Wednesday, July 2, 2014

Rubenstein's Nightmare

CNBC's Kelly Evans interviewed Carlyle Group co-founder David Rubenstein.  I noted his comment:

"And people are giving us lots of money to borrow. In other words, we can borrow more money than we really need or want to take because the markets are really liking the kind of returns that we give to investors in these high-yield funds."

It echoed financial sins that set up the 2008 financial crisis.  The greed and leverage boys get cheap debt to lever up deals.

I nearly blew tea out of my nose when I read Rubenstein's response to Kelly's "hard hitting" question:

KELLY EVANS: What do you think is the potential biggest disruptor?
DAVID RUBENSTEIN: Biggest disruptor to private equity?
DAVID RUBENSTEIN: Well, the biggest disruptor to private equity would be if investors begin to say, "We don't want higher rates of return." If all of a sudden they say, "We want low rates of return," that would be a problem. I hope that won't happen.
KELLY EVANS: Or if they settle for low rates of return.
DAVID RUBENSTEIN: They settle for low rates of return, and people say, "I don't really want 19%, 20% rates of return, I want 3% and 4% rates returned." That would be a disruptor.
It sounds like P.T. Barnum attracting rogues to his carney shows.  Rubenstein speaks like a politician or salesman.  Wait they're one and the same.   

PEU disruptors would be increased interest rates, a financial crisis in part of the globe, the implosion of a major financial institution, cratering of specific financial products, massive capital calls on debt for companies having to make huge asset write downs.  The biggest disruptor would be if PEU exits closed down for years and debt balloons came due.  They need a mark to monetize.