Side Letter: Rubenstein’s warning, Oklahoma and GP errors, Brexit LBOs

Happy April Fools! Carlyle's Rubenstein warns on debt and Oklahoma TRS finds errors in its GPs' reports. Here’s today's brief, for our valued subscribers only.

Just happened

Rubenstein on threats to PE

Debt is the biggest threat to private markets, says industry titan David Rubenstein. Speaking at Invest Europe’s Investors’ Forum in Geneva, the Carlyle Group co-founder said that while the market has “tolerated” the amount of debt in the system – the US owes around $22 trillion and that figure is growing – it will soon realise this is too much to roll over.

“Debt right now is readily available,” Rubenstein said. “If it was more constrained, that would be a problem for the private equity market.”

Here are some key points from the veteran investor’s almost hour-long appearance:

  • Lessons PE learned from GFC: If you see a company going south that has some reasonable prospects, buy the debt back at a discount and put more equity in because the economy always comes back.
  • Where he’d invest his last $10 million: Carlyle stock, of course. High dividend, low price.
  • US tech companies’ biggest fear in Europe: The regulatory environment. European tech companies don’t seem to have as much desire to conquer the world the way the American ones do.
  • Most overheated sector: Billionaire apartments in New York City.

He’s not alone in warning on the use of debt. Jonathan Lavine, co-managing partner at Bain Capital, says private equity groups are taking on too much debt in the competition to win deals, heightening the risk of a crash in the sector, the Financial Times reports (paywall).

But the pièce de résistance was Rubenstein’s view of Brexit, in which he channelled Winston Churchill via a tongue-in-cheek letter he claimed he’d received from the British wartime prime minister earlier that morning to convey his thoughts on the subject. Spoiler alert: Church-stein is pro a second referendum.


Paying to avoid overpaying. The $16.5 billion Teachers’ Retirement System of Oklahoma is the latest pension to consider operational support to ensure it is not overpaying in its private markets programmes. Last year Oklahoma TRS found at least four errors in GP reporting, ranging from carried interest to misreported capital contributions. The pension expects complexity to increase with its steadily growing alternatives portfolio and would look to the vendor to verify capital calls and distributions against LP agreements in addition to tracking fees.

It’s not alone: New Mexico State Investment Council, the California State Teachers’ Retirement System, the California Public Employees’ Retirement System and Los Angeles County Employees Retirement Association have all tapped outside consultants or conducted internal reviews to better understand their private markets costs.

Are we there yet? British LBO funds are playing the waiting game in the build up to Brexit, according to data provider eFront. While these funds have continued to invest steadily in the UK, paid-in-to-committed-capital multiples have exceeded 1x on a net basis since Q4 2017, suggesting distributions are being recycled as managers delay raising new vehicles. This wait-and-see approach has seen average time-to-liquidity periods stretching from 2.6 years in Q1 2013 to 3.4 years in Q2 of last year.

LP meetings. Here are LP meetings to watch out for this week.

Inside tip

PEI reporter Alex Lynn has been receiving interest from corporates after his commentary last week on Starbucks’s first fund commitment. Are you a corporation investing or looking to invest in PE? He’d love to hear from you.

Go deeper

Want more data? There are more than 6,700 institutions in our database, including Carlyle and Oklahoma Teachers from today’s Side Letter.

She said it

“As it is today, my personal view is it would not be sensible to allocate 100 percent to impact investments because it feels that the journey from niche to mainstream is still happening.”

Anita Bhatia, investment director at Guy’s and St Thomas’ Charity, tells delegates at Invest Europe’s Investors’ Forum in Geneva that the charity had allocated 5 percent of its investments last year to impact.

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Today’s letter was prepared by Isobel MarkhamAdam LeAlex LynnCarmela Mendoza and Preeti Singh.

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