Monday, January 23, 2012

The Carlyle Group: Fareed's Fawning

GPS's Fareed Zakaria went prostrate on a Brintons' carpet before Carlyle Group co-founder David Rubenstein.  Turn your head if fawning makes you ill.  Otherwise, read on or listen to the podcast:

ZAKARIA:  My next guest is a pioneer of private equity. The term didn't really exist before David Rubenstein and his partners founded the Carlyle Group almost 25 years ago. Today, Carlyle is, by some estimates, the largest private equity firm in the world. The companies in Carlyle's portfolio have revenues of approximately $100 billion.

If Rubenstein's name sounds familiar, he was also in the news this week for donating $7.5 million to fix the Washington Monument.

Welcome, David.


ZAKARIA: Do you understand the attacks that people are making about private equity, about Mitt Romney? The basic argument, as I understand it, goes private equity companies buy these companies, load them up with debt, fire all - lots of workers, find some low cost place to do the same thing, and that's how they make money, and it's terrible for American workers.

RUBENSTEIN: Well, I think that's unfortunate because that's not the reality. The reality is this. Private equity firms are very good at buying companies, improving them, strengthening them, actually increasing employment in many cases, and doing a very good job for the investors, most of whom are public pension funds, fire workers, policemen, teachers. They're the beneficiaries principally of private equity.

ZAKARIA: Do you think that the basic model that people look at is wrong then, that they say these private equity companies come, you - so when you buy a company, how do you strengthen it? You know, how do - what is the magic that makes you able to grow the company other than firing workers and, therefore, reducing costs?

RUBENSTEIN: Well, firing workers is rarely something that's actually done. You know, the private equity statistic show that when you hire more workers, you actually make more money. So, in the end, private equity firms are trying to hire more workers and actually make the companies bigger than they were when they - when they made the original investment.

ZAKARIA: Because it would make -


RUBENSTEIN: Yes. That's what the statistics show. When you hire more people and you make more products or more services that you sell, you actually make more money, and that's good for the investors.

But actually, what private equity does is this. Somebody like my firm will buy a company. We are incented to do well. We typically get 20 percent of the profits, so we are perfectly aligned with our investors who put up the bulk of the money, though we invest as well.

The managers of the company, the people, the CEOs running the company, they get a large piece of the profits as well. Typically, we do this in a private setting. We don't have to worry about public reporting for a long time. The company's CEO can worry about making the company more efficient over a four to six-year period of time.

And what statistics show over a 10-year, 20 year, and 30-year period of time, that if you invest with a good private equity firm, you're likely to get a much higher rate of return than you would in almost anything else can you invest with.

So we're not doing anything that's magical, we're simply incenting the workers, we're incenting the CEOs, we're incenting the professionals to be aligned with the investors and make the companies grow.

ZAKARIA: What do you think of Bain Capital and - and the stories you hear about it in the context of this campaign?

RUBENSTEIN: Well, it's disappointing if you're in this - an industry that is actually adding value, creating jobs, making America more efficient in many ways and more effective in many ways.

Private equity is dominated by the United States companies. The largest private equity firms are here. Many people around the world are looking to us to how we do private - how they should do private equity there. In fact, the Chinese, for example, they very much want to import our private equity statistics and - because the statistics show that we are very good at what we do, and they want these - these skills and these know-how that we have here.

So why is it that the Chinese are so interested in learning what we do in private equity? Because they want to make their companies more effective, more efficient, and - and strengthen employment as well.

So I don't think what happened to Bain in terms of the criticism is really that fair. They may have done some things I don't know about years ago that aren't the practice of today. Remember, much of what Mitt Romney did happened 20 years ago or more, and the practice of the industry have evolved.

ZAKARIA: The other part about private equity that people worry about or are kind of stunned by is the kind of money you guys make. So - because there may be an IPO for Carlyle, you had to report this, and the three founders of Carlyle I think collectively made $450 million plus. There was returns from your own investments. You made several hundred million dollars last year.

Does - you know, do you understand how a lot of Americans look at that and say this just isn't fair?

RUBENSTEIN: Well, first, I do come from very modest circumstances. My father worked in a post office and never made probably more than $8,000 a year as an employee of the post office, so when people can rise up from very modest circumstances and do well economically, I think that's a good thing about America, and we should encourage that kind of activity.

Secondly, I give away about 50 percent of my income, so my, you know, desire to give back to the country is pretty strong and I intend to give away a lot more. I've signed the giving pledge with Warren Buffett and Bill Gates, and I intend to give away the bulk of my money. So yes, I do have a good income by most American standards, but I'm giving it away and doing the kinds of things that you mentioned the other day, the Washington Monument.

Third, I - I don't really set the - the rules about what income will be and taxes and so forth. If taxes are something that people are concerned about, Congress should change the taxes in the context of comprehensive tax reform.

