Switzerland: Behind every great fortune there is a great crime,” David M. Rubenstein says with a sardonic smile.
Rubenstein, the founding partner of The Carlyle Group, one of the country’s largest private equity funds, doesn’t really believe that famous quote from French writer Honore de Balzac. At least he doesn’t believe it applies to his industry.
But he certainly understands why many people might take that view of the enormous wealth that has accrued to private equity partners in the last decade. Indeed, given the hard times that private equity is now confronting—and the way the industry has been attacked by politicians and the general public—he’d be a fool not to realize it. (And David Rubenstein is no fool.)
Last week was a good time to check in on the state of private equity, as most of the private equity bigwigs—including Rubenstein, Henry Kravis of Kohlberg Kravis Roberts and Co., Stephen A. Schwarzman of Blackstone Group, Leon Black of Apollo Management LP, Glenn Hutchins of Silver Lake and Jonathan Nelson of Providence Equity Partners Inc.—were gathered in Davos, the site of the annual World Economic Forum.
On the one hand, there was a distinct feeling at Davos that private equity was not on the hot seat—at least not as Topic A. This time sovereign wealth funds got most of the scrutiny. “We’re no longer the object of so much scorn and attention,” said Rubenstein as he trudged through the snow, wearing a North Face ski jacket over his banker’s pinstripes.
On the other hand, back here in the real world, private equity—and all it represents—remains as contentious as ever. Just days before arriving in Davos, Rubenstein was swarmed by some 50 protesters during a speech at the Wharton School of the University of Pennsylvania.
The protesters, who were escorted out of the auditorium by the police, had come to protest Carlyle’s acquisition of a nursing home company. Among other things, they were championing efforts to establish a union at the company—which of course would impair Carlyle’s efforts to cut costs if it were successful.
As a protester with a megaphone challenged him, Rubenstein shot back—sarcastically—“I think a remedial English course would be helpful.” (He later called the protester and apologized.) When Rubenstein was finally able to begin his speech again, he began by saying that the Golden Age of private equity—a phrase coined by Kravis at the peak of the buyout boom—had turned into the “Purgatory Age, where we’re going to have to atone for our sins a bit.”
When you get down to it, there are two big problems facing private equity. The first has to do with economics; the second has to do with perception.
The economic problem is easy to understand: The good times for private equity are over, at least for now. Deals have dried up. “If we make too much money, we’re roasted for stealing companies from the public,” Rubenstein said at a panel discussion.
“If we don’t make enough money, people say we aren’t as good as we say we are.”
That comment speaks to the second problem facing private equity: the perception that it enriches itself at the expense a larger society. Even the industry’s biggest beneficiaries, the pension funds, have been unwilling to speak in their favour. And the industry itself has done a poor job making its case.
Carlyle itself is a case in point. For years, its secrecy and connections made it fodder for conspiracy theorists. More recently, the company has opened up and is using Rubenstein’s charm and wit to deflect critics.
To his credit, Rubenstein understands the problem. For years, he said, private equity firms concerned themselves only with their investors—who cared mainly about how much money they were. “Virtually no investor has ever asked me what type of community support we’ve given from our various companies in our portfolio,” he said.
But that is precisely the kind of question that the public has. The question of what value private equity adds to society is one the industry has never adequately answered, though it appears to be taking aggressive steps in the right direction.
The Private Equity Council, the industry’s lobbying group, published a study recently suggesting that companies that have undergone buyouts created 8.4% more jobs than their peers. The World Economic Forum, meantime, published its own study about private equity’s impact on society that was so muddied, it was difficult to make sense of it.
There was an undeniable Schadenfreude at Davos over the prospect of private equity unable to make deals, thanks to the credit crisis, or even seeing companies that had recently been taken private having to file for bankruptcy.
Rubenstein was more sanguine about the economic difficulties than about its perception. “No one should be shedding tears for the private equity industry,” he said. “We will have a somewhat greater default rate but not nearly as high as last time in the late 1980s and 1990s. Now funds are so large that if more equity needs to be put in to shore up the balance sheet, they really have the resources.”
Then there is the greatest irony of all, the prospect of private equity firms having to do to themselves what they have done so often to the companies they buy—downsize. At a dinner last Thursday night attended by private equity kings such as Stephen G. Pagliuca of Bain Capital Llc. and Scott Sperling of Thomas H. Lee Partners, executives talked about how during 2000 and 2001, several firms did not make a single acquisition, despite carrying a large number of employees.
But not everyone is so sanguine. “We’ve taken on a big number of bodies that need to be fed,” said Joseph L. Rice III, the co-founder and chairman of Clayton, Dubilier and Rice Inc. If the market continues to be choppy, “we might have to do what investment banks have done,” he said, alluding to layoffs, without ever using the word.
©2008/THE NEW YORK TIMES