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Harvard Business School Professor, former Medtronic CEO

Private Equity King Rubenstein: Crisis Implication And Investment Opportunities

David Rubenstein, the legendary founder of Carlyle, spoke for 30 minutes at The World Business Forum (#wbf09).  Carlyle’s funds have invested $50B + with an IRR exceeding 30% since the funds’ inception.  Highlights:

Rubenstein opened with an audience poll.  The consensus among attendees was pessimistic: taxes will increase; the worst isn’t over; real wealth won’t increase.   Over $14T of real wealth has evaporated in the Current Great Recession.  Here are implications: 

  • Debt.  Right now we have $11.8T of government debt, $5T in government-backed Fannie and Freddie debt, $34T in unfunded Medicare/Medicaid liabilities, $7T in Social Security liabilities. This is $57T in debt.  (Rubenstein didn’t mention the contingent loan commitments from the bailout and implicit guarantees of the banking system, which we’ve seen estimated at over $10T.) We had more debt in the country before this Great Recession than we did before the Great Depression.
  • Deficit.  High deficits will remain with us.  We will have FY $1.5T of debt in the most recent fiscal year.  In the upcoming year: $1.2T or $1.3T.  In the last 50 years, we have had only four surpluses.  By 2019, Rubenstein predicts we will add $9T in debt.  This is expensive: a 1% increase in rates results in a $125B increase in annual rates.  Currently, we pay $425B a year in debt service.
  • Inflation.  Over last 20 years, inflation has been ~2% per year.  In 2-3 years, inflation will creep to 4-5%.
  • Unemployment.  Highest rate in 26 years.  Black 15%.  For ages 16-24, people looking for full-time jobs, unemployment is  53%.
  • Taxes.  Right now, we are taxing a smaller share of GDP than we’ve ever taxed.  Currently we tax 15% GDP – versus a historic average of 18%.
  • Entitlements.  In 1934, Social Security was financed with a 1% tax o the first $3,000 of income. It has grown substantially since then.  Without changes, it will be insolvent by 2040.  Medicare will be broke by 2017; Medicaid is projected to default in 2020.
  • Dollar.  The dollar represents 62% of foreign reserve currencies, versus 70% in 2000.  The dollar’s purchasing power is decreasing.  “I expect its value to continue to decrease.”
  • Savings.  Right before the Great Recession, we were saving 0% of net income.  Now it’s back to 4%.  Personal consumption was 75% of GDP, and while it has down declined to 71%, it is still too high.  Consumption is 40% of GDP in China and 65% of GDP in the U.K.
  • Interest rates.  While currently they remain very low, they will increase substantially in the near to medium-term. 
  • Energy.  The cost of energy is relatively low in real terms.  It is less expensive now to purchase oil than 1980.  This will change.

We have to cut spending dramatically and increase taxes.  Unemployment of 4-5% will not be the norm.  “There are no simple answers to address these things.  If I had a simple answer, I’d be a politician.”

The crisis has had a psychological impact.  Americans are less confident in the future and less trustful of government and big business.  Americans are less willing to take risks.  We see a tendency towards prioritization of liquidity, a willingness to accept lower rates of return, greater public concern about executive compensation, diminished support for entrepreneurial activity, and less interest among young people in financial careers. 

“Where would I invest?”

  • Distressed investing and turnarounds. 
  • Government-supported industries
  • Energy; carbon-related and alternative energy
  • Healthcare.  Will increase 17% to 20% of GDP
  • Natural resources (oil and water)
  • Emerging markets

“Advice for the audience?”

  • Focus on areas that are likely to grow. 
  • Avoid excessive leverage.
  • Persist.  Don’t take “no” for an answer.  This is the most important quality that I’ve gotten out of my business career. 
  • Take some entrepreneurial risk in your career. 
  • Think of yourself as an owner.
  • Improve your skills of persuasion.  We are all selling something.  Improve your ability to convince other people.  Few people
  • Pick partners who you can trust.  Nobody can build a business by themselves.
  • Think like a leader, not a follower. 
  • Don’t worry about making $$ over the longer-term.  If you love what you’re doing, money will flow.
  • Get involved in emerging markets. 
  • You make your own luck.  You take advantage of opportunities that come along.
  • Be involved in your community.