Four Princes of Private Equity Speak Out
Private-equity barons are notoriously, well, private. But with their firms doing high-visibility, multibillion-dollar deals–and now, a few of them starting to go public–the curtain has been rising on these once secretive investing houses. In April, four titans of the private-equity universe–David Rubenstein of the Carlyle Group, Leon Black of Apollo Management, veteran private-equity investor Tommy Lee, and David Bonderman of the Texas Pacific Group–spoke together at a conference in Beverly Hills, Calif., sponsored by the Milken Institute. Deputy Business Editor Rick Newman was in the audience. He transcribed some of their remarks:
On the pros and cons of private-equity firms going public:
Black: "Going public provides a currency [stock] you can use to acquire niche firms to make your company stronger. Like for us, in healthcare and energy. It may be more efficient to buy a boutique in those niches than to build our own, using the currency of public stock. It's also nice to be able to monetize these cash flows. The real negative is being in that fishbowl, where a small shareholder can sue you for anything. Plus, [the] Sarbanes-Oxley [corporate reform law]."
Rubenstein: "The big private-equity firms will probably all go public at some point, because we'll have to if we're going to compete with each other. I wouldn't be surprised if all the big firms are public within four or five years. The principal issue is, will you really favor the public shareholder over the private investor? The private investors are going to worry that you pay too much attention to quarterly earnings and stock price."
Bonderman: "The nirvana in our business is permanent capital. The only place to get it is the public markets. Of course, there is this delicious irony in us proselytizing to public companies that you should go private at the same time we're talking about going public."
Lee: "We may be less likely to take risks if private-equity firms are public."
On the reasons private equity has become so prominent:
Bonderman: "It's because of excess liquidity. It's everywhere. One reason is the U.S. stock market is up 170 percent over the last five years. And that's the worst performance out of the top 25 markets in the world."
On the best markets worldwide for private equity:
Rubenstein: "The U.S. will be the best market for capital for some time. Carlyle is looking worldwide, in Latin America, the Middle East, Japan, China, and India. Worldwide, government pension funds are setting up investment arms. Five years from now, they'll be competing with us–including in India and China."
Black: "We just opened an office in Singapore, and we're looking at Japan. I don't see us in China right now. But we're learning about it. Where are the best deals? In 2005, about 45 percent of private-equity deals were in the U.S., about 25 to 27 percent were in Europe, and the rest were in Asia."
Bonderman: "At the end of the day, private equity will follow [gross domestic product] and go offshore."
On how big private-equity deals can possibly get:
Bonderman: "I don't think bigger is necessarily better. There's lots of liquidity but not much buoyancy in the U.S. ... Sarbanes-Oxley and public limitations have led to more private-equity deals. The [price-to-earnings] ratios of the 50 largest U.S. firms declined 70 percent over the last five years. But now, about $50 [billion] to $60 billion is the most you could raise without too many people; $100 billion is a possibility, but it would have to be a real-estate deal, where the markets are deeper and more liquid."
Rubenstein: "The problem with big deals is if they don't work, it takes years to dig out. KKR [Kohlberg Kravis Roberts] put 60 percent of its fund into RJR Nabisco [in 1989], and it took years to unwind that."
On the future of private-equity firms:
Black: "Capital is a commodity today. We're all overinflated with capital. The big difference is human capital. It really comes down to people."
Rubenstein: "One of the changes is that we have hundreds of experienced people now, and we can recruit good CEOs like Dave Calhoun [former vice chairman of General Electric, now CEO of the Nielsen Co., a Carlyle property]. The way we compensate people is we reward them dramatically if they do dramatic things."
Bonderman: "The risks I see are tightening liquidity, an incompetently run war in the Middle East, the only superpower going in who knows what direction. The Big Three in Detroit going under, over time. But the market shrugs this all off. Two years ago, I was skeptical, and we slowed down our investing. Last year, I became unskeptical, and we stepped it up again."
Lee: In auctions [of companies or divisions] today, there's a lot of competition. There are no real bargains. If you don't have a specialized point of view, you don't know what to do if you buy, especially if you paid too much. Also, big companies, like Microsoft, that have a lot of money, like Microsoft's $30 billion–maybe they will turn out to be buyers like us."
On careers at private-equity firms:
Rubenstein: "Twenty-five percent of the graduates at Harvard Business School want to go into private equity. Probably another 10 percent want to go into hedge funds."
Bonderman: "It's a sure sign the end is nigh when one third of business school graduates want to go into private equity or hedge funds. It is the flavor of the month, and it will continue as long as the salaries we're willing to pay people remain unreasonable."