Private-Equity Firms Face Public Future

· Carlyle, which is observing its 20th anniversary, is planning to increase the sum it has under management from $56 billion to an estimated $80 billion by year-end, an amount that would edge it past Blackstone, which now has $78 billion under management. He said Carlyle had its best year ever in 2006, distributing $10.2 billion in cash to investors.

· He is wary of proposals in Congress to tax more of private-equity funds as income instead of at the lower capital-gains rate. "If it ain't broke, don't fix it," he said. "We have an industry that works very well. We have benefited public pension funds, we have benefited endowments."

Rubenstein, the son of a Baltimore postal clerk and graduate of the University of Chicago Law School, co-founded Carlyle in 1987 with William E. Conway Jr. and Daniel A. D'Aniello. The firm is now headed by former IBM chairman Louis V. Gerstner Jr. and has 420 investment professionals in 29 offices around the world. Its holdings represent a wide range of U.S. business, such as car rental company Hertz, Dunkin' Donuts and oil pipeline operator Kinder Morgan.

Rubenstein cited several motivations for private-equity firms to go public. One is that owners want to monetize their investments so they can sell part or all of their stakes in the companies. Another is that the corporate structure of a public firm can absorb more losses than those who own a private company and so can afford to take more chances. He cited the success of Goldman Sachs, which has taken bigger risks since going public in 1999 and whose stock price has soared.

"What is really going on is that you have a generational transfer," Rubenstein said. "Most of the large private-equity firms today have been built by people who are today in their 50s, mid-50s and 60s. A lot of people who have built these firms have said these things are very valuable . . . and one of the best ways to realize the value of that is to take the company public."

But he said there are downsides to going public, including a potential conflict between the interests of the shareholders and the longtime investors.

"Operating a public company today is not a walk in the woods, it's a pain," Rubenstein said. Hedge funds and other financial devices have prompted the chief executives of public companies to pay attention to their earnings and stock prices by the hour instead of by the year, he said.

"If you're an investor with me and you've been an investor from the beginning, . . . you say, 'David, I love these 30 percent returns, but you've only been worried about my return up till now.' On the other side, you have public shareholders focused on share price."

"You might be tempted to sell a company prematurely to show some earnings for the benefit of the shareholder. If you held on to that company two or three more years, you might have been able to earn more for your private-equity investor. That has been the dilemma."