David Rubenstein may not come across as a man in a hurry, but he is definitely a man on the go. The founder and managing director of The Carlyle Group spends almost 320 days a year on aeroplanes.
The determination with which he goes about the business of running Carlyle leaves little room for other pursuits. Rubenstein has a house near Vail, but does not ski. He has another house in Nantucket, but does not sail.
?I don't play golf. I don't drink. I don't gamble. This is what I do. I would probably drop dead of a heart attack if I ever took up relaxation. This is my hobby?, Rubenstein says during this interview which takes place on a rare day spent in his office in Washington, D.C.
The so-called hobby is to make Carlyle the world's leading private equity firm, and in so doing, make it a brand name as prominent in its industry as Fidelity's in the mutual fund world.
Rubenstein, who spends most of his time recruiting, fundraising and thinking up new ways of growing the company, is well on his way to achieving that. Set up in 1987, Carlyle manages $12bn in assets for almost 500 investors from 55 countries. With 500 employees, 350 of them dealgenerating professionals, it is one of the largest private equity firms on the planet. It runs a multitude of different funds investing in buyouts, real estate, venture capital and turnarounds and serving a diverse range of investor tastes and requirements.
If it is big, it also performs. Carlyle's average annual return of 30 to 35 per cent places it among industry leaders, even though it has a conservative approach to investing its investors' capital. Whilst targeting early stage opportunities, it doesn't invest in seed capital situations. It does not change the valuation for any company in the first year of an investment, and marks down publicly traded stocks by 15 to 20 per cent. To make sure investors are kept in the loop, they are sent detailed quarterly performance reports.
Thinking beyond the next deal
Unusual for a private equity partnership, Carlyle has a single, centralised management structure, making it a standard bearer of a new, much more institutionalised type of private equity business model. It isn't a franchise with independent funds using its name for a fee. All administrative functions are dealt with in the Washington headquarters, allowing the investment professionals to concentrate on doing deals. These are approved centrally, with the investment committee having ultimate control over the process under the supervision of co-founder and managing director, William Conway Jr., the committee's chairman. Fellow managing director Daniel D'Aniello oversees the real estate funds and the administrative operations of the business.
To remind staff working in over 20 international offices that they belong to a single firm, Carlyle structures its compensation so that paycheques are not going to soar or shrivel based on the performance of a single fund. Professionals are paid salaries with bonuses, and generally receive 50 to 60 per cent of the carried interest in their own funds as well as a piece of the carried interest in other Carlyle funds. In addition, they share in a general capital account.
The compensation scheme ?certainly causes people to think about the firm as a whole and not just specific deals?, says Michael Kelly, a managing director at Hamilton Lane Advisors, the Philadelphia-based fund of funds manager. One key advantage is that if a deal isn't suited to a dealmaker's own fund, it still stands a good chance of being passed on to another one within the company, says Kelly, whose firm has recommended a number of Carlyle's funds to clients.
The staff's company-wide focus is not only meant to support the investment process, it is also expected to generate added value inside the franchise independent of the success of the firm's founders. This may yet prove to be the most lucrative reward that Carlyle employees are entitled to, especially if the firm finds a way of translating such value into hard currency by selling the firm's equity to third parties. That this has potential was first demonstrated earlier this year when Carlyle sold a 5 per cent stake in the business to CalPERS, the giant Californian public sector pension scheme, for $175m. Part of the proceeds from the deal were paid into the firm's general capital account to benefit employees.
According to Rubenstein, yet another aim underlying the way employees participate in the firm's upside is to avoid the kinds of in-house squabbling which at investment banks often makes the newspapers. The firm is keen to avoid situations where one division outperforms another and then demands a greater share of the profit.
Such concerns notwithstanding, his basic vision of the company's culture has nevertheless been inspired by a large investment bank. Rubenstein points out that Carlyle is trying to recreate the culture that used to permeate Goldman Sachs before it became a public company. ?Goldman had a quality rarely seen in the investment banking world,? he says.
What Carlyle wants to avoid however is to breed the sort of individual stars that inhabit many investment banking organisations. ?You often read of masters of the universe. We don't want that culture. Our culture is not to make a star of any one of us. The firm is the star.?
Enter the relationship managers
This conviction hasn't stopped Carlyle from adding some big names to its payroll. Rubenstein himself may not be as well known as other buyout veterans such as Ted Forstmann or Henry Kravis. But an extremely illustrious group of advisers including George Bush Sr., James Baker, Arthur Levitt, and John Major in London have certainly helped increase the firm's visibility in the market. Their job is to open doors and generate access to investment opportunities.
Its close affiliation with high-profile politicians has on occasion led to Carlyle's being perceived as a firm with potent political relationships. But Rubenstein insists that it is not in what he calls ?the government business. Obviously President Bush is a friend of mine, but I did not give his son one dollar when he ran for president.? The firm makes no political contributions to avoid any impression that it or its portfolio companies receive government favours.
Running a global private equity firm as large and diverse as Carlyle with a multitude of independent funds operating in several segments of the market is difficult. And there have some been glitches along the way. Finding the right people hasn't always been easy. One investor says he has passed on a number of opportunities to invest in specific Carlyle funds because the quality of the people running them wasn't sufficiently convincing.
?I don't play golf. I don't drink. I don't gamble. This is what I do.?
New types of investors such as wealthy individuals gravitate to brand name groups
One area where Carlyle has learned some lessons is technology investing. Betting on the competitive local exchange carrier (CLEC) sector for instance, the firm made venture capital and later stage investments in telecom service provider Net2000 Communications, which filed for bankruptcy in November. The sector had seemed a good idea at one point, says Rubenstein, adding that ?deader than a door nail is probably a better description for it now.? Another CLEC investment that closed its doors this year was NorthPoint Communications ? albeit after Carlyle had exited at a very decent multiple.
In Europe, Carlyle's technologyrelated investment activities have seen some difficulties as well. One example is the €732m European internet-related fund that had been raised at the height of the technology boom. Entering the market at a difficult moment, the fund struggled to gather momentum, saw a number of executives depart and has since advised investors it may still return part of its cash if the investment climate fails to improve.
The jury is out
Is Carlyle trying to be too much to too many people? Mixed fortunes in technology-related venture capital alone cannot be the basis for such an assessment. As far as the broader question about the organisational model is concerned, supporters say the firm is simply going with the times. ?You can point to a number of things which are very much in favour of the Carlyle model?, says Josh Lerner, a professor at Harvard Business School. Private equity investing is moving ?from a cottage industry that has been run on a very idiosyncratic basis to a much more institutionalised industry?, he points out. ?That manifests itself in how groups are managed and the scale on which they are operating, as well as in the way they are communicating their presence to the outside world.?
New types of investors such as wealthy individuals are moving into private equity who do not have the resources and skill sets to actively manage their exposure to the asset class. Carlyle is in a position to take advantage of the readiness of these newcomers to gravitate to brand name groups, Lerner says.
Hamilton Lane's Kelly agrees: ?They are clearly able to leverage the brand name to create new products. And the centralisation of administrative functions is a good idea.? He also thinks that the firm deserves high marks for providing information about its funds and instituting safeguards to protect investors' interests.
But Kelly also says that some limited partners prefer giving their money to a generalist fund and let the managers choose how and where to invest, while others prefer the idea of selecting from Carlyle's broader menu of product-specific funds. He thinks the jury is still out on which approach works best for private equity firms.
If that's the case, David Rubenstein will be doing all he can to ensure the final verdict will be in Carlyle's favour. Don't expect the number of days he spends travelling on aeroplanes to drop any time soon.