David Rubenstein Sees More Investors Interested in Private Equity

David Rubenstein

6 May 202007:01

Summary

TLDRIn this engaging discussion, David Rubenstein explores key trends in private equity, business strategies, and major global events. He reflects on the rise of large-scale buyouts, the shifting landscape of private equity, and how returns and investor dynamics have evolved. Rubenstein also shares insights into tech giants like Apple and Microsoft, government regulation, and the impact of SoftBank’s Vision Fund. Additionally, he comments on President Trump's impeachment proceedings, business community sentiment, and his interactions with leaders like Boris Johnson, Tim Cook, and Ivanka Trump.

Takeaways

💼 There's interest in interviewing notable figures like Greta and British Prime Ministers such as Boris Johnson, Tony Blair, and David Cameron.
📈 Buyout sizes were significant before the Great Recession, but larger deals have become rarer, with recent ones being in the range of $5-10 billion.
🏢 The number of private equity firms has grown substantially, from 250 when Carlyle started to 8,500 today, with a handful dominating large transactions.
💰 Investors like sovereign wealth funds and public pension funds are more interested in private equity, seeing it as a hedge against recessions.
📉 Expected rates of return have decreased; private equity investors used to expect 20%, but today they are content with around 15%.
🧐 Raising capital has become easier, but deploying it effectively remains a challenge for private equity firms.
🚀 Tech companies have seen massive growth, with examples like Tim Cook and Satya Nadella leading companies to trillion-dollar market caps.
🏛️ Historically, the US government has intervened when companies grow too large, but that hasn't happened yet with today's tech giants.
⚠️ Lessons from the WeWork collapse highlight the dangers of overvaluation and poor corporate governance, particularly when large amounts of capital are deployed.
🇺🇸 Despite the impeachment of the President, the US economy and business community seem unaffected, with business leaders still supporting the administration.

Q & A

Who is David Rubenstein referring to when discussing notable figures at the event?
-David Rubenstein mentions several British Prime Ministers, including Boris Johnson, Tony Blair, and David Cameron, as well as other influential figures such as Michael Dell and Jeff Bezos.
What does Rubenstein mean by 'scale' in the context of private equity transactions?
-Rubenstein is referring to the size of buyouts and investment deals in private equity. He notes that while large buyouts have historically been significant, they have become more challenging post-recession, with current buyout sizes typically in the range of $5-10 billion.
What is one of the major changes in private equity that Rubenstein highlights?
-Rubenstein points out that private equity firms have become more diversified, engaging in private credit, infrastructure, and real estate in addition to traditional private equity. Additionally, large private equity firms are now publicly traded, adding a new dimension to their operations.
How has the expected rate of return in private equity changed, according to Rubenstein?
-Rubenstein notes that in the past, private equity investors sought net internal rates of return of 20%. Today, investors are content with a 15% return due to lower interest rates.
What is Rubenstein's perspective on raising and deploying capital in the current environment?
-While raising capital has become easier due to the acceptance of private equity as a mainstream asset class, Rubenstein acknowledges that deploying capital effectively is more challenging.
What lesson does Rubenstein take from the WeWork situation?
-Rubenstein highlights that overly large investments, like those made by Softbank's Vision Fund in WeWork, can result in overvaluations and governance issues. He sees this as a generational mistake, one that has been made before and will likely happen again.
What has been Rubenstein’s observation regarding the success of major tech companies?
-Rubenstein marvels at the immense growth of tech companies like Apple and Microsoft under leaders like Tim Cook and Satya Nadella, noting their rise to trillion-dollar market capitalizations. However, he cautions that such rapid growth may not be sustainable forever.
What insight does Rubenstein offer about the current political climate in the U.S., particularly regarding impeachment?
-Rubenstein finds it unusual that, despite the impeachment trial of the U.S. President, the economy and business community remain largely unaffected and supportive of the administration's policies.
Was impeachment discussed in the meeting Rubenstein attended with the U.S. President?
-No, there was no discussion of impeachment during the meeting. The focus was on topics like job creation, with speeches from the President and his daughter Ivanka Trump.
How does Rubenstein describe the current perception of private equity by institutional investors?
-He explains that institutional investors like sovereign wealth funds and public pension funds view private equity as a hedge against economic downturns and have increased their allocations to private equity as a result.

Outlines

00:00

🎤 David Rubenstein on Dream Interviews and Business Leaders

David Rubenstein discusses his desire to interview notable figures such as British Prime Ministers and highlights key CEOs and heads of state who are present at the event. He expresses interest in scaling business transactions and reflects on buyouts and their evolution since the Great Recession. He mentions the difficulties in executing large buyouts today compared to past decades, where the largest buyouts had a significant impact but were not always successful.

05:01

📈 The Evolution of Private Equity and the Challenges of Scaling

Rubenstein delves into the growth of the private equity industry, noting that when he started, there were only 250 firms globally, while today there are around 8,500. He observes that a handful of the largest firms dominate the market and explores how these firms have diversified their investments into private credit, infrastructure, and real estate. He also addresses the challenges of achieving high rates of return, with expectations shifting from 20% to 15% due to lower interest rates. Capital is easier to raise but harder to deploy in the current market environment.

💼 Tech Giants' Success and Future Challenges

Rubenstein praises the growth of tech giants such as Apple and Microsoft under leaders like Tim Cook and Satya Nadella, whose companies have seen their market caps soar into the trillions. He reflects on the unprecedented success of these firms and predicts that such rapid growth may eventually plateau. He warns that when companies reach such high levels of profitability, government scrutiny often follows, though it has not yet impacted these firms.

🚨 WeWork and Lessons from Failed IPOs

Rubenstein reviews the lessons learned from WeWork's failed IPO and Softbank's Vision Fund. He argues that deploying large amounts of capital into one deal, especially at inflated valuations, can lead to problems, citing governance and overvaluation concerns. However, he notes that mistakes are part of every generation of business, and the WeWork situation is unlikely to be the last of its kind.

🇺🇸 Impeachment and the Business Community's Reaction

Rubenstein comments on the unusual situation surrounding the impeachment of the President of the United States, noting that despite the political turmoil, the economy and business community remain strong. He describes a breakfast meeting with the President, where business leaders expressed support for his policies. Despite the ongoing impeachment trial, business leaders seem unbothered, and the President did not face any questions about impeachment during the meeting.

Mindmap

Keywords

💡Scale

In the context of the video, 'scale' refers to the size of business transactions, specifically buyouts and deals in the private equity world. The concept is tied to the size and complexity of investments. For example, the speaker discusses how, before the Great Recession, buyout sizes were large but some didn't work out. Now, while there are fewer massive deals (e.g., $15-25 billion buyouts), scale still plays a crucial role in the strategic combinations of private equity firms.

💡Private Equity

Private equity refers to investment funds that buy and restructure companies that are not publicly traded. In the video, the speaker mentions how private equity has evolved from being a niche or 'alternative' investment class to becoming more mainstream, with increased involvement from sovereign wealth funds and public pension funds. The focus on private equity highlights its importance in today’s financial landscape, especially in large transactions and infrastructure investments.

💡Buyouts

Buyouts refer to the acquisition of a company, often by a private equity firm, to gain control and restructure it for profit. The speaker discusses how the scale of buyouts has changed over time, with notable examples like Michael Dell’s highly successful buyout. The video also highlights that larger buyouts have become less frequent in recent years, mainly due to economic caution following the recession.

💡Sovereign Wealth Funds

Sovereign wealth funds are state-owned investment funds typically derived from a country’s reserves, used to invest in various assets for financial returns. In the video, they are highlighted as significant investors in private equity, with increasing amounts of capital to deploy. These funds have become critical players in the global financial landscape, particularly in large-scale investments.

💡Recession

A recession is a period of economic downturn marked by reduced industrial activity, higher unemployment, and lower consumer spending. The speaker references the Great Recession as a time that caused changes in buyout sizes and private equity strategy. The video also touches on how private equity firms have adapted to work through potential future recessions, positioning themselves as resilient investment vehicles.

💡Corporate Governance

Corporate governance refers to the rules, practices, and processes by which a company is directed and controlled. It is brought up in the video in the context of the WeWork fiasco, where governance issues were partly responsible for the company’s downfall. The speaker uses this example to illustrate how improper governance, especially in large firms like those backed by the Softbank Vision Fund, can lead to significant financial problems.

💡Tech Companies

Tech companies are a focal point in the video, particularly giants like Apple and Microsoft, whose market caps have grown astronomically in recent years. The speaker marvels at the staggering size and profitability of these companies under leadership like Tim Cook and Satya Nadella. The video discusses how these companies have managed immense revenue growth and free cash flow but also acknowledges that this growth may not be sustainable indefinitely.

💡Impeachment

Impeachment is a formal process in which a sitting president or other government official is charged with misconduct. The video references the impeachment trial of a U.S. president, noting the paradox of a booming economy and widespread business support despite the ongoing political drama. This disconnect between political turmoil and economic stability is presented as a curious aspect of modern American governance.

💡Vision Fund

The Vision Fund, managed by SoftBank, is one of the largest venture capital funds in the world, with a focus on tech startups. The video references the Vision Fund in the context of the WeWork debacle, where excessive capital deployment into a single company at inflated valuations led to major financial and corporate governance issues. The fund is used as an example of the risks associated with deploying too much capital in high-growth but unstable companies.

💡Public Pension Funds

Public pension funds refer to pools of money set aside by governments to fund the retirement of public sector workers. These funds have become major investors in private equity, as mentioned in the video. Their importance has grown as they seek higher returns than traditional investment avenues, such as public equities, in order to meet long-term financial obligations to retirees.

Highlights

David Rubenstein expresses interest in interviewing prominent figures like Greta Thunberg, as well as potential interviews with British Prime Ministers, including Boris Johnson, Tony Blair, and David Cameron.

Rubenstein discusses the evolution of private equity buyouts, noting how the size of transactions has changed since the Great Recession, with fewer buyouts exceeding $15-20 billion in recent years.

Michael Dell's buyout, considered one of the largest and most successful ever, is highlighted as an example of large deals still working in certain cases.

Rubenstein reflects on the growth of private equity firms, from 250 firms globally when Carlyle was founded to over 8,500 firms today.

The increase in private equity investor interest, particularly from sovereign wealth funds and U.S. public pension funds, is a significant trend mentioned.

Rubenstein points out that private equity returns have decreased over time, with 15% net internal rates of return now considered strong, compared to the previous benchmark of 20%.

Rubenstein explains that raising capital has become easier for private equity firms, as the asset class is now considered mainstream, with major interest from sovereign wealth funds.

Tech companies like Apple and Microsoft have seen staggering growth in market capitalization, with Apple growing from $350 billion to $1.3 trillion under Tim Cook, and Microsoft experiencing similar growth under Satya Nadella.

Rubenstein references Herb Stein's famous economic adage: 'If something can't keep going on forever, it won't,' to caution that the massive growth of tech companies may not be sustainable long term.

Rubenstein touches on the increasing scrutiny tech companies might face from the U.S. government as they grow larger and more profitable.

The WeWork debacle is mentioned as a learning lesson from the past year, particularly regarding issues with high valuations and corporate governance.

Rubenstein emphasizes that mistakes like the WeWork situation are cyclical and occur in every generation, though they provide valuable lessons for future investments.

Rubenstein discusses the impact of the U.S. President's impeachment on the business community, noting that despite the impeachment, the economy is doing well and the business sector remains supportive of the President's policies.

Rubenstein shares insights from a breakfast meeting with the President, where discussions centered around job creation efforts, particularly led by Ivanka Trump, Tim Cook, and Ginni Rometty.

No questions about impeachment were raised during the President’s meeting, as the forum wasn’t intended for press-related inquiries.