Sunday, February 16, 2014

Rubenstein's Talk at Tiger 21

The Tiger 21 Conference hosted several high profile private equity underwriters (PEU's).  ValueWalk reported:

David Rubenstein – The Carlyle Group

The private equity expert explained that as emerging markets mature, the frontier markets – those countries with even less developed markets – will present the best investing potential. 

An Angolan general and energy partner with The Carlyle Group's Cobalt Energy became an early frontier market billionaire.

The headline read:

"General Dino:  The new Angolan billionaire.  The third largest private oil and metals trader in the world , based in Switzerland , helped himself to "shell companies " to make the Angolan General richer by $750 million. The front man for Iron Angolan president is currently holder of a fortune above a billion dollars." 

The last paragraph of the article states:  

"General Dino owns an Angolan company - Nazaki Oil & Gas - north American partner of Cobalt International Energy business , whose main shareholders Goldman Sachs and a background set of power controlled by the Carlyle Group and Riverstone Holdings."

One could view it as get in early and let billionaires grow more of their kind.  Upon closer examination it looks more like the payola PEU's have given for decades, before blaming underlings and settling for millions to make the whole thing go away.   But back to Rubenstein's Tiger 21 talk: 

Rubenstein noted that we’ll have a historic moment in 2014 when the Gross Domestic Product of emerging markets will surpass the GDP of the developed markets  – this includes the emerging markets of China (2nd largest economy) and Brazil (6th largest economy).

“If you are going to invest for a 5 or 10 year period of time there is no doubt that the emerging markets are going to become the dominant part of the global economy. The US will still be the greatest place to invest, because while we don’t have great growth rates we do have rule of law, transparency, great financial markets, talented people to run companies and exit opportunities. That aside, emerging markets are the place where you will see the greatest growth and number of opportunities,” said Rubenstein.

On China – where Carlyle has 15 percent of its workforce – Rubenstein thinks the country is experiencing a difficult transition as it grows, but in the long-term it remains a safe bet. The key to Carlyle’s success in China is that the firm is bringing people and their skills to Chinese companies and teaching the Chinese workers, which helps those companies grow. This is in contrast to companies that completely take over a Chinese business for market share.
I expect there to be a number of historic moments in 2014.  It'd be nice if some of those involved pulling the curtain on private equity and actually prosecuting some of their "investigation worthy" behavior.

As for the familiar China refrain, Carlyle's training the Chinese (world renowned for bribery) in PEU greed and leverage, I offer an assessment from 2011:

I can't tell if the PE guys are being insincere when they talk about China or they are actually stupid. There is no way that the Chinese govt would let American firms come in and strip cashout of Chinese companies the way they've been allowed to in the US! I imagine the Chinese welcome the PE guys because they see it as another way (through PE orchestrated mergers) to get hold of more American technology and companies and jobs.

Carlyle needs more PEU's in China to have exit opportunities.  If China hits a bad patch and credit gets hit, 9% of Carlyle's assets under management could experience severe stress.  It'd be interesting to see the Chinese reaction to PEU capital calls, especially given the way China refused to honor its derivative commitments in the 2008 financial crisis and its aftermath.  Maybe that's what Rubenstein means by rule of law.