The days of large club deals, in which five or six private equity firms team up to do a multi-billion-dollar leveraged buyout (LBO), are fleeting, 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 steer away from large LBOs and instead co-invest with limited partners (LPs) in mid-range deals to avoid fees, he said at Thomson Reuters’ Buyouts East conference on April 3 in Boston.
“These large buyout deals don’t produce a great return,” Rubenstein said. “When there’s that much equity involved, it’s hard to get the kinds of returns you want.”
A $20 billion-plus bid, such as Blackstone’s take-private offer to Dell Inc., is generally not replete with success, he argued. Michael Dell “wasn’t thrilled to hear that,” Rubenstein quipped, citing a frank dinner conversation he had with the computer company founder recently.
Big buyers, such as Carlyle, are instead doing deals somewhere between the middle-market threshold of $1 billion and the block-bluster LBO in the multiple billions. These days, they’re 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, (see “The Buyside: Are Blockbuster Mergers Back?”) Rubenstein expects cases involving multiple billions of dollars and multiple PE firms to be few and far between.
Recent deals show that Carlyle practices what it preaches. In December, the firm partnered with two other financial buyers when it agreed to purchase investment banking firm Duff & Phelps Corp. (NYSE: DUF) for about $665.5 million. As Mergers & Acquisitions reported previously, the consortium included Greenwich, Conn.-based Stone Point Capital LLC, Swiss bank Pictet & Cie and Luxembourg-based Edmond de Rothschild Group. (For more on the deal, see “Carlyle Heads Consortium to Acquire Duff & Phelps for $665.5M.”)
Syndicated deals are a far cry from “the glory days of private equity,” Rubenstein said, referring to the period between 2002 and 2007, when megadeals were more common, and it was easier to raise funds.
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, recently 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, private equity firms have rolled up their sleeves and become stronger, Rubenstein insisted. "We’re more resilient than we were before.”
One sign of new-found adaptability on the part of PE firms can be found in emerging markets, which are increasingly getting more attention and capital. Sponsors will become more dominant in other countries over the next several years, Rubenstein predicted.
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 seek to raise capital to invest in companies abroad.
Rubenstein, who prior to Carlyle served as a domestic policy adviser to President Jimmy Carter, said this will ultimately lead to a more global PE industry, where the strongest firms may not necessarily be headquartered in New York or Boston.
Meanwhile, Washington, D.C.-based Carlyle will continue to diversify and invest in alternative asset classes just as it has done, Rubenstein added. This includes corporate credit, commodities and certain sub-sectors of real estate.
For example, with a $2.3 billion real estate fund raised in 2011, Carlyle acquired Monarch Place Piedmont, a 149-unit assisted living community in Oakland, Calif., in January. For more on the fund, see the April cover story, “Beyond Location.” In total, Carlyle has roughly $170 billion in assets under management across 113 funds and 67 fund of funds.
For more on Buyouts East, see “Carlyle’s David Rubenstein, Robertson & Foley’s Rob Slee, and Evolution Capital’s Jeffrey Kadlic to Speak at Buyouts East.”