Rubenstein’s take on the future as Carlyle tops PEI 300

As Carlyle is once again named the largest PE firm in the world, David Rubenstein, the architect of its fundraising success, talks about the future of private capital.

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$100 billion in the next four years. That was David Rubenstein’s bold assertion in 2016 about The Carlyle Group’s fundraising prospects. At the time, Carlyle, known in the industry for its fundraising prowess, sat fifth in the PEI 300.

A few things have changed since then. For one thing, Japanese tech company SoftBank has somewhat normalised the figure by raising most of a quasi-private equity fund with that target. Second, Rubenstein and his co-founder Bill Conway have handed the reigns of the firm to Glenn Youngkin and Kewsong Lee.

And third, Carlyle is once again the largest private equity firm in the world. The firm has raised more than $60 billion in the last five years, according to the latest PEI 300.

The firm is not alone in enjoying fundraising success. Its peers at the top of the PEI 300 are hoovering up an increasing percentage of the capital flowing into private equity (see p. 36). And they are taking a larger slice of a pie that is itself growing; the total capital raised across the industry in 2017 was only just shy of the 2008 fundraising peak.

Image problem?

Continued success, however, is never guaranteed. Amid the strong returns and growing institutional demand, there have been some high-profile examples of LBOs-gone-wrong – with bankruptcies and job losses – that do nothing to correct an image of private equity as capitalism at its most predatory. “Private equity? It’s more like pirate equity” read the headline of a Bloomberg opinion piece in late March, just days before we caught up with Rubenstein.

So is the industry – which continues to ride high amid rampant institutional demand – ignoring a wider image problem?

No. To Rubenstein, investor demand is the first and best indicator of how private equity is perceived.

David Rubenstein

“As a general rule when you see enormous amounts of money going into private equity you have to conclude that generally these sophisticated LPs have assessed the alternatives and think that the risk-reward balance represents a good opportunity,” he says. “Why are all of these smart people doing this? I think it’s because they realise that rates of return are likely to, as they have in the past, outperform other asset classes.”

Rubenstein equates negative sentiment towards the asset class with the politics of envy; those who amass wealth attract criticism. “I can’t say that throughout history people that have made a lot of money have had people throwing daisies at them, telling them how wonderful they are. So it’s not just private equity; it’s banks or industrialists throughout history.

“I do think that private equity people have done a pretty good job of recycling the money into philanthropy and other things, but whether that is enough to mitigate the concerns, I don’t know.”

Rubenstein knows a thing or two about the importance of image. A willingness to appear in public that sees him host a television talk show as well as being executive chair of Carlyle, has, in his estimation, helped his firm become a fundraising machine. It has graced the top five of the PEI 300 every year since the ranking started in 2007 and is number one this year for the fifth time.

The firm’s co-founder sees the fact the world’s largest sovereign wealth fund, Norway’s Government Pension Fund Global, has not yet invested in private equity not as a negative, but as a reason to be optimistic. He argues it is one of many giant investors – like Japan’s Government Pension Investment Fund or Saudi Arabia’s Public Investment Fund – that represent huge pools of potential capital for the future.

In the weeks after our discussion, this optimism is dealt a blow; Norway’s finance ministry concludes GPFG should not invest in private equity.

“Unlisted equity investments would challenge the management model based on transparency low management costs, and a limited degree of active management,” the ministry said in mid-April.

Retiring quietly

Another potential pool of future capital is individual investors. Those saving and investing through individual retirement accounts or 401(k)s are currently unable to access private equity, but “at some point I think the government will let some part of an IRA or 401(k) go into an illiquid private equity investment”, says Rubenstein.

It is a cause being championed by Rubenstein’s peer Tony James, the former chief operating officer of Blackstone and co-author of the 2016 book Rescuing Retirement, which sets out a plan to ensure US workers save sufficiently for retirement through individual accounts.

Rubenstein is optimistic that this money – or a portion of it – will find its way into private equity, but less clear on when this could happen. “It’s hard to know, but I think there is a general view that the government should let people who need higher rates of return invest in higher returning assets… but not unlimited amounts.”

Even if the government permitted 5 percent of an IRA, “that’s an enormous amount of capital”, he says.

A number of firms – typically those operating in the fund of funds space – have developed IRA-appropriate offerings, but the floodgates have yet to open. For Carlyle’s part, “it is not our main focus today, as the government is going to have to do something about it”, says Rubenstein.

Instead the firm is seeing more capital coming from family offices. “It’s a gigantic growth area,” he adds. As is capital from feeder-funds: “Individual investors that don’t have family offices typically, but are being rounded up by Goldman Sachs, Credit Suisse, Morgan Stanley and so forth. We see a lot of that.”

Carlyle has shown itself to be a firm comfortable with trying out new strategies based on investor demand. A look through the firm’s early history on the PEI database shows funds raised in the late 1990s and early 2000s focused on venture, energy, high-yield, Japan, Mexico and ‘the internet’. Indeed, in a 2016 interview with Private Equity International, Rubenstein suggested he and his partners “probably should have tried fewer things and focused only on those businesses where we had clear expertise and could scale quickly”.

Making an impact

One emerging area of interest for institutional investors is impact investing: investments intended to have a tangible positive effect on society or the environment as well as generating financial returns. Bain Capital and TPG Capital are both established private equity brands that have successfully raised capital for the strategy, while KKR is plotting its own version of an impact fund. Goldman Sachs is also active in the niche, having acquired a specialist investment advisor in 2015, and Partners Group is currently marketing a $1 billion private markets fund – PG LIFE – that will target deals in line with the United Nations Sustainable Development Goals.

Rubenstein does not seem particularly taken by the ‘impact’ label and what it suggests about other private equity funds. “We would say that we do impact investing all the time, because we’re not doing things that are destructive to the environment and are doing things that are, we think, socially useful,” he says. “But the way impact investing has been pigeonholed is that you can only do impact investing if it’s called impact investing and it’s designated as such.”

Is Carlyle thinking about a foray into impact? “We haven’t designated specific funds to be ‘impact investing funds’, but we are looking at whether that makes sense or not,” he says.

Of course, if Carlyle decides to take the plunge, it is likely to set impact fundraising records, too.

  • To see the full list and read more about which firm made the ranking and changes this year, visit our PEI 300 page here
  • To view a chart of the top 50 firms, visit here