At Michael Milken's conference, private equity honchos discuss going public, government scrutiny—and the likely end to years of easy money
"We are with the titans of investment management today," said Maria Bartiromo, the CNBC anchorperson (and BusinessWeek columnist). She wasn't exaggerating.
On Apr. 24 at the Milken Institute's annual Global Conference, Bartiromo hosted a panel composed of four of the highest-profile names in the world of finance: Leon Black, founder of Apollo Advisors; David Bonderman of Texas Pacific Group; David Rubenstein of the Carlyle Group; and Thomas Lee, who heads an investment firm that bears his name.
The conference, sponsored by the think tank founded by former junk bond king Michael Milken, ran Apr. 23-25 at the Beverly Hilton in Los Angeles. The event, which this year celebrated its 10th anniversary, is always an eclectic affair. This year topics included everything from investing in emerging markets to curbing gang violence to nutrition. Four Nobel laureates addressed climate change. Tennis star Andre Agassi discussed philanthropy. Actor Kirk Douglas signed his book Let's Face It: 90 Years of Living, Loving and Learning.
'A Terrific Time to Load Up'
The last time Milken got this caliber of takeover artists together in one room, he was running the bond-trading desk at Drexel Burnham Lambert and hosting his Predator's Ball at the nearby Beverly Hills Hotel. Between them, the four panelists manage over $100 billion and are responsible for some of the biggest buyouts in the works today, including the $17 billion purchase of Harrah's Entertainment (HET) and what could be the largest leveraged buyout in history, the $45 billion acquisition of Texas utility TXU (TXU) (see BusinessWeek.com, 2/26/07, "How Green Green-Lighted the TXU Deal").
Rubenstein set the tone early on when he said, "It can't get any better than it is now—none of us ever dreamed our companies would grow into the management firms they are today." Rubenstein said that when he co-founded the Carlyle Group twenty years ago, he didn't put standard language in the lease that would allow him to expand into more office space. "I never thought I'd have more than ten people," he said.
Asked what he thought the best investment opportunities were now, Black said it was "raising money, it's a terrific time to load up." Black wouldn't address rumors that he would likely soon follow other private equity firms, including Fortress Investment Group (FIG) and the Blackstone Group, in selling shares to the public (see BusinessWeek.com, 3/22/07, "Blackstone Going Public—Its Own Way").
The Case for Going Public
But Black did build his case for public ownership of the businesses. He said publicly traded shares would allow him to retain top managers and recruit new ones by offering them stock in the firm. He also said such an offering would give him currency to acquire other, smaller firms. One of the ways Black said he's been able to achieve superior returns was by hiring investment managers with experience in specific industries. He said he'd like to expand that expertise, noting that health care and energy were two areas in which his firm was weak.
Rubenstein added that public ownership would also provide a way for the older founders of firms to cash out, adding that "I wouldn't be surprised if all of the major firms are public four years from now." But Bonderman disagreed. "All of us got into private equity because we wanted to be private," he said. He called the upcoming public offering prospectus for the Blackstone Group a "Steve Schwartzman biography with all those dollar signs," a reference to the high-living founder of Blackstone and his gargantuan compensation. Bonderman said it would "not be good for any of us."
Indeed, with public ownership comes public scrutiny, and private equity has had its share of scrutiny lately. The spate of high-profile deals, such as TXU and the $38 billion battle for Equity Office Properties Trust, have got some people worried that these new Masters of the Universe have become too rich and too powerful. Unions have raised concerns about job losses in takeovers. And Congress is considering taxing some private equity fees as income—rather than as capital gains, which are taxed at lower rates. The industry formed its first lobbying group, the Private Equity Council, and more of the formerly press-shy managers have made themselves available for newspaper and magazine profiles in order to take some of the mystery out of who they are.
If Congress were to change the tax code, Rubenstein said, it would have a negative impact on all partnerships "…including many of the people in this room,". Black addressed the jobs issue, saying that studies in Europe showed that companies purchased by private equity firms enjoyed more than 5% job growth, versus just 1% for businesses that weren't owned by private equity. "It's not just about making money for ourselves," he said, noting that the investors in private equity funds are often public pension funds providing retirements for teachers, policemen, and firemen.
'Money Is Gushing in the Streets'
The big question, however, was how long the good times will last. "Money is gushing in the streets," Bonderman said. He noted that the large private equity funds raised in the 2001-to-2004 time period were earning returns in excess of 40% per year. "Long term, that's unsustainable," he said. Lee said that at some point, default rates for the riskier corporate loans—"almost nonexistent today"—would increase to their typical peak of 9%. "The financing part can grind to a halt," he said. "We're at the end of a long cycle."
Rubenstein said leveraged buyouts today are much better capitalized than in years past and that the firms doing the buyouts have deeper layers of talent. He said that when industry pioneer Kohlberg Kravis Roberts did its infamous $25 billion buyout of RJR Nabisco in 1989, he didn't think the company had more than twelve investment professionals to oversee all its businesses. Still, Rubenstein said, "If you're in a large buyout fund, you're doing better than anything else you can legally do with your money today."
No one disagreed with him.