The best days for private equity are ahead, says David Rubenstein, co-founder of private equity giant Carlyle Group.
When the current down cycle ends, probably in a year or two, private equity will roar back, with deals bigger than ever, he told students at the Wharton School of University of Pennsylvania.
As Rubenstein sees it, 2002 to the middle of 2007 was private equity’s golden age. We’re now just past that point.
When that ends, private equity will enter its “platinum age,” Rubenstein says.
“The rates of return have been consistent and better than anything else you can legally do with your money,” he told members of the Wharton Private Equity Club.
“And, as a result, I think the private equity world will grow even stronger. You'll see more people getting in, individual investors as well as institutional investors from all over the world.”
Private equity firms will be much larger, and there will be enormous opportunities for new firms to get started, he predicts.
Rubenstein cited hard facts to prove his case. After the 2000-2001 downturn, leveraged loan volumes took three years to return to their 2000 highs.
“But, when the recovery came, it exceeded all expectations,” he says. “Leveraged loan issuance more than doubled between 2002 and 2004, and again between 2004 and 2006. Issuance jumped 20 times between 2001 and 2007.”
Now is a great time to invest in private equity, he says, noting that deals with the best returns are historically done during downturns.
One problem is that sellers are in denial over their companies’ values, refusing to accept lower valuations. Instead, they’re postponing selling, hoping that prices recover.
“And sellers are probably going to take six to nine months before they realize it's not coming back anytime soon, and so they probably will sell,” he says.
“But, once we're through that, I think we'll see some extraordinary deals and extraordinary returns generated for investors.”
For the time being, deals are much smaller and have less leverage. Private equity is moving overseas, Rubenstein says.
“It's clear that some of the greatest growth opportunities for private equity moving forward are in China and India and other so-called emerging markets,” he says.
“And, as a result, more and more firms will begin to invest overseas.”
Private equity is already rebounding, Rubenstein told The Wall Street Journal while on a business trip in Beijing.
"We think that the bottom has been hit in terms of private equity investing activity, and you're now beginning to see the upward swing," he says, predicting companies will begin closing deals in the $2 billion to $4 billion range and use less debt.
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