Rubenstein Says Returns Will Fall as Economy Struggles

David Rubenstein, co-chief executive officer of Carlyle Group LP, said returns on private equity will decline from their historic averages as lackluster economic growth forces firms to put more money into deals and hold their investments longer.

Carlyle, which has produced average returns of about 30 percent over the past 25 years, is targeting gains of about 20 percent when doing deals now, Rubenstein said an interview with Erik Schatzker, Scarlet Fu and Cristina Alesci on Bloomberg Television’s “Market Makers” today.

“We do think that private-equity returns probably will come down compared to the historic highs we had 10 years ago,” said Rubenstein, who co-founded Carlyle, the second-largest alternative-asset firm by assets. “I think if you could get net internal rates of returns in the high-teens, low-20s,” investors “would be very, very happy.”

Rubenstein joins private-equity executives including Blackstone Group LP President Tony James in forecasting lower returns in the industry, amid below-average economic growth following the financial crisis, more competition among buyout funds and volatile stock markets. Returns for Carlyle’s main buyout funds have declined to 12 percent for the 2004 pool, from 25 percent for the 1994 fund and 21 percent for the fund started in 2000.

Beating Stocks

At 20 percent, Rubenstein’s estimate is still three times what investors would have made in U.S. stocks over the past year. Private equity, whose investors include pensions funds and endowments, has beaten public stock markets over the past three years and the past five years, according to research company Preqin Ltd. The asset class also outperformed bonds, hedge funds and real estate over the five-year period.

With returns declining and competition increasing, raising money for buyout funds has also become more difficult, Rubenstein said. Carlyle’s latest buyout fund, which it began raising in the first quarter with a $10 billion target, has garnered $3.7 billion so far, chief financial officer Adena Friedman said last week.

“It is harder to raise money for everybody than it used to be, because there’s less money out there right now looking for these kind of investments and investors are more skeptical of private equity and other kinds of alternative investments than maybe they were years ago,” said Rubenstein. “The leverage has shifted to the investors, there’s no doubt about it.”

Fiscal Cliff

The firms faring the worst are those without long track records, said Rubenstein, who typically travels more than half of each year to lead fundraising for Carlyle. A young firm raising a new fund “would have a hard time raising it, with fees that you wouldn’t really like,” he said.

Rubenstein, 63, co-founded Carlyle in 1987 with William Conway and Daniel D’Aniello. The firm, which now oversees $157 billion across 99 funds and 63 funds-of-funds, is operating today under the belief that the U.S. is the best place to invest, Rubenstein and Conway have said.

From 1977 to 1981, Rubenstein was deputy assistant for domestic policy to President Jimmy Carter. A lifelong Democrat, he said a deal resolving the so-called fiscal cliff will probably be reached, although it won’t be a “perfect” solution.

“I don’t think there’s going to be a grand bargain, but also they’re not going to go over the cliff,” Rubenstein said today.

The fiscal cliff refers to $607 billion in spending cuts and tax increases that are set to start in January unless Congress acts to avoid them. The drop in spending and burden of higher taxes would probably lead to a recession, according to the Congressional Budget Office.

“They’ll reach some agreement on some things, they’ll kick some things down the road,” said Rubenstein. “I think there will be enough progress so people will think they’re doing a better job than they did before.”

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