Exec Urges Private Equity Industry Reform

By ADAM SCHRECK

posted: 44 DAYS 3 HOURS AGO

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DUBAI, United Arab Emirates (Oct. 13) - The co-founder of Carlyle Group said Tuesday the private equity industry made mistakes ahead of the economic downturn and needs to change how it does business to succeed in the post-crisis era.

Speaking at an investment conference in Dubai, David Rubenstein said private equity firms helped inflate the credit bubble by buying companies at high prices, relying on large amounts of cheap debt and pursuing ever-larger buyout deals.

"Private equity contributed to the problem. ... I think we made some mistakes ourselves," he said. "We tended to invest near the bubble peak at very high multiples."

Rubenstein, Carlyle's managing director, said he believes the private equity industry has the potential to grow larger than it was before the recession as the economy recovers over the coming years.

But individual investments will likely be smaller than in the past and will force companies to take a larger stake in their acquisition targets, he predicted.

"The industry could address some of the problems that have been identified in the last couple of years and actually try to transform itself and grow itself again," he said.

Private equity companies traditionally have relied on large amounts of borrowed money — often reaching into the billions of dollars — to finance takeovers of struggling companies.

The firms aim to turn the companies they acquire around by shedding jobs, cutting costs and getting rid of unprofitable businesses. After a few years, they then resell the companies — ideally at a profit.

That business model has been seriously crimped by the credit crunch and subsequent downturn. Financing for buyouts dried up and the values of many private equity investments tumbled as the economy soured.

Rubenstein said prospects for the global economy are now improving, providing a new window of opportunity for companies like his.

"The great recession is probably near its end," he said. "You'll begin to see economic growth in all parts of the world."

Adapting to the new economic realities won't be easy for an industry associated with bullish corporate takeovers and heavily leveraged dealmaking.

But over the next two to three years, Rubenstein predicted private equity firms will adjust to a world of tighter lending and more modest growth.

Buyers will be forced to put up more of their own money — possibly as much as half the purchase price — and hold on to acquisitions for four to six years, at least twice as long as is now common, he said.

Carlyle ranks as one of the largest private equity firms in the world, boasting $86.1 billion under management. Its holdings range from government services contractor Booz Allen Hamilton Inc. to a stake in the company that owns Dunkin' Donuts and Baskin-Robbins.

The firm over the years has maintained close ties to Washington's political elite, at one time employing former President George H.W. Bush and his secretary of state, James Baker. Several top Democrats also have worked for the company.

Oliver Sarkozy, a half brother of French President Nicolas Sarkozy, serves as managing director and head of the company's global financial services group.

The California Public Employees Retirement Systems pension fund and Mubadala Development Co., a sovereign wealth investment vehicle from Abu Dhabi, also have stakes in Carlyle.

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2009-10-13 12:16:21