Saturday, October 20, 2012

Carlyle's Quotable Co-founders

The Carlyle Group, now publicly traded, is run by three of its original co-founders.  Two co-founders stood front and center this week in the business media.

Carlyle Group co-founder William Conway said relations between buyout firms and investors “have passed their nadir.”  This came after an investor dressed down Conway for private equity's fee fractal.  Bloomberg reported:

Oxford University’s investment chief attacked private-equity funds’ charges, saying firms such as Carlyle Group LP (CG) are more interested in collecting fees for managing money than generating top returns for their backers. 

Presidential hopeful Mitt Romney, co-founder of Bain Capital, is a fellow private equity underwriter (PEU).   Consider Romney's PEU role, as described by the unhappy investor:

“The resources and expenses investing through limited partnership structures is a pain in the backside,” she said. “It is as if you make it deliberately hard for us, you make it hard to get in, the tedious fundraising process, the fight for allocations, the pain of partnership documents, the fees. And not just the headline figure, all the tricks we have to look out for such as transaction fees, monitoring fees, fees for paying the fees for your software licenses, fees for visiting limited partners. Come on guys, pay your own bills.” 

Private equity gets preferred taxation on carried interest.  Carlyle's co-founders are on record as hating taxes, which was the subject addressed by co-founder, David Rubenstein, the firm's public face..  CNBC reported:

“The most important thing the next president has to do is resolve the uncertainty of the debt and deficit,” Rubenstein said, adding that it was impossible to predict whether either President Barack Obama or Republican nominee Mitt Romney would be better for the economy.

Rubenstein, ever the marketer, dangled higher returns during times of disequilibrium,

“You make most of your money when you’re doing things in an uncertain environment,” he said. “So disequilibrium is the kind of thing that people like us like.”

How many Carlyle funds is Rubenstein marketing at the moment?  It was kind of Andrew Ross Sorkin and CNBC to give him free aim time.  Rubenstein used it to give a basic description of private equity, so people could understand Mitt Romney's background.  Joe Kernan lobbed a softball question on what PEU's need tax policy wise to invest in U.S. companies and keep jobs here:  Rubenstein replied:

1.  Certainty - we need to know what the tax policy will be for the next couple years.

One thing's certain, Rubenstein worked hard on Capital Hill the last six years to keep private equity's preferred taxation on carried interest.

2.  Certain incentives would also be valuable.

Rubenstein knows how to milk Uncle Sam's trillions in annual spending.  It pulled out of bidding on Virginia's ports after finding the expectation that it would need to pay much higher local taxes.

3.  Opportunities to manufacture in the U.S. at lower prices than people thought was the case.

This comes as result of direct and indirect government subsidies, as well as dumping worker pension funds. 

4.  Capital gains taxes will likely be higher in any budget deal, but lower than they've been for the last decade or so.  

The Bush tax cuts went into effect in 2001.  So for the last decade, the capital gain rate has been 15%.  That's the same rate PEU partners are charged on their investment returns, known as carried interest.  The Carlyle Group is a virtual nonprofit, like a church or safety net hospital. 

Rubenstein's PEU grand bargain has a slightly higher capital gains tax, alongside cuts in entitlement programs.  While Carlyle's operating companies cuts pensions, their co-founders support cutting Social Security and Medicare benefits.

Give the big money boys their certainty.  I expect PEU sponsored politicians to do just that.