Carlyle’s Rubenstein on family offices, fund duration and why some investors shun emerging markets

Here are five key takeaways from the Carlyle Group co-founder's speech on private equity's top trends at a recent industry conference in Geneva.

David Rubenstein has said large family offices in the Middle-East and Asia will change the private equity landscape by doing more direct deals.

Speaking at Invest Europe’s Investors’ Forum in Geneva in March, the Carlyle Group co-founder discussed the industry’s top trends including fund durations, emerging markets and listed private equity firms. Here are five key takeaways from the industry titan’s speech:

The 10-year fund is here to stay

Long-duration funds are on the rise among institutional investors. CVC Capital Partners passed its €4 billion target for its second longer-term fund in January, and a number of other large PE firms including Carlyle and Blackstone have raised or are raising such funds.

This development does not mean the traditional 10-year fund is on its way out, Rubenstein said.

“I think that clearly people are experimenting with different fund formats, and in both directions,” he said. “We have funds now that are 15- and 20-year funds because some people want the longer-horizon funds. But some other organizations have a two-year or three-year investment period for a fund, with the whole fund lasting five or six years.

“There is much more variation than [what the industry has had] historically.”

Family offices are changing the LP landscape

Family offices have recently loaded up on the asset class in anticipation of a slowdown and will change the game.

“You now see multi-billion-dollar family offices in the Middle East and Asia,” Rubenstein said. “Staggering amounts of money in family hands, and they are allocating a higher percentage to private equity than pension funds ever did or even that SWFs are.

“This money is now coming in and you are seeing in many cases family offices saying that they will do deals directly and that they don’t need to give money to Carlyle, Blackstone, KKR, Cinven and CVC. We’ll see that phenomenon occurring.”

Developed markets > emerging markets

“The bloom is off the rose of emerging markets,” Rubenstein said, adding that private equity is moving more towards developed markets. Investors have historically been willing to take on additional risk for theoretically higher rates of return, but this is changing.

“In the last couple of years, more and more investors have been willing to deploy more and more private equity in developed markets than emerging markets, because the risk profile is better and the returns are just as good,” he said. “That’s a little bit of a surprise.”

He added that emerging markets have not raised as much capital as they were expected to globally.

Governments around the world are positive on PE

One change that has happened in the private equity world is that governments no longer believe the industry is a threat.

“It used to be that some people thought that private equity was destroying economies. But that has not been the case, partly because firms have adapted,” Rubenstein said.

“In the early days of private equity, they tried to get the highest rates of return regardless of whether jobs were being destroyed, taxes were not being paid or environmental considerations were not a factor at all. Today, PE firms all care about ESG and make much more sensitive sensible decisions than before. It has evolved in a way that you are seeing in emerging markets governments encouraging firms all over the world to invest in their countries. I suspect that trend will continue.”

He has high hopes for PE stocks

Asked where he would invest his last $10 million if he had to place it on one concentrated bet, Rubenstein answered: “Obviously, Carlyle stock. High dividend, low price.”

Private equity firms, who are staffed by the greatest dealmakers in the world, have not been able to make their own stock as attractive to investors as they would like, he added.

Rubenstein noted that most private equity firms are judged and publicly traded on how much fee income they generate, when their worry is carried interest and how much that yields for their investors.