Carlyle’s Rubenstein eyes energy, take-privates as economy slows

Carlyle Group founder and co-CEO David Rubenstein said he expects an economic slowdown in 2016 after several years of expansion, but that lackluster growth could help private equity firms boost returns because of a fresh supply of underpriced assets.

The United States has fallen into a recession (usually for nine months) every seven years since World War II. Given that history, the economy is due for a recession — or at least a slowdown, Rubenstein said.

“We haven’t repealed the business cycle,” he said to a crowd of about 1,000 at his keynote presentation at the 22^nd Annual Columbia Business School Private Equity & Venture Capital Conference in New York.

With opportunities such as more take-private deals and distressed debt of companies in the energy sector, private equity firms may generate returns into the teens from this period, Rubenstein said.

In the past four years, private equity has returned more money to LPs than it has invested for the first time in the history of the business. That trend will reverse in 2016, he predicted.

Only about 5 percent of transactions in private equity come from take-private deals, but there have been fewer than that in recent years because of lofty stock prices, he said. If equity prices continue their downward path, “you’ll see more of them [take-privates] in the not too distant future,” he said.

Meanwhile, the “greatest single area to invest in” is energy assets because prices are low and people are afraid, he said.

Among the headwinds facing the economy: a strong U.S. dollar hurting exports, slower growth in China and in more developed markets, $4 trillion of corporate debt from emerging markets facing refinancing because of weaker overseas currencies, and $50 billion in corporate energy debt now worth roughly 65 cents on the dollar, Rubenstein said.

Meanwhile, gridlock in Congress is preventing the government from repeating past stimulus efforts to juice the economy and create more jobs in a presidential election year. The U.S. Federal Reserve may hike rates, which could actually dampen growth. Rubenstein said he doesn’t expect negative interest rates, however.

But private equity is in a position to benefit, he said.

“Great investments are made not when prices are high, but when prices are low,” he said. While banks may not be rushing to lend, leverage will still be available when companies are sold at more affordable levels.

A severe drop in publicly traded units of Carlyle Group and other private equity firms this year stems from jitters over whether GPs will be able to borrow money because of tighter credit markets, or if they’ll be able to exit deals because of a lack of IPOs in bear markets, he said.

While the next two years may be difficult, private equity will fare well as an asset class, he assured the audience.

“The industry’s death has been predicted many times,” Rubenstein said. “Every time we have a recession, the industry comes back stronger.”

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Photo: Carlyle Group co-founder and CEO David Rubenstein speaks at the Washington Ideas Forum, in Washington October 29, 2014. REUTERS/Jonathan Ernst