Far Cry from the Glory Days

These days, big buyers are more likely to co-invest with limited partners

Large club deals, in which five or six private equity firms team up to do a multi-billion-dollar leveraged buyout (LBO), are becoming less common place, according to David Rubenstein, co-CEO and co-founder of the Carlyle Group LP (Nasdaq: CG).

Today, the bulge-bracket PE firms, such as Carlyle, Apollo Global Management LLC (NYSE: APO), the Blackstone Group LP (NYSE: BX) and Kohlberg Kravis Roberts & Co. (NYSE: KKR), are more likely to co-invest with limited partners (LPs) in mid-range deals to avoid fees, he said at a recent conference in Boston.

"When there's that much equity involved, it's hard to get the kinds of returns you want," he said regarding large buyout deals.

A $20 billion-plus bid, such as Blackstone's take-private offer to Dell Inc., is generally not replete with success, he said. Michael Dell "wasn't thrilled to hear that," Rubenstein quipped, citing a frank dinner conversation he had with the computer company's founder.

Big buyers, such as Carlyle, are more likely to co-invest in transactions with price tags between $5 billion and $7 billion, as a means of spreading the risk and generating more favorable initial rates of return.

While megadeals started to come back a bit in the first quarter of 2013, Rubenstein expects cases involving multiple billions of dollars and multiple PE firms to be few and far between.

In December 2012, the firm partnered with two other financial buyers when it agreed to purchase investment banking firm Duff & Phelps Corp. for about $665.5 million. The consortium included Greenwich, Conn.-based Stone Point Capital LLC, Swiss bank Pictet & Cie and Luxembourg-based Edmond de Rothschild Group.

Syndicated deals are a far cry from "the glory days of private equity," Rubenstein said, referring to the period between 2002 and 2007. Today, many of the problems that surfaced at the start of the economic downturn in 2008 continue to affect where PE firms put money to work. Fundraising still poses a challenge in many respects, and dealmakers are still shying away from the European Union, he said. The fact that the government of Cyprus, for example, considered wiping out Cypriot bank accounts has unnerved investors, who worry other countries may do the same in a financial crisis, he added. Since 2008, however, sponsors are more resilient, he added. Emerging markets are increasingly getting more attention and capital. While the biggest firms are currently U.S.-based - Apollo Group Inc. (Nasdaq: APOL), Bain Capital, Blackstone, Carlyle, KKR, Oaktree and TPG Capital LP - that is expected to change as more funds raise capital and invest abroad, said Rubenstein who, prior to Carlyle, served as a domestic policy adviser to President Jimmy Carter. This will lead to a more global PE industry, where firms based in New York or Boston may not be the norm.

Meanwhile, Washington, D.C.-based Carlyle continues to invest in alternative asset classes, Rubenstein added. This includes corporate credit, commodities and certain sub-sectors of real estate. For example, Carlyle acquired Monarch Place Piedmont, a 149-unit assisted living community in Oakland, Calif., in January. Carlyle has roughly $170 billion in assets under management across 113 funds and 67 funds of funds.

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