Carlyle’s Rubenstein: Banks Will Pull Back on PE, Prep for Volcker Rule

BERLIN(Reuters) – Large banks will likely pare back their private equity-related operations in anticipation of the so-called “Volcker rule”, despite it being unclear if it will be adopted, the co-founder of Carlyle Group said on Wednesday.

U.S. President Barack Obama’s plan, inspired by White House economics adviser Paul Volcker, includes proposals that banks or financial institutions that own banks would not be able to own, invest in or sponsor private equity funds unrelated to serving customers.

That has prompted expectations that banks such as Goldman Sachs (GS.N) or JPMorgan (JPM.N) may have to sell private equity units.

“I think what you’ll see — whether or not the legislation is adopted — is the sales of a number of captive private equity organisations of large banks and the sale of hedge fund related operations,” Rubenstein said at the Super Return private equity conference in Berlin.

“I do think you’ll see a shifting away from those activities by the banks,” he said.

Some large banks will assume the proposals will be adopted and sell operations, or just want to get out of the area to avoid potential criticism, Rubenstein said.

Rubenstein said he thought Congress will look at the proposals very seriously but said it was too early to tell if they would be adopted. He said he didn’t expect similar legislation to be adopted in Europe.

Government regulation for the private equity industry is also likely on its way.

“Right now, the U.S. hasn’t really adopted any yet for private equity,” he said. It was probable that the U.S. Securities and Exchange Commission will require registration of private equity firms, he added.

Rubenstein said that the private equity industry shouldn’t be lulled into complacency.

“We haven’t been punished the way some banks are being punished, we have not been vilified the way some investment banks have been vilified, our profits have not been criticised, out bonuses have not be criticised but that doesn’t mean we are loved,” he said.

Rubenstein said it was also unclear whether tax on “carried interest” would rise in the U.S., although said the “world will be better if it didn’t, for sure”.

The long running dispute on the tax was revitalized last week when Obama once again proposed changing the rate in his budget request, a blueprint for Congress.

In Australia, a separate dispute is ongoing, concerning the tax treatment of a profit TPG Capital [TPG.UL] made through the IPO of a portfolio company.

Rubenstein said that wouldn’t impact his decisions to invest in the country.

“We have a team there, we think its very attractive place to invest… I don’t think (the situation) will change our view or TPG’s view.”

DEAL SLOWDOWN

Rubenstein said it could take the private equity industry — which was hit by the lack of financing for deals after the credit crunch — 2-4 years to get back to the volume and velocity of deals done in 2007.

In the meantime, buyout houses and their investors will have to come to terms with low returns on many funds invested in the three years leading up to the crash.

“Returns from many pre-recession deals in funds will likely be modest at best,” Rubenstein said.

Deals done in 2009 will do spectacularly well, however.

“Most deals I am aware of in 2009 were done at distressed prices and are probably going to be among the best deals done in the last ten years or so.”

In the future, private equity returns will come off their peaks, but will remain attractive, he said.

By Megan Davies and Simon Meads
(Editing by Elaine Hardcastle)