Limited partners will pull away from private equity as the financial crisis continues, but they will return and change the asset class from what is now considered an “alternative” investment to a “normal” investment, according to David Rubenstein, managing director and co-founder of The Carlyle Group.
“Private equity will become part of the norm rather than the alternative,” Rubenstein said at PEI Media’s Emerging Markets Private Equity Forum in New York.
“There will be a lull where investors will question private equity,” he said, but “in three or four years, there will be a recognition of private equity, it will be considered part of the normal investment scheme of” a limited partner like an endowment.
There will be more opportunities [in China] than anywhere else.
Before private equity’s resurgence, the industry will go through a restructuring that is already changing the way firms do business, Rubenstein said.
Fund sizes will shrink as well as the sizes of deals, which will include less leverage, he said. Investment periods will be shorter and the balance of power between general partners and limited partners will shift so that investors have much more say, he said.
Distributions from deals done in the past few years will be fewer because exit opportunities are rare, Rubenstein said. Many of the biggest transactions of the past few years will have to be restructured and some will fail, he said.
Rubenstein also talked about the emerging markets, and, as he has in previous speeches, said China will present the most attractive opportunities of all the “emerging market” economies in the future, as the nation is regaining its positions as the world’s largest economy.
“There will be more opportunities there than anywhere else,” Rubenstein said, adding that Brazil is also an attractive region because it has not been as effected by the financial crisis as other areas.
Firms that work in emerging markets need to convince investors not to flee from the sector as they did after the Asian economy crashed in the late 1990s.
“We need to convince people that private equity money invested in the emerging markets is as safe as private equity money in the developed markets,” Rubenstein said. “I think there’s risk in all markets, but convincing people that the emerging markets are here to stay, that’s a key challenge for the emerging markets private equity industry.”
Carlyle is the world’s biggest private equity firm, having raised about $45 billion since 2004, according to the PEI 50.