Friday, May 28, 2010

McKinsey on PEU's "New Ecosystem"

McKinsey Quarterly featured an interview with Carlyle Group cofounder David Rubenstein. The promo says Rubenstein "discusses the new ecosystem he sees developing for the private-equity industry."

David Rubenstein said:

I do think that the large private-equity firms, the largest ones—KKR, Blackstone, Carlyle, TPG, Apollo, Bain—will aggregate even a larger percentage of capital that’s available, because their brand names, I think, give investors some comfort. These firms all survived the recession in reasonably good shape.

And I think all these firms are going to become what I’ll call “alternative investment-fund managers.” They won’t just be private-equity firms. They’re now going to expand their offerings so they have not just private equity but they might have real-estate funds, infrastructure funds, distressed debt funds, and credit funds, and just all kinds of different funds.

Hedge funds. Hedge fund of funds. Private-equity fund of funds. So they can use their brand name and help sell those funds around the world, but also acquire very talented people who could manage these funds. I think virtually all of these funds and firms will probably be public entities within five years or so.

The new face of private equity underwriters (PEU's) is much like the past. The Carlyle Group had a hedge fund, BlueWave Partners and a publicly traded alternative investment, Carlyle Capital Corporation. Both imploded in 2008. However, Carlyle doesn't count these blemishes.

We’ve averaged about 30 percent gross internal rate of return on all the money we’ve invested—almost $60 billion of equity over the 23 years or so of the firm.

It'd odd that McKinsey used the word ecosystem to describe men age 55-65 monetizing their PEU holdings via independent public offerings (IPO's). Rubenstein said:

Most of the founders of these global private-equity firms are probably between 55 and 65. And at some point, they want to monetize what they have built, and I think the IPO helps monetize it.
How did Rubenstein sell aging white men cashing in?

We need to make a better case that we are paying taxes, we are sensitive to environmental concerns, we are sensitive to socially responsible investment principles. I think the private-equity industry may be a little late to that game.

Odd, David and his peers were on Capital Hill lobbying against "paying taxes." I bet they weren't late to discussions with Senators.