In a riveting conversation, David Rubenstein, a pioneer in private equity, philanthropist, and author, shares his insights on the dynamics of private equity, the future of the industry, and his philanthropic endeavors.
He also discusses his leadership roles in institutions like the Smithsonian, Kennedy Center, and the National Gallery of Art.
The Global Spread of Private Equity
Private equity is gradually expanding into emerging markets.
However, this process is slow as the infrastructure, talent, financing markets, and exit markets in these regions are not as developed as they are in the developed markets.
The Endurance of the ‘Two and Twenty’ Fee Structure
The ‘two and twenty’ fee structure in private equity, which includes a 2% management fee and 20% performance fee, has proven its durability over time.
This structure is deemed appropriate by the market and its origins can be traced back to Venetian ship owners or the first hedge fund established in the mid to late 1940s.
The Biggest Threat to American Prosperity
The greatest risk to American prosperity is the rise of China.
China’s larger population and different type of capitalist system could lead to it surpassing the US as the world’s largest economy, which could have significant implications for the US’s geopolitical power and prosperity.
Predicting the Future of Private Equity
The future of private equity is a subject of ongoing debate among industry professionals.
Key questions include whether private equity will continue to grow exponentially, whether the carried interest will survive, and whether the rates of return that private equity can achieve will remain as attractive as they have been.
The Future of IPOs and SPACs
While SPACs have simplified and reduced the cost of the IPO process, they are unlikely to completely replace IPOs. The role of intermediaries in IPOs provides a level of vetting and review that can be reassuring to investors.
The Core of Private Equity
Private equity revolves around enhancing the value of a company.
This process typically involves acquiring underperforming companies, improving their management or incentivizing existing employees, and selling the company after a few years, often yielding a return of around 20% per annum.
Private equity is a business of adding value to a company. In buyouts, you’re taking a company that isn’t performing that well and you’re adding better management or incenting the incurred employees to do a better job. – David Rubenstein
Venture capital involves taking bets on entrepreneurs and concepts, whereas private equity involves due diligence and projecting cash flows based on previous cash flows. I would say it’s a little bit more scientific and less of a gamble than venture capital. – David Rubenstein
The Significance of the Financial Sector
The financial sector plays a crucial role in the real economy and attracts a significant portion of talented individuals.
Many talented people are now gravitating towards entrepreneurial startups, which could be considered part of the financial sector.
Cryptocurrencies: A Risky Bet or a Valuable Service?
Cryptocurrencies are perceived differently by different people.
Some view them as zero-sum, while others see them as providing a valuable service.
Investing in cryptocurrencies is likened to gambling, with the advice to only invest a small portion of one’s net worth.
The Evolutionary Journey of Private Equity
Private equity has undergone significant evolution since its inception.
When Carlyle was launched in 1987, the term ‘private equity’ didn’t exist and the industry was vastly different.
Most businesses evolve significantly from their original business plans.
The Art of Recruiting Talent
When recruiting, it’s important to look for hardworking, reasonably intelligent individuals who have a vision for their life, are easy to work with, and have some humility.
Great investors often have a high degree of IQ, but it’s their focus and desire to prove they’re right that sets them apart.
The Symbiosis of Wall Street and Washington
There is a symbiotic relationship between Wall Street and Washington, with each relying on the other.
People on Wall Street often believe that Washington must know what it’s doing because it keeps passing bills, while people in Washington believe that Wall Street wouldn’t allow certain things to happen if they weren’t feasible.
Contrasting Private Equity and Venture Capital
Private equity and venture capital demand distinct skill sets.
Venture capital involves betting on entrepreneurs and concepts, while private equity requires due diligence and projecting cash flows based on previous cash flows, making it more scientific and less of a gamble.
