Carlyle’s Rubenstein Sees ‘More Normal Limit’ Of $5B-$7B On Deal Size

Rubenstein said the $20 billion-plus bid by Silver Lake for Dell Inc. marks a unique situation with a motivated chief executive, Michael Dell, who owns a large stake in the firm, rather than the start of a new era of huge buyouts. The Blackstone Group and Carl Icahn are also mulling offers for Dell.

After mega-deals such as the buyouts of TXU and RJR failed to provide significant returns on capital years later, deals of around $5 billion to $7 billion will be “the more normal limit” on deal size as the economic recovery continues, with occasional buyouts of $10 billion or maybe up to $15 billion, he said.

“It’s unlikely you’ll see five private equity firms coming together as they did in the past,” Rubenstein told the audience of several hundred at his keynote address at the Boston Seaport Hotel & World Trade Center.

Instead, limited partners prefer to reserve additional capital for specific transactions, he said. This allows LPs to avoid paying carry and management fees on investments in specific deals.

“Investors want…to co-invest,” he said. “They are now saying to PE firms like us, ‘If you have a big deal, don’t call up one of your brethren in the private equity world, call us up,’ and that’s what you’re going to see more of.”

Reuters News Editor-in-Chief Stephen Adler, who interviewed Rubenstein on stage, asked if a federal anti-trust case against private equity firms, which recently moved forward in Boston, has also served as a deterrent for club deals.

 “I don’t think that’s a big factor,” Rubenstein said. “I think the biggest factor is that you have investors that are putting money into your funds and they’re saying, ‘We don’t really want to put all of our money in your funds, we’ll want to reserve some for co-investment, where we pick the deal and where we have no fee and no carry.’ I think that’s the driving force.”

Overall, Rubenstein said he’s more upbeat than pundits such as David Stockman, who just authored a book, The Great Deformation, about the fragility of the U.S. economy.

“I do realize that markets will go down, but it’s not something that makes me lose sleep at night because I realize that generally in private equity what we’re trying to do is create companies that will be more valuable over a longer period and we don’t’ try to market time quite as much,” Rubenstein said. “As a general rule of thumb, private equity people tend to be more optimistic about the future and in my case, more optimistic than David Stockman.”

Rubenstein said the U.S. will continue to dominate the global private equity business over the next five years, but other global players may emerge after that. Carlyle, along with Blackstone Group, TPG Capital, Kohlberg Kravis Roberts & Co., Apollo Global Management, Bain Capital and Oaktree Capital Management make up the seven “truly global” firms with $75 billion or more under management, he said.

“They’re likely to continue the same strategy of having multiple funds, diversifying their base from just one area, and using their brand to try to raise money in different areas and get deals done in different areas,” he said.

After emerging from the recession, the private equity business is on a “pretty good” trend of fundraising and distributions and outperforming other asset classes over the last four or five years.

Investors want smaller funds, lower fees, and they want a greater alignment of interest between general partners and limited partners, he said.

Also, governments around the world have concluded that private equity is not a cause of systemic risk and are generally leaving private equity alone; taxation issues that have been discussed are not really on the front burner, he said.

But Rubenstein said the private equity industry, represented by the Private Equity Growth Capital Council and other groups, faces an image problem.

“I wish the private equity business could do a better job of explaining what it actually does to create value, but we haven’t done a really good job with that,” Rubenstein said.  “In baseball, they invented a statistic many years ago called saves—what a relief pitcher would have—he didn’t have wins, but he had saves. We don’t really have a good statistic for how many jobs we prevented from being lost by turning around companies…We have to do a better job of explaining what it is that private equity people actually do that makes society somewhat better than it was before.”