Monday, December 9, 2013

The Rubenstein PEU Fascination

Forbes interviewed Carlyle Group co-founder David Rubenstein, one of the most public faces in private equity underwriting (PEU).  They found five fascinating things about Rubenstein:

Number 1: Sub-Saharan Africa and Other Emerging Opportunities

When you have a young population combined with enormous minerals extraction opportunities and a growing consumer market, you also have enormous potential opportunity.
It sounds like the place for a huge PEU profitgasm.  Recall that Carlyle mostly buys and sells companies for huge profits.  Some of those companies are in the energy space and others in consumer goods/services.  Carlyle and its ilk hollowed out America's middle class during the President George W. Bush years and Africans are supposed to trust the latest group of predatory white PEU men looking to profitably trade local companies?   

Number 2: Private Equity Investing: Now and the Future

As for investing in private equity now, David says it’s a wonderful time to sell since company valuations are so high, but a tougher time to invest for the same reason.  He is bullish, naturally, on private equity, and believes that more investors will have an opportunity to invest in private equity funds. David believes that in future years, investors may even be able to access private equity funds in their company 401ks.
High valuations echo 2007-2008, the run up to the financial crisis. Remember Rubenstein is the consummate PEU salesman and Forbes gave him free promo space.  No matter what's going on it's the perfect time for high net worth individuals and sovereign wealth funds to invest with Carlyle.

Everything distinctive about private equity, that supposedly contributed to Carlyle's incredible 30% annual returns on equity, will have disappeared when the SEC allows individuals to stock their retirement funds with PEU investments.  Investors who believe in Carlyle can become unit-holders today, have no say on anything and sit at the foot of the master's table waiting for crumbs to fall.  

Number 3: About the Fed and Future Taper Tantrums

We’re in uncharted waters and no one really knows what will happen when the Fed pulls back its bond buying program – even the Fed.
The Carlyle Group feasted off low interest financing, thanks to the Fed.  Carlyle executed  numerous liquidity recaps, i.e. loaded affiliates with more debt in order to pay themselves (sponsors) huge dividends.  If interest rates go up many of these debt instruments would likely explode, long after Carlyle monetized the affiliate for a multiple of their original investment (2 to 10 times).

Number 4: The Importance of Patriotic Philanthropy

While many may feel that the Federal government already takes too much of our money, David points out that it just doesn’t have the money to make the necessary renovations to our national treasures and symbols, like the National Mall in Washington, DC. He thinks that everyone can participate in patriotic philanthropy in some way and help preserve our beloved historical sites.
Rubenstein saved hundreds of millions in taxes from Carlyle's being a virtual nonprofit, and paying preferred carried interest tax rates on PEU income.  The Carlyle Group located in Washington, D.C. for the very purpose of being close to Uncle Sam's wallet, currently spending $13 trillion per year.

PEU's want lower corporate taxes and the D.C. crowd seems determined to comply.  Rubenstein knows his banks wouldn't fund the annual budget deficits our federal government runs.  He also knows the Fed will.  Carlyle will suckle for as long as possible on the federal teat by rotating in and out of companies services the government funds (which leads to his next fascinating statement).

Number 5: Making the Case for Higher Education

“Over the course of history, education produces people who are better citizens,” David said. “We should want people who are better educated.”

Knowledge and wisdom are characteristic of people who are better citizens.  The people have been repeatedly lied to by our political and business leaders.  Better citizens learned "eliminating nonexistent weapons of mass destruction opened up new markets to Western goods or gave American branded multinationals access to our oil."

Rubenstein wants citizens to believe "his greed is good" and "crony capitalism is free market capitalism."  I hope many in our league of humanity know better.  That includes Africa and 401(k) holders.