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Private Equity Had Role in Crisis, Says Carlyle Co-Founder

By Thomas Heath
Washington Post Staff Writer
Wednesday, October 14, 2009

Carlyle Group co-founder David M. Rubenstein acknowledged Tuesday at a conference on private equity in Dubai that his industry helped drive the recent financial bubble, whose eventual implosion contributed to the credit crisis and the current recession.

"Private equity contributed to the problem," Rubenstein said, according to a Carlyle spokesman who was present at the speech. "I think we made some mistakes ourself."

Rubenstein was referring to the rise in prices that Carlyle and other private-equity firms paid to buy assets, offers driven by cheap credit and loose loan terms that allowed private equity to put up very little of its own money.

During the private-equity heyday of 2006 and 2007, firms put together deals worth tens of billions of dollars to buy companies, saddling the acquired companies with huge debt burdens. The subsequent market crash and financial meltdown reduced the value of many of those acquisitions, forcing some private-equity firms to write down their investments. In addition, falling revenue caused by the recession has made it difficult for some firms to make their debt payments.

"Clearly we contributed a little by paying higher prices. We rely on very cheap debt. It was intoxicating to get debt with no covenants," Rubenstein said. "People wanted to do more and more deals, and there was a greater focus on very large deals."

Rubenstein's comments came in a wide-ranging speech in which he said private equity is in a lull because of difficulty in getting access to credit. But Rubenstein predicted that the industry will have a rebirth that will be characterized by smaller funds, more transparency to investors and the media, more partnering with others, and new sources of equity and debt.

Meanwhile this week, Carlyle rival Blackstone Group reportedly plans to sell several of its companies, a sign that markets are starting to recover from one of the worst recessions in history.

In a letter to investors last week, according to the Wall Street Journal, Blackstone chief executive Stephen A. Schwarzman said his firm was planning to sell eight companies through initial public offerings and was in the process of selling others.

Carlyle said that it, too, is planning take several companies public, including three that will be listed in Asia and two in the United States.

Carlyle, of the District, is one of the world's largest private-equity firms, with more than $86 billion under management. Lately, the firm has been investing in banks. A year ago, Carlyle invested $75 million in Boston Private Financial Holdings. In August, it was part of a group that injected $900 million into Florida's BankUnited.

More recently, Carlyle and a partner bought out of bankruptcy a Michigan manufacturing company known as Metaldyne for $450 million.

Rubenstein, who founded the buyout company two decades ago with Daniel A. D'Aniello and William E. Conway Jr., said the current recession is about over. He said he expects economies in developed countries to grow at 2 to 3 percent annually, while emerging markets could grow as much as 6 to 10 percent.

Rubenstein also said he expects U.S. dominance of the private-equity industry to decline over time.

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