David Rubenstein, founder and managing partner of private equity giant Carlyle Group, says private equity financing is going to pick up later this year.
Though Moody’s and Standard & Poor’s predict write-offs will continue for many private equity deals consummated in recent years, Rubenstein cautioned that this will not be a large percentage of the deals.
"There will be some defaults. It may be 5 percent of the debt," Rubenstein said in an interview with Bloomberg TV. "It's not going to be 50 percent of the debt."
There is financing for deals now, but these are smaller, sub-billion-dollar projects, he says.
"By the end of this year, the banks will be considering $2 billion, $3 billion, $4 billion deals, with 50 percent of the deal in debt," Rubenstein predicts.
One of the reasons for the slow pace of deals is the reluctance of companies to sell their assets at a reduced price, Rubenstein says.
"Lack of leverage is not the problem. The asset prices need to go down another 10 percent to 20 percent in the next few months. Why pay 50 cents on the dollar now when you can pay 30 cents on the dollar in a few months time?" he says.
Rubenstein does not think that the Obama administration is going to reign in private equity with new regulations. Obama has been aggressively critical of the investment business in during recent days.
At the Davos conference, Henry Kravis, the famed investment banker, caused a stir when he suggested that private equity might be regulated by the government.
Rubenstein, however, thinks that hedge funds are more likely candidates for new regulation since they have the ability to cause a systemic risk for the global economy. "It is likely to governments will do something to restrain leverage," Rubenstein says.
Though the economic news has been sour of late and layoffs are mounting, some economists agree with Rubenstein that the government shouldn't be worrying about private debt.
They should be worried, instead, about a multi-trillion dollar federal deficit.
"The U.S. is facing a potential combined $2.8 trillion deficit for fiscal 2009 and 2010. Folks, these are staggering numbers. We, as a nation, face the real possibility of having our AAA credit rating reduced to a lower level," says business analyst Sanford Kahn.
"This could put any incipient economic recovery in the gutter because lenders will demand higher interest rates on our debt due to increased risks.”
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