Carlyle Cites PEU Paradox

Carlyle Group co-founder David Rubenstein shared in a recent earnings call:

"I think, final comment, what I’d call the paradox of private equity is that returns are coming down, prices are high. There’s a lot of dry powder by normal standards. So why are so many people giving so much money to people like us? Because they see everything else being less attractive" 

What has Carlyle done in the past to earn returns for investors?  It launched Carlyle Capital Corporation during an era of high prices and lots of dry powder.  Carlyle's website states:

When The Carlyle Group created Carlyle Capital Corporation in 2006, it was designed to provide attractive risk-adjusted returns for shareholders by investing in a diversified portfolio of fixed income assets consisting of U.S. government agency AAA-rated RMBS securities and leveraged finance assets. Due to the low-risk, low-return nature of the U.S. government agency-backed securities, a large position (and thus a correspondingly large amount of leverage) was required to realize gains substantial enough to warrant the investment. At the time, this approach was time tested in the market for these types of assets.  Unfortunately, extreme volatility and market movement during this liquidity crisis created a hostile environment for CCC and similar types of vehicles.

Carlyle promised to make back investor losses:

David Rubenstein, co-founder of the Carlyle Group, on Thursday pledged to compensate investors hit by the collapse of a $22bn mortgage-backed securities fund his private equity group floated seven months ago. “We have stood behind our products in the past and we are working on ways to address the losses that are being suffered by investors,” Mr Rubenstein told the Financial Times

One investor did not fill compensated for his CCC losses and chose another route for payback, bankrolling a lawsuit against Carlyle for its representations and actions regarding Carlyle Capital Corporation.

There are other paradoxes of private equity, some identified by the business media.  I'll offer:

1.  Pension funds invest in Carlyle, which has been known to dump employee pensions as part of its takeover strategy.
2.  Family offices invest in Carlyle, whose co-founder David Rubenstein refuses to leave an inheritance to his children to establish a family office.
3.  Preferred carried interest taxation continues despite ten years of overwhelming popular support for billionaires to pay a higher tax rate than their gardener or secretary. 

The PEU industry grew mightily from the last paradox.

At a Credit Suisse forum in Miami, in 2013, Rubenstein said of private equity, “Carried interest is really what the business has historically been about—producing distributions for your investors from good sales and I.P.O.s . . . and getting twenty per cent of the profits for yourself.” He went on, “That’s how we’ve really grown our business.” 

That's how Mr. Rubenstein likes it.  America's PEU sponsored politicians kept his wish to continue carried interest despite little to no public support.  That's my PEU paradox for the week.

Update 10-4-17:  ZeroHedge wrote about PEU high prices and nearly $1 trillion in dry powder.  Lever up!