And, most importantly, the money that I make, or my partners make, is perfectly aligned with our investors. If our investors make a lot of money, then we will make money. We typically get 20 percent of the profits. So if the pension funds that invest with us are doing very well, yes, we will do well. And because we're doing well, I'm fortunate to be able to give away the bulk of my money. 

ZAKARIA: Do you know - you know that there is a proposal that the bulk of the money you make, which is currently taxed at capital gains rates, which is much lower than income tax rates, that that should be changed. There are a lot of people who feel that isn't fair, that this is really income, and it should be charged at a higher rate.

Do you support changing the rate of carried interest from capital gains to ordinary income?

RUBENSTEIN: Well, there are a very few people who actually go to Congress and say please tax me higher. Maybe there are some, but there - there aren't many. In my case, what I would like to do is to have Congress tackle a tax reform in a comprehensive way. Trying to do it peacefully I don't think usually works well.

When I worked in the White House for President Carter, we tried to do comprehensive tax reform and we made some progress, and other presidents have as well. I think if you want to change that particular provision, do it in the context of everything else.

The tax system we have today is not fair in many ways. I wish it could be improved. When you have 10,000 pages of regulations and nobody can fill out their own tax return, that's not a good thing.

So I wish we would change it, but don't blame me for complying with the law. All I'm doing is I'm filling out my tax returns - or my accountants are, and I'm paying whatever I'm supposed to pay, though I'm giving away a large amount of the money and that probably lowers my tax rate because I'm giving away so much money. But change the law, but don't blame me for the law. I'm not writing the law. I didn't write the law.

ZAKARIA: But in the context of comprehensive tax reform, you would be comfortable with a change -

RUBENSTEIN: I would like to see what the whole changes would be. I can't just pick one change out and say it should be this way or that way. I want to make sure that we have good incentives, though, for doing what we do well in our business.

The United States does very well in private equity, and we have a very good economy, the most innovative economy in the world, and I want to make sure we don't do anything in tax reform that would change that. We are the envy of the world still in the way our economy is so innovative and the way we do investments very well. I want to make sure that whatever Congress does, it - it encourages people to do the kind of investing that we do.

ZAKARIA: Let me ask you about the economy, because you're looking at it with all these companies that you own, with hundred billion dollars in revenue, and this would put you as one of the largest corporations in the world, really, if you were to count it that way. Do you get the feeling that the American economy is bouncing back?

RUBENSTEIN: The American economy is in better shape than people thought it was just six months ago. I expect that this year we'll grow at three percent, maybe 3.5 percent. Europe will probably be flat to - to negative.

So the United States economy, while we have too much debt - and I'm very concerned about that. We have $15 trillion of - of debt, and we're running a $1.3 trillion annual deficit. That has to be addressed, and I hope Congress and the president will address that relatively soon and not wait until after the next presidential election to address it.

But, given those debt figures, we are doing reasonably well. I think we would do better if we tackled our debt problem, though.

ZAKARIA: Let's talk for a second about the stuff that you buy and give away.


ZAKARIA: So you - you're giving $7.5 million to clean the Washington Monument. You bought a -

RUBENSTEIN: More than clean it. It's to repair it. It's (INAUDIBLE) earthquake damage. Yes.

ZAKARIA: You bought a copy of the Emancipation Proclamation, and what did you do with it?

RUBENSTEIN: I have bought a number of historic documents, and I've put them on display at places where I think people can see them, because I think it's important for people to know about American history.

So I bought a copy of the Magna Carta, the only one in private hands. I've put that on display at the National Archives so Americans can see the document that inspired the Declaration of Independence and the Constitution and the Bill of Rights.

I bought a copy of the Emancipation Proclamation, and I've put that on display at the Oval Office, and I - the president is very pleased to have it there.

I bought a couple copies of the Declaration of Independence. One is on display at the State Department.

Recently I bought a copy of the 13th Amendment, which freed slaves, and that is going to be displayed somewhere else in Washington soon.

So I'm very proud of owning these documents and making - important - making sure that people can see them and learn American history. I'm very concerned that people don't know enough about our history and the rights that we have and the freedoms that we have. And I think if Americans would learn more about American history, I think we'd be a better country. 

ZAKARIA: But you - and you buy all these documents. You don't keep any of them at home?


ZAKARIA: If we were - if one were to go to your house, would there be any documents there?

RUBENSTEIN: No. My - I don't want to have things in my house because how many people are going to see them? I want the American people to see them.

So millions of people go to the - to the Archives. Millions of people going to the Smithsonian. Millions of people go to the State Department. And they can see these documents, and that's more important than having them in - displayed in my house.

ZAKARIA: David Rubenstein, pleasure to have you on.

RUBENSTEIN: My pleasure, Fareed.

GPS and Carlyle would like to close this CNN provided PEU infomercial with a well know song from The Graduate.
"Here's to you Mr. Rubenstein.  Congress loves you more than you could know  Coo, coo ka choo...."

Update 1-24-12: Financial News noted the GPS piece