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David Rubinstein, founder and managing director of The Carlyle Group, says private equity will be “challenged,” but that it “won’t go away.”

David Rubenstein

Smaller deals, less debt

Carlyle Group founder David Rubenstein foresees challenging times for the venture capital industry

By Amy Trang

1/9/2009 - Private equity will survive the recession, but when the fallout ends, the industry will be much smaller and a lot wiser.

That was the prediction of David Rubenstein, co-founder and managing director of The Carlyle Group, in a presentation to students Jan. 8 at the Kellogg School. “Private equity won’t go away,” Rubenstein said. “The industry will survive because the concept works, but it will be more challenged than before.”

Founded in 1987, The Carlyle Group is one of the world’s largest private equity firms, with about $91.5 billion in assets under management in industries including aerospace, defense, retail and financial services.

Rubenstein, a former lawyer and White House deputy domestic policy advisor, said that private equity firms are focused on making their current portfolio companies perform well and on how to buy back their own debt.

“A lot of deals done in 2006-2008 will not return their capital,” Rubenstein told a nearly full auditorium. “Some of the best brand-name deals will not survive. Deals going forward are going to be smaller.”

Infusing humor throughout his speech, Rubenstein also described some of the major transitions underway in the global economy. He predicted that the United States no longer will be the dominant player, as Brazil and China start to add more to the world’s gross domestic product. The nation will be forced to be more creative in how it produces GDP because the automobile and manufacturing industries that carried the country since World War II are declining.

“Wealth has spread and gone away from the U.S.,” he said. “The U.S. economy is never going to be as powerful as it once was.”

Borrowers also are facing a transition from a period in which they had ready access to virtually any amount of capital, to one in which they are finding it difficult to borrow any capital at all, he said.

“We were overleveraged. We took on too much debt,” Rubenstein said.

Rubenstein also bestowed career advice to Kellogg students, explaining that he never set money-making as his goal. Instead, he tried out careers in law and politics before realizing that he did not have an aptitude for those fields. Students should pursue what they love and seek to make themselves indispensible in their positions, he said, adding that the money will come later.

“My career shows you can make mistakes,” Rubenstein said. “Don’t obsess over your career; you don’t know what you will do in five to 10 years. Do something that is daring once or twice in your life.”

Rubinstein’s speech was the latest in the J. Ira Harris lecture series, which brings speakers from the finance industry to the Kellogg community.