Private Equity's Next Targets

Private equity was the business story of 2006, and it's far from over. Deals for companies with market caps as high as $60 billion--previously unheard of--are now being contemplated. And the rivalry with Wall Street doesn't stop with the race for investor dollars. The competition is getting more intense for executives who, like just-departed Home Depot CEO Bob Nardelli, are uncomfortable with the new corporate confines. The questions for 07: Will the Fed get stricter with lenders? Will a major deal collapse and cause regulators to tighten the screws? I caught up with David Rubenstein, co-founder of private-equity heavy-hitter Carlyle Group, to get his take on where this juggernaut is headed.

What are your expectations for 2007? Can this keep up?

It's hard to believe it can get any better. [But assuming that there is no] cataclysmic event like 9/11, or a government regulation that will collapse the industry...I think in 2007 you will see much more money going into emerging markets--China, India, and Southeast Asia, including Vietnam. We have more money in Asia than anyone, though [a recent] New York Times article barely mentioned us. And we will double it in a year. We are moving into the Middle East. Brazil and Latin America will see much more volume. Also Africa. In 07, I think the new thing will be commodities and natural resources. Not just companies but agricultural resources and mines. Another trend: You will see more hedge fund money coming into the private-equity space. We just saw that effort to buy Delphi (DPHIQ ) [page 38]. Private equity will spend more time on...buying people. Now [Carlyle] is getting the Lou Gerstners of the world or the David Calhouns...enabling us to convince people that we can and will add value to businesses.

Will we see more regulation of private equity?

The Declaration of Independence says we are supposed to pursue happiness, but when people are too happy, the government doesn't like it. And right now, private equity is very happy. We have a new Congress, and while there isn't a particular problem people have put their finger on, I suspect you will see more attention to private equity. The fact is that in the last couple of years, other than Refco (RFXCQ ), no major buyout has failed. But if one deal doesn't work, you will have people coming out of the woodwork saying: "See, I told you so...these guys are not as responsible as people thought, and we should look closer at it." KKR, Texas Pacific Group, Carlyle, and Blackstone have just organized a trade let people know what private equity is doing. We have done a terrible job of explaining how we earn money, how we add value, and the fact that most of the money we make goes to pension funds and blue-collar workers.

Let's talk about Asia. What obstacles do you encounter?

We started to buy a company in China about three years ago. It still hasn't been approved. The Chinese do not wake up every day and say: "How can I make the West can I help Carlyle Group?" Remember, for 15 of the last 17 centuries, China was the world's biggest economy. So in its mind, China is reclaiming its dominance. They don't need our capital as much as our knowledge, skills, and technology. They aren't interested in selling prized companies just to get money. They don't need it. On the other hand, China is fertile territory. If you are not on the ground floor today, in 15 years you won't be there.

Is it fair to say the good people are leaving Wall Street for private equity?

At the top level, people who have had great success managing businesses are saying: "Why am I working in such a transparent business...a public company, making $1 million or $2 million and getting beaten up all the time? Why not run a private business?" The people at midlevel jobs at investment banks know that while they won't get [Goldman Sachs (GS ) CEO] Lloyd Blankfein's job... they will make a lot of money. But they are leaving to go to private equity because they can make more money. And business school graduates who in the old days were going to Procter & Gamble (PG ) and McKinsey now see their friends making so much money that the best ones are going to private equity and hedge funds. There is a brain drain of people going to med school and law school. I always say I would hate to be operated on by someone in the next 10 years.

By Maria Bartiromo

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