David Rubenstein on Private Equity

When introducing David Rubenstein, the co-founder of the Carlyle Group, at yesterday’s Institute for Education/INFO breakfast, I was not quite sure how to refer to him. Is he a mogul? Is he a tycoon? The title I eventually settled on was the one I read in Gerry Seib and John Harwood’s new book, Pennsylvania Avenue: Profiles in Backroom Power. They referred to David as a private equity pioneer. That sounded perfect. Rubenstein said jokingly that he was a bit intimidated by that title since he did not want to ruin it for “future pioneers of private equity.”

Rubenstein characterized his business as a balance between fear and greed.

Once it was demonstrated that private equity firms could make incredible profits, banks started lending money to them fearlessly. This made it very easy for private equity firms to get loans.

The ease of obtaining loans made it possible for private equity firms to have explosive growth; however, that growth has fallen off recently. The current economic downturn is hurting the revenue and profitability of the companies acquired, but a lack of cheap loan funds has dramatically slowed private equity.

Because firms like the Carlyle Group were making regular multibillion-dollar purchases of companies, they started to show up on the radar of Congress and the media. People tend to pay attention to huge amounts of money. Investors started asking about companies’ ethical policies, treatment of their workforces, and what kind of environmental standards were in place. They wanted to know more than just the rate of return.

Finally, banks have too much debt to keep loaning money to private equity firms. The fearless lending has turned into fearful lending, and banks are worried private equity loans will collapse just as sub-prime mortgages did. In order to move on, private equity firms will have to deal with these obstacles.

Like investment banking, Rubenstein thinks it is likely that private equity firms will consolidate and continue to go public. As you can see, the private equity world will be a very different world 10 years from now, as it was when David Rubenstein founded the Carlyle Group, which is why he will likely not be the last pioneer of private equity I introduce! But he was the first.

Kathy Kemper is founder and CEO of the Institute for Education, a nonprofit foundation that recognizes and promotes leadership and civility locally, nationally and in the world community.