Q&A: Private-Equity Barbarians

The so-called barbarians—private-equity firms with their eyes on big targets—are no longer at the gates. They're knocking them down. Last month, Blackstone bought out New York real-estate group Equity Office for $39 billion in the biggest private-equity deal in history. Soon after, KKR and Texas Pacific Group shattered that record with a $45 billion takeover of Texas energy firm TXU. Recent aggressive deals have prompted outcries—last week British union leaders branded private-equity firms "immoral asset strippers." To get a sense of the industry's future, NEWSWEEK's Emily Flynn Vencat spoke to David Rubenstein, a founding partner of the Carlyle Group, one of the elite private-equity firms. Excerpts:

Flynn Vencat: Private equity has a slash-and-burn reputation. But the TXU deal is quite green—the consortium is going to scrap plans for 11 new coal plants and invest in wind power. Is the industry changing?
Rubenstein: I don't think it's fair to say that this was ever a slash-and-burn industry. In the very early years, we didn't pay as much attention to the way the public viewed us as we should have, and so we just got that reputation. Private-equity people spend most of their time building companies and improving efficiency. The fact that the TXU deal involves working with the environmentalists isn't unusual. Often private-equity people work with those constituencies that are important to a company. It's more of surprise to the media world than to the private-equity world.

Private equity is in the spotlight now. People all over the world are focused on us. We are under a microscope, and anything we do that might be seen as inappropriate or politically controversial will get enormous scrutiny. So, we're letting people know what we actually do. We're trying to be less mysterious and more transparent. We're involving environmental [and] labor groups. We're not interested in destroying companies or hurting reputations or communities. We're simply not that type of people.

Moves into countries like China and South Korea are met with fierce resistance.
Whenever private equity shows up, there are always some concerns about motives. When the companies see what we can do to help our investors and improve employment, some of that concern goes away.

Where are the best opportunities now?
It's hard to compare, say, the United States and China, because there are different types of risks and rewards. There's nothing quite as good as getting a successful buyout in a developed country because you've got the instant ability to liquefy and a very transparent rule of law, combined with a good set of private-equity professionals. Due to diversification, it's important to be in a lot of places. Clearly, however, over the next several years, emerging markets will be a more important arena for private equity because there is less competition; the assets can be bought at more attractive prices and there are more things that can be done to improve the companies being bought. The opportunities in places like China, India, Brazil and the Middle East are pretty impressive.

Are there any particularly promising sectors?
Energy, telecommunications and financial services will continue to be three growing global businesses. Another industry becoming increasingly important in the United States is health.

Some say there's too much money in private equity chasing too few deals.
If you add up the total market cap of the NYSE and the NASDAQ, and you compare that to all the money available for private equity, we're only 3 percent. We're just a drop in the bucket. That said, the deals are getting larger and more visible. And there is a fair amount of money in the industry. You just have to ask yourself: "Why is there so much money?" Clearly investors are not giving money to private-equity professionals because of our charm and good looks. The reason is this: if you do an analysis of the last 10 years, what you find is that the top quartile of buyout firms have yielded returns so spectacular [35 percent] that there is virtually nothing else that one could legally do with money to get a better return.

Do you have any predictions for the industry?
I believe that buyout deals will grow—that there will be a $50 billion buyout deal done within the next two years. It's not impossible that a $100 billion deal will happen in the next several years. I think private-equity firms could become public. I also think you'll see increased blurring between hedge funds and private-equity funds. Finally, you'll also see very senior business executives leave public firms to go to private-equity firms, because they realize that private-equity firms can do many things that public firms cannot.

And what's next for Carlyle?
Carlyle's goal is to build the best global private-equity firm that we can, to provide greater returns for our investors and for ourselves. Remember, we are giant investors in our own firm. We are also trying to do things in a socially responsible and ethical way. We don't want to make money at the expense of these principles. We take great pride in our ethical track record over the years, and we continue to build a firm where people are proud to work.