Carlyle Group (CG) co-founder David Rubenstein spoke with Bloomberg TV’s Cristina Alesci in Berlin, Germany today. Rubenstein said that buyout firms will put “much more” money to work this year as deals pick up. He said, “We are going to see a pickup in M&A activity and a pickup in corporate buyer activity…I do think that this year we will see much more money deployed than you did see last year.”
Rubenstein also said, “I think the Fed has done an extraordinary job for the United States and is really the hero of the last four years…The Fed has been a real hero to the U.S. economy and the global economy…I suspect they will keep interest rates pretty low for a while.”
Rubenstein on the Federal Reserve:
“I think Fed has done an extraordinary job for the United States and is really the hero of the last four years. If the fed had not taken action, action that probably was not in its original charter — remember, the Fed was supposed to be set up to regulate the monetary supply and to control inflation. But the Fed in recent years has taken on the mission of saving the U.S. economy and spurring economic growth. That really wasn’t its main mission. By doing that, the Fed has been a real hero to the U.S. economy and the global economy. The fed has some policies they’re looking at changing, perhaps, but I suspect they will keep interest rates pretty low for a while. That’s been a very good fuel for economic growth in the United States.”
On the consequences of the low interest rate environment:
“When interest rates are as low they are and kept somewhat artificially low, they cannot be kept that low forever. As Herb Stein, a former chair of the Council of Economic Advisors once said, if something can’t keep going on forever it won’t. And low interest rates will not keep going on forever. At some point, they will rise and people have to anticipate that will happen. The greatest fortune to be made in the United States in the next two or three years is going to be made by somebody who determines when the interest rate rise will occur. If somebody will do what John Paulson did in effect in subprime debt, have is the perfect derivatives and take advantage of that. Market rates will go up at some point. As long as they are low I think it’s an attractive opportunity to use those low interest rates to fuel growth and to make acquisitions, buyouts or other kinds of corporate M&A.”
On when interest rates will go up:
“I wish I knew. If I knew, I would be doing exactly what I said. I suspect within two or three years at some point, you will see interest rates rise. Not dramatically, but somewhat a rise.”
On whether investors should be worried about the Fed taking paper losses:
“The Fed made a lot of paper gains in some of its earlier investments so maybe this would counter what they did. The main concern Americans should have is not about The Fed’s taking paper losses–that may or may not happen, who knows. I suspect the main concerns is whether we get our unemployment rate below 8% and sustain it below that and actually our growth rate above 2.2%. The best way to solve economic problems in the United States, without doubt, is economic growth of 4% or 5%. If we can have that kind of growth rate, maybe fueled by what the Fed is doing, we could solve all lot of our debt and deficit problems. But unfortunately, we have had growth rates at 2% or lower than that for the past couple of years.”
On the M&A environment this year and with the exception of Dell, why private equity hasn’t jumped in yet:
“Last year, you did not see as much M&A or buyout activity in the latter half of the year because people were worried about the fiscal cliff situation as well as the elections. People wanted to see what the outcome was. Now that we know the outcome was and we know that there are some issues that the federal government still hasn’t resolved but likely it will be resolved–the debt limit, for example–I think you will see a pickup in M&A and corporate buyout activity. Interest rates are low, there are a fair amount of deals out there. We’ve seen in the last couple of months deal flow pick up in the United States. It is not as heroic as it was in 2004, 2005, 2006, but we have seen it pick up and I think this year, you’ll see much more money deployed than you did see last year in the buyout world.”
On how much more Carlyle plans to do:
“I cannot say exactly what we’re going to do. As a publicly traded company, I go to jail every time I say something to specific, so I’m going to be very careful. I would say simply that we have projected and we have said to people that we expect, but cannot guarantee, that we will probably invest more this year than we did last year.”
On why megadeals have not worked historically for private equity:
“If you take the largest deals that have ever been done, they have not yielded great rates of return. If someone were to look at the history as a predictor of the future, you would say, name the five biggest buyout deals that have been done. Did they yield heroic rates of return? Probably not. As a result, people would say that it is easier to get good rates of return with deals that consume less equity and therefore it’s easier to return that equity. Law of size has some advantages to it when you are doing some types of deals. You can get better deals. You can buy more mature management teams when you’re dealing with companies that are maybe $1 billion to $5 billion in purchase price. When you are buying a company that has a $20 billion or $40 billion market cap, it may be very difficult to get the rates of return that you want.”
On whether there is a deal size that is a bridge too far:
“I would not say a bridge too far. I would say, in our case, we tend focus on deals that are in our sweet spot. That is probably deals that consume equity of maybe $350 million up to $1 billion and the total purchase price might be below $5 billion in size. We like deals in the $1-2-3 billion purchase price range. That is what we are comfortable with and what we have done for 25 years. We’re not somebody that has gone to see the mega deals and that it hasn’t been our sweet spot. It has been good for other people, but not something we have pursued.”
On compensation:
“We have about 110-115 partners in our firm. I take virtually no salary, for example. I have a modest salary. I took no bonus last year. The other co-founders took no bonus. I make virtually all my money on the dividends of my stock and my personal investments. I am not compensated very high compared to many people in our firm.”
On owning the majority of Carlyle stock:
“That is an owner. That is different than compensation and high salary…it is not as high as some people thought it would be. Right before we went public, some people thought we owned more.”
On whether his ownership stake will change over the next few years:
“Nothing is forever. I’m 63 years old. I have decided to follow the Pope’s lead and to retire when I’m 85, so I have 22 years to go. Gradually over those 22, years I suspect my stake will go down. Maybe I will sell some stock. I do not have any plans to sell stock at the moment. But at some point, I might sell stock. Gradually, more and more people will get in and get new stock. That is the way the world works. There will be an evolutionary change at some point. But for the foreseeable future, we don’t expect to see any major changes and I do not expect to be selling my own stock.”
Courtesy of Bloomberg Television
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