible changes we have made to the mind-set and culture, enabling us to be great at the business of doing deals. For example, we are continuing to break down silos for more connectivity and collaboration among investment teams.

Carlyle has pushed further into credit, insurance, and other businesses. How much more do you want to diversify?

Last year, we raised $51 billion. Two-thirds was away from private equity. We are going to be focused on private markets. But private markets are expanding—well beyond private equity. Private credit is a fraction of its potential and could surpass the size of the PE market.

Real estate is huge. Infrastructure is just now starting to grow, and there is this huge business around portfolio solutions because the private market has grown so large that [chief investment officers] need help. The secular tailwinds for private markets will continue for many years to come.

What is driving that growth?

For companies, it is not just about access to capital anymore. The real edge is access to capital that comes with an ability to help them compete in an increasingly competitive world. Private capital can bring with it global networks of experts to help drive real, fundamental value. In a digital age where human capital is one of the most valuable competitive advantages, private markets are simply at an advantage to public markets.

What are your plans for the $2.5 billion on Carlyle’s balance sheet?

Witness recent credit acquisitions—CBAM and iStar—and the strategic advisory agreement with reinsurer Fortitude Re, each of which aligns with the growth areas we’ve been talking about. You will see more acquisition and investment activity in strategic areas to expand our presence, consolidate our position, and drive leadership in private markets.

What are the biggest concerns among the boards and chief executives you talk with?

CEOs and boards are wrestling with an environment with more volatility that’s projected to look quite different than it has over the past several decades. The confluence of rising rates, inflation, digital transformation and disruption, energy transition, geopolitical decoupling, and supply-chain vulnerability, among a host of other factors, will drive accelerated change. That change can create opportunities for those that can adapt quickly and pivot, so there is a lot of focus on trying to track where the puck is going.

Technology is a key consideration. Every deal is a tech deal, and it’s about how you use data and digital strategies to help drive growth.

What’s the outlook for mergers-and-acquisitions activity?

Volatility is going to create uncertainty, and CEOs are going to be cautious. While there may be a lag, eventually corporations need to figure out how to execute their plans and grow. A lot of CEOs have also learned after Covid that these are times to be bold and opportunistic—and really drive for acquisitions. Our pipelines are as busy as they have been in terms of deal flow, across all our asset classes and business lines.

Geopolitical tensions, an economic slowdown, and a drastic crackdown on technology companies in China has unnerved investors. Is that market still investible?

I know folks are saying we are decoupling. No doubt we are, but I view it less as a total decoupling and more of a new era of globalization. The challenge is how to manage that—and the risk in a decoupling and polarizing world. Any deal has to meet our ESG [environmental, social, and corporate governance] standards across the board.

Carlyle Group CEO Kewsong Lee.

Photograph by Benedict Evans

How can you invest with an ESG lens in China, given its authoritarian government and human-rights abuse allegations?

Look, this is a major region of the world and global economy. All of our clients, big and small, want to know how to invest in that part of the world. No doubt it’s very complicated, and there are issues. But that is why we have to be focused on adhering to our ESG standards that are uniform around the world.

How have the war in Ukraine and sanctions on Russia changed the face of globalization?

We are entering a new era where there is more thinking about regional ecosystems. That will create a shift from “just in time” to “just in case.”

Business leaders will have to think through implications to their supply chains, logistics, and the capital they need, including working capital, to enable a more resilient, “just in case” mentality instead. It’s early days, but clearly there are cost implications, [an impact on the] efficiency of capital usage, and huge supply, inventory, and working-capital implications.

Who benefits?

There are going to be lots of businesses that are advantaged—data companies to manage these supply chains better and new finance and payment solutions as we move toward this different ecosystem as it applies to the implications of “just in case.” There will be risks but also enormous opportunities for companies that can move quickly and adapt.

Are you worried that inflation and spiking commodity prices could pause the energy transition?

This is going to accelerate investing into alternative forms of energy, not slow it down. But it’s not an either/or. We have to do the hard work to improve companies and reduce their footprint and emissions. You can’t divest out of this problem. You have to invest your way out. We invest with an ESG lens that enables us to not just drive lower emissions, but also drive great returns.

Some see a reckoning ahead for ESG. What do you say to naysayers?

ESG is not a fad, concept, or a metric—it’s a mind-set that needs to be infused in your culture because it helps improve outcomes and drives our performance.

Where do you see froth in the market?

Liquidity driving higher and higher valuations—that game is over. There are certain aspects of the market, like momentum investing in certain sectors, which I think have come to an end. Eventually, all companies need to have a realistic path and timeline to profitability—that has become more apparent in an environment where rates are going up. When there is a tremendous amount of change, we look to invest in ways that will benefit from that change.

What investment trends will we be talking about in five years?

We have talked in the past about cybersecurity or energy security, but you are going to be hearing about food security. People are starting to realize how much wheat production and fertilizer run through the regions in conflict. The whole climate topic is going to continue to grow. Infrastructure is also going to become a huge topic. The private sector has amassed a lot of dollars to help fix problems and make critical investments in all aspects of our infrastructure.