Private Equity: An Expert Tells How It's Done
What makes a good target?
There must be a reasonable expectation of stability within two to three years. And the private-equity firm must have the capability of fixing specific issues. We also find companies sometimes where the owners are a little bit distracted. Dex [U.S. directories business]: distracted. Avio [Italian jet engine company]: distracted. KDDI [Japanese mobile phone company]: distracted.
So how do you determine when it's time to get out–your "exit strategy"?
Three things create value: paying down debt, increasing earnings, and you can also play the market for the optimal terms. Private equity has a clock on its money, which is, it has to turn the capital.
Time is the enemy of returns. The ways to exit are to do an IPO, sell to a strategic, or do a secondary buyout with another firm. Many times the preferred exit is an IPO. To do that, we have to establish the growability of the company and stabilize new markets. Growth: If people see it happen, then it becomes a very attractive public target.
Some people think there's a bubble in the private-equity market. If there is a bubble and it bursts, what will that look like?
The smart people in private equity are gearing up for a slowdown. The marginal firms will go away. Financial engineering, which is what private equity used to offer, has become a commodity. Firms today need expertise in the businesses they invest in and the infrastructure to deliver. The bulge-bracket PE firms may breathe a bit more, but a lot of them will go away, like the midmarket firms without a lot more than financial engineering. A lot of those will go away.
What you need today, it's connecting people with other people who can bring value on the factory floor. That's what reduces volatility to our investors. And we have a "one Carlyle" policy. We hold no barriers with regard to our resources and skills. We share expertise globally.
How big can these deals get? You mean, could there be a $70 billion deal?
I think there actually could. The appetite for coinvestment remains. On one deal, we were looking for $50 million in coinvestment. Within three weeks, we had $350 million worth of demand.
So why don't you do a massive pro bono project and buy one of the U.S. auto firms and re-engineer it until it's competitive?
Not an auto company! [Laughs.] Autos and airlines, we're a little bit reticent. If they catch a cold, we catch pneumonia.
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