Private Equity: An Expert Tells How It's Done
In 1987, Dan D'Aniello left the Marriott Corp. to start the Carlyle Group, along with cofounders David Rubinstein and Bill Conway. Since then, Carlyle has become one of the world's biggest private-equity firms, with more than $46 billion under management. Carlyle owns all or part of nearly 200 companies, usually holding its stake for four to six years before cashing in. Overall return to investors exceeds 25 percent per year. D'Aniello spoke recently with Deputy Business Editor Rick Newman about Carlyle's purchase of Dunkin' Brands and trends in private equity.
As you know, a lot of people are worried about the growing role of private equity in the economy. Help explain private equity, in plain English.
Private equity is an asset class that allows for companies that are underperforming, or undermanaged, or not part of the core strategy of the owner to be put through a transition that allows us to improve their future, value, utility, and the products and services they offer. Private equity is like the body shop of the capital markets. Then, once you've fixed it, you need to ask, where's the vigorish?
Our mission is to produce returns in excess of what the market might provide. For private equity to earn a premium return, we must manage against heightened risks. And we promise absolute returns, not relative returns.
Explain some of the ways Carlyle adds value to companies.
There are different routes to profitability, such as acceleration of growth or improving the productivity of the assets. Then, once you've stabilized a company, you can ask a higher price. We also tend to put less debt on a company so management can focus on the business and not on statistics. We want the CEO working for the shareholders, not the banks.
So what does private equity offer that a big corporate owner, for example, might not?
You have to ask: Is private equity the right investor? It's more than just money that a private-equity firm can bring. It brings expertise. Business runs on trust, and when you can understand the strategy of a company and you believe management can execute sufficiently against that strategy, that's a powerful incentive to invest. Here again, the power of private equity is that occasionally management teams can get lost in a bigger organization.
Another key element for private equity is the alignment of incentives. We don't make money unless the company makes money and our investors make money. It's all aligned. In a public company, the stock might go up or down but not necessarily based on your actions. That's one of the incentives for management teams to go private. In the private world, reality is where we work, rather than perception. Public perception can add or take away value overnight. Like in the dot-com world. But not in the private world. Your range of movement in dealing with the business issues of a company in the private world is much broader. You don't have to worry about perception, just reality.
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