Carlyle Co-CEO Sees Private Debt Growth at Twice the Rate of Equity

so you are fresh off of your first investor meeting your first annual meeting with your investors in your new role take us inside what did you tell them what was the main message to your customers as they gathered in Washington well sure I think it's kind of like a couple different thoughts happening first investors are really pleased with returns the industry's been doing great I think it's fair to say the US economy is doing great so people feel good about that but I think the issues of the day are how long can this continue how long can the global economy keep going because we are starting to see some interesting signs but really in the deal environment how is all the money going to be deployed that investors that folks like us have raised and what are gonna happen to returns moving forward right and let's put some numbers around that roughly a trillion dollars give or take in so-called dry powder awfully speaking it's a lot of money so how do you put there how worried are you given what you oversee a couple hundred billion dollars across all asset classes about getting that money out and delivering the returns that you have historically I mean look that's our major focus we're an investment firm there's nothing more important to us than figuring out how to deploy it manage these investments well and deliver a great return so that's what we go to sleep thinking about and what we think about waking up when you take a step back the role of private capital though in the global economy not only is expanding but has to continue and I believe will continue to expand I mean just think about private equity folks may not appreciate this but the number of public companies that are around are about half of what they used to be from 20 years ago the Wilshire 5000 only has 3500 component companies in it we're seeing companies now they don't want to go public there's so much more advantage to working with private equity in terms of long-term growth value creation what we can do to help these companies really drive value that we're just seeing a tremendous shift in terms of the desire to partner with private equity but really private capital you're seeing growth in different asset classes infrastructure now certainly private credit which is growing at twice the rate of private equity so I think there's an underlying theme that's at play here in the world which is the role of public capital versus private capital and you're going to continue to see the emergence of private capital at the expense of public capital now I'm not saying there isn't a role for public capital there certainly is but surely what we can do with the money and all the value add that we bring to our companies is they're only gonna drive more investment opportunities in the future I want to get back to private credit for a second but before we get there you've described a very attractive landscape that's drawing a lot of competitors yes into that trillion dollars of dry powder what's the net effect on that of prices for deals valuations overall especially given the economic back right well the net effect is it's going to get harder returns have been great in the past and no doubt returns can be great in the future but it's just going to be harder to keep driving the rates of returns that the industry has shown on average if you take a step back there are three ways we drive value to equity it's you can financially leverage right you can buy low sell high meaning buy it won multiple sell it at different multiple or you can grow the company leverage is at about the highest you're gonna be seeing for a while rates may start to go up so I'm not so sure there's more upside in financial engineering multiple expansion it's kind of hard to make a case right now given how high valuations are that multiples will keep expanding and in terms of growth I do think there's real ways to grow companies and to us that's where we're most focused on Carlyle drives 60 is 70% of all of the returns we drive for our investors by fundamentally growing earnings that our portfolio companies all right so those first two things as you said those are a little easier to do the third is a bit harder right costs more does that ultimately way on returns a little bit what's the net effect there the it's harder to do you need to do it over the longer term and you have to find great CEOs and great management partners and then bring to the company a platform of resources whether it's leverage purchasing or IT or human capital management a whole bunch of things that Carlyle can do working in conjunction with the CEOs to really drive growth and earnings and earnings improvement at these companies and I actually think in the future the role of private equity it we're turning into more of an industrialist as opposed to the financial investor it used to be you were looking for folks who could go find a great deal or figure out a way to raise cheaper debt now the folks who do well in private equity our folks who can say that's the right CEO who can execute this business plan at that company in this sector with all that's going on it's much more of a business judgment industrial judgment type of a perspective that I think is really going to be critical to successful investors moving forward and what about the appetite carve-outs is a release where you guys have played really since the beginning of the firm several decades ago taking and unloved or under loved as the company orphan karate or a division how Hardy is the appetite on your side and how hard is the appetite on CEOs to sort of unload things at this point very high we are we've made a great business around doing carve-outs accident Novell recently announced at otech exalt a very successful deal of ours and I think you're gonna see that trend continue and in fact one of the reasons why I think you're gonna see deployment opportunities continue at least in our business is the scale and complexity of these carve-outs is just increasing we as a firm are incredibly well positioned to go after that but as the world continues to grow and corporations start to focus on their major businesses and and start to dispose of assets that they think they could do less with there is a real role for private capital to step in and say we can do more with it in conjunction with a new management partner so let's talk about those CEOs because the other sort of intimate look that a guy like you gets is how CEOs how boardrooms are feeling about their own businesses what they're hearing from their customers take us inside those conversations both with the companies that you own and the companies maybe you want to own what are they most worried about I think everyone appreciates how strong the US economy is right now US economy in fact has accelerated a little bit from last year but I think we are very cautious about the fact that outside of the United States growth has slowed Europe is slowing down a bit China definitely has slowed down a bit Japan and we're also seeing monetary policy and conditions diverge u.s. is trying to raise rates the rest the world is either trying to wait and see or in China's case lower rates and so there's a ton of uncertainty that is being injected in the environment right now and I think with respect to the u.s. CEO they're trying to think through input prices are starting to go up can I pass those costs through to the consumer if they can they can keep their margins high and the profits going if they can't you're gonna see a squeeze in in corporate profitability how worried are they about trade war look I think it's fair to say everyone's worried about the trade war and everyone should be worried about trade tensions we have not yet seen the mathematical effect of the impact of all of this noise on our portfolio company companies but I'm more worried about the second third order effect of what does this do to confidence what does this do to investment spending what does this do to supply chain plans in terms of where you position your factories and your points of distribution and III think there's a level of uncertainty that's been injected and you know we're strong believers in in fair trade and free trade and hopefully the authorities can figure something out

Channel: Bloomberg Television

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Length: 7min 46sec (466 seconds)

Published: Thu Sep 20 2018