It would be misleading to equate the tech bubble of the late 1990s with the current private equity climate, Carlyle co-founder David Rubenstein declared on Wednesday [via Reuters].
In a speech at the annual SuperReturn private equity conference in Frankfurt, Rubenstein said that while we may not be in a bubble, “there will be declines. We can’t continue like this forever.”
Large, top quartile buyout funds have produced returns on investments of more than 35 per cent, Rubenstein said, compared to single digit returns from major market benchmark indices. The high buyout returns are not sustainable, he said, and would eventually diminish.
He also said the regulatory regime would likely get stricter but he questioned whether this was analagous to the tech meltdown.
The primary distinction between the tech bubble and the current private equity boom was that private equity holdings make up such a small proportion of the market, Rubenstein said, noting that a mere 3.2 per cent of listed company market value in the US was PE-owned. Moreover, PE houses are also committing more cash to their portfolio firms than ever before.
Furthermore, Rubenstein said that those in charge at the buyout houses had witnessed the tech bubble – and subsequent carnage – first hand, and have analysed all the resultant scenarios. Current buyout targets are also generating tangible revenues and profits, and are headed by top quality management, Rubenstein said, a further distinction from the nebulous Silicon Valley startups of a decade ago. He also pointed out that with increasing fund raising, there more money available to prop up companies that are lagging behind.
But Rubenstein cautioned that a certain level of complacency still prevails in buyout circles – some players are simply unafraid of any dip in returns, and this should be a cause for concern. He emphasised that private equity firms need to be mindful of their wider – largely negative – perception, and need to take the lead from public companies in becoming more accountable and transparent.
He recommended that private equity houses disclose their investors, how much cash they put into each deal and their growth strategy for their acquisitions.
Rubenstein’s speech echoed that of Jonathon Nelson, founder of Providence Equity Partners, who spoke at the conference on Tuesday. Nelson also doubted the existence of a private equity bubble. “Inevitably, some LBOs will run into problems,” he said, but emphasised that despite rising borrowing levels, firms cash committments to current deals were consistent with current levels.
Currently, equity accounts for around a third of a deal, compared with less than a quarter ten years ago, and a mere seven per cent 20 years ago.
“No portfolio will be immune” from failures, Nelson said. “But I don’t see a bubble nor one bursting.”