Private equity firms are awash in cash, with nearly US$1 trillion of available capital, but the industry is facing internal competition as limited partner investors seek to play a more active role in buyouts, according to David Rubenstein, co-founder and co-CEO of the Carlyle Group.
The structure and composition of PE funds will change significantly as LPs that would previously have invested in the funds increasingly branch out into arranging buyouts themselves, Rubenstein said.
Rubenstein was giving his views on the future development of PE firms, based on his 30-plus year career in the industry, at the SuperInvestor Conference in Amsterdam this week.
“I expect we’ll see longer duration funds become more prevalent, with consequently lower fees for LPs and carried interest for general partners (private equity firms),” Rubenstein said.
Many LPs are looking for longer-term investments with lower return targets, which will ripple through the conventional buyout community, Rubenstein said, adding that more permanent capital will also be sought to match longer investment duration needs.
Several LPs that would have previously invested in PE funds, including Canadian pension funds PSP Investments and Canadian Pension Plan Investment Board, have built their own operations to buy assets in recent years and some European firms are also looking at co-investment buyouts.
Rubenstein predicted that sovereign wealth funds will replace U.S. public pension funds as the largest source of capital for buyout firms, and said that retail investors will also play a more significant role going forward.
“Individual retail investors will be the biggest new entry as regulations relax on investing in private equity,” he added.
He also highlighted private debt as a significant growth area and predicted that it could grow to rival private equity. Private debt, which includes direct lending that targets small and medium-sized companies, currently has US$600 billion of assets under management, according to Preqin.
While the global PE industry currently has nearly US$1 trillion of ‘dry powder’ available to spend, the break-neck development of the shadow banking market means that sponsors now form a smaller part of the investment world, other delegates said.
Rubenstein is expecting public and political opinion, which has been highly critical of PE’s role in turning around under-performing companies via debt-financed buyouts, to relax as knowledge of how the industry works develops.
“A lot of people still don’t really understand what private equity does,” Rubenstein said.
PE firms are gearing up to lobby hard against proposed U.S. tax reforms that could curb the industry’s profitability and make buying and selling companies more difficult.
Rubenstein said that a proposed cap on the tax deductibility of interest payments exceeding 30 percent of income is unlikely to have a significant impact on PE firms, as debt forms a smaller proportion of buyouts than in the industry’s early days.
The bill also includes a tightening of the carried interest loophole, which allows PE managers to have their profits taxed at a lower capital gains rate than income tax rate if they hold a company for more than one year.
“I think we can expect some effect there,” he said.
By Max Bower
(Editing by Tessa Walsh)
(This story has been edited by Kirk Falconer, editor of PE Hub Canada)
Photo of David Rubenstein, co-founder and co-CEO of the Carlyle Group, courtesy of Reuters/Lucy Nicholson