At current high valuations, Carlyle is 'trying to sell a lot'

Singapore

DAVID Rubenstein is a man in a hurry. The billionaire co-founder and co-CEO of The Carlyle Group unloads his thoughts at the pace of machine-gun fire.

Aged 67, he is racing against his mortality to give away his wealth intelligently. His firm, one of the largest private equity funds in the world, is also briskly exiting its investments while stock prices remain high.

"We're trying to sell a lot, and we have sold a lot. We're very judicious in what we buy," Mr Rubenstein said in an interview last Monday.

People are paying earnings multiples for companies which are historically high, he said.

"I think when interest rates go further up, as I suspect they will, and the stock market goes down a bit, I suspect valuations will come down, but right now they are not cheap."

Mr Rubenstein was speaking to The Business Times after a keynote address at a recent market outlook event organised by Bank of Singapore. The private bank is understood to be working with Carlyle on a private equity fund product.

High valuations mean that future returns will be lower. But client expectations have come down, Mr Rubenstein said.

He noted that a net internal rate of return (IRR) of 15 per cent a year is still achievable and acceptable to clients. This means about 20 per cent a year before fees.

Moreover, private equity as an asset class has gained favour in the last five to 15 years, and is no longer regarded by governments as harming the environment or harming employee interests, he said.

A private equity firm typically locks up investors' money for five years or more, while it buys control of a company and possibly gears it up while making management and operational changes.

After restructuring the firm or expanding its business into new areas or markets, the private equity investor is able to sell or relist the firm for a hefty multiple. This had led to past net IRRs of over 20 per cent or even 30 per cent.

With high stock market valuations in recent years, private equity firms have been returning more money to investors than it is investing, Mr Rubenstein said.

There is also plenty of unspent cash in the industry. Carlyle itself had US$54.4 billion of such "dry powder" as of the third quarter of 2016. Industry-wide, there is more than US$1 trillion.

"You don't go to jail if you don't invest the money," Mr Rubenstein said.

The firm typically gets five years to invest, and Carlyle's funds have historically been almost fully invested, he said. "So you got a fair period of time and you can also get extensions, sometimes another year or two. So it hasn't been a big problem for us."

While the firm competes against its peers such as The Blackstone Group, KKR and Apollo Global Management in looking for deals, it still has opportunities amid a world flush with liquidity, he said.

"There's an infinite number of deals that are being looked at, at any given time. The world is always selling things and buying things. So you don't have to compete head-on with all your competitors on every single deal," he said.

"So some areas we have expertise in, we know it pretty well, and so we might have some advantage. You have a lot of contacts that might bring you a deal that is not fully shopped yet."

But Mr Rubenstein is a believer in mean reversion and business cycles. Towards the end of 2015 he was quoted as saying that a US recession might come in one to three years. This is simply because every seven years on average since World War II, the US gets hit by one.

Now, it has been more than seven years since the last cycle ended in 2008-9.

"Since World War II we've gone once 9.5 years without a recession, maybe we can go nine years without one now. But I think if the policies that (US President Donald) Trump announced he's going to pursue came into effect, and Congress went along with it, it might push the recession back down the road a bit," he said.

He added that a strong US dollar is a worry for the US economy as well as for emerging market companies who have borrowed dollar debt - a point he made again at the World Economic Forum in Davos, Switzerland, where he flew to after the interview. "I think it's strong now. I hope it doesn't get stronger."

He finds the energy, tech and healthcare sectors attractive. In Asia, he rates China as the top opportunity, followed by countries such as India, Japan and South Korea.

And if he had to start a business again, he said it might be something related to the Internet, or healthier food, sustainability, global climate change, and education.

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