Private-Equity Firms Face Public Future
Carlyle Co-Founder Concedes the Trend

By Thomas Heath
Washington Post Staff Writer
Monday, April 16, 2007

The co-founder of the Carlyle Group, the giant District private-equity firm that invests tens of billions of dollars on behalf of pension funds and other investors, said over the weekend that he expects most of the major firms in his industry to become public companies in the next few years.

"These guys who built these private-equity firms: You can say many things about them, but one thing you can't say is they're stupid, or they are not an alpha male," said David M. Rubenstein, Carlyle's managing director. "These guys are going to be fairly forthright about getting what they think they earned for building these firms."

What about his company? Rubenstein, 57, said Carlyle is in "a monitoring mode" and would closely watch how one of its chief rivals, the Blackstone Group, does with the initial public offering it announced last month.

"It's fair to say that Carlyle . . . would be thought to be a natural candidate to go public," Rubenstein said. "We don't have our heads in the sand and we're not ignoring what's going on with Blackstone or Fortress [Investment Group] or others.

"Today we are not working on an IPO. But . . . if our competitors all go public and all of them seem to be stronger than they were before, obviously we would have to take a look at the situation."

Rubenstein made his comments in an interview at a downtown Washington hotel on Saturday, where he, Starbucks Coffee chairman Howard Schultz, former NBC News anchorman Tom Brokaw, Intel board chairman Craig R. Barrett, Darden Restaurants chief executive Clarence Otis Jr. and others were honored by the Horatio Alger Association of Distinguished Americans, which is hosting its 60th anniversary celebration this weekend.

Some of Carlyle's private-equity rivals, including Blackstone, Kohlberg Kravis Roberts and Texas Pacific Group, took center stage over the past decade as they bought and sold tens of billions of dollars worth of companies, earning billions of dollars for investors and hundreds of millions for the firms' owners.

Rubenstein said Carlyle passed up some potentially lucrative deals in the past five years as competition drove up the prices of some marquee companies. "Because we were nervous, we didn't do deals in the last five years that in hindsight we should have done," he said. "There were many deals that we looked and we just passed on because we thought they were too expensive."

Rubenstein also said during the interview:

· He does not think private equity is in a financial "bubble" and considers the industry better able to weather an economic downturn than the high-tech industry was in the late 1990s. "We might have lower rates of return for investors than they would like, but I don't think they're going to see big losses of capital." The major firms have put up to 35 percent cash into their investments, have more expertise in running companies and have financial arrangements with investors that are likely to allow them to deal with setbacks.

· 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."