A Goldman Sachs podcast recently featured David Rubenstein. Business Insider reported:
The billionaire investor and Carlyle cofounder also forecast superior returns in private markets than public ones.
"Almost every year for the last 30 years or so, private equity has outperformed public-market indexes, by anywhere from 200 to 500 basis points on average. I suspect that will continue, and it will happen in part because the economic incentives are incredible. You get 20% of the profits on somebody else's money if you do well, above a minimum return in some cases. As a result, I think people are highly motivated to do well, and they're very careful."
Careful? This is the same David Rubenstein who called buying crypto "titillating" and interviewed FTX CEO Sam Bankman-Fried as his peer for Bloomberg in September.
Carlyle gets to calculate their outperformace data as there are no standard measures. Did Rubenstein include the implosion of Carlyle Capital Corporation in those figures? Carlyle ran away from CCC's stinking carcass after it entered bankruptcy. Rubenstein sold Carlyle Capital Corporation as a low risk, safe investment and for that he was sued.
Another safe investment, pipeline operator SemGroup, entered bankruptcy after executives there rang up over $4 billion in energy trading losses. After shareholders sued Carlyle pleaded "puffery" as their defense.
Defendants also contend many of the alleged statements are immaterial as a matter of law because they are "simply immeasurable or incapable of verification." [Doc. No. 211, pp. 28-29].[ 5 ] Vague statements of corporate optimism or "puffery" cannot be materially misleading because "generalized statements of optimism are not capable of objective verification and reasonable investors do not rely on them in making investment decisions."
Note Rubenstein's use of figures in his sales talk but when sued for same, Carlyle stated they aren't real measures and no one would use them as a basis for investment. This double talk should be front and center as investment professionals push private equity for individual unaccredited investors.
CNBC interviewed the CEO Matt Brown of CAIS, an alternative investment platform for financial advisors. CAIS provides those advisors access to hedge funds, private equity, private credit, real estate and other alternatives. Brown recommends small investors devote 20% of their funds toward alternatives.
He said "due diligence" is critical for small investors concerned about funds not marked to market, which is the case for private equity. As private equity is opaque and there are no standard measures it is nearly impossible for anyone to conduct due diligence.
"We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest," Mr. Buffett said Saturday at Berkshire Hathaway's annual meeting.How can one devote 20% of their portfolio to an area where due diligence is nearly impossible? That's the ask.
Levered equity should have more risk, not less. Small investors should be wary of the impervious blob of private equity and not get lured by the David Rubensteins and Matt Browns of the PEU world.
Update: Grant Williams posted a warning about private equity.