David Rubenstein co-founded The Carlyle Group in 1987, and it has since become a private equity behemoth with $369bn under management and 29 offices across five continents. A lawyer by training, Rubenstein is now Carlyle’s co-chair, but he wears many hats, as a philanthropist, author, and host of two shows on Bloomberg Television.

This year has seen a worsening landscape for private equity, with high inflation, rising debt costs, and a poor fundraising environment for much of the industry. Rubenstein has seen such economic conditions before: he worked in the White House during administration of President Jimmy Carter. His career also included a stint working alongside Federal Reserve chair Jerome Powell, whom Rubenstein hired at Carlyle in 1997.

Lately, Rubenstein has been conducting scores of interviews of his own, for both his television shows and his most recent book, How to Invest. It includes 23 Q&As with investors ranging from BlackRock CEO Larry Fink to hedge fund managers Seth Klarman and John Paulson.

Rubenstein recently spoke with Private Equity News’ sister title Barron’s about what makes those investors successful, the economic environment, and whether anyone could have seen the crypto meltdown coming. An edited version of the conversation follows.

Barron’s: FTX, the second-largest cryptocurrency exchange, is in bankruptcy, and its founder, Sam Bankman-Fried, is accused of misusing customer funds. You interviewed him for your own show this summer. Could we have seen something like this coming?

David Rubenstein: A lot of times, young people have some really clever ideas, and they can do things older people can’t imagine. He seemed to be intelligent, and to have built a very good business in a short period of time. I was willing to be swept up in the idea that maybe he’s smarter than people my age can understand. It’s clear, from what I have read in the press now, that there seems to have been some activity that was inappropriate, illegal, fraudulent, whatever you want to call it. I don’t have the facts.

My view is that you shouldn’t put more money into any cryptocurrency than you’re prepared to lose. If you enjoy going to Las Vegas, fine, as long as you allocate money that you can afford to lose. This event will likely lead to greater regulation and a shrinking of the industry for a period of time. I don’t think the industry will disappear.

Your family office has investments in the crypto industry. What do you see as its value?

I get nervous at times. Sometimes, when I’m filming something for Bloomberg, the camera guys come up to me and ask about Bitcoