Wednesday, June 29, 2011

Carlyle Group Theorist David Rubenstein

Pensions & Investments interviewed Carlyle Group co-founder David Rubenstein.  Rubenstein is the public face of Carlyle, which is important given the private equity underwriter's (PEU's) looming IPO. 

Our theory is if the public markets go down by X percent, we go down by less. Public markets go up by Y percent; we go up by more because the theory is that private equity is better than the public markets. If it weren't, people wouldn't invest with us, right? So, what happened was when the private markets went down, a lot of people were nervous about their stocks and a lot of people were nervous about their private equity valuations. 
Rubenstein's theory has been tested since Fall 2008.  He could've shared data on public vs. private returns, but chose not to.  He failed to mention ten investments Carlyle lost to bankruptcy or lawsuits by former investors.

In other words, why would somebody invest in private equity? Why would somebody do that? The reason to invest in private equity is not because the founders of these firms are so charming and good looking, right? It's more that investors have looked at these statistics and they have seen over one, five, 10, 15 and 20 years private equity returns overall have outperformed public equity but not so much so that you would contort your life to go into private equity. It's only the top-quartile funds that so dramatically outperform the public market returns that people spend an enormous amount of time trying to figure out, “How do I get into the top-quartile funds?”

The "outperformance" isn't dramatic.  What percent of private equity returns are less than public market?  Is it one third, one half?

One failure of a theory requires its reexamination and possible revision

Knowledge is prediction.  My theory is Rubenstein offered puffery, which eventually works against his IPO sales pitch.  Private is better than public.  That's why private Carlyle is going public, so the PEU can be worse?  At least he's got his snake charm and slithering good looks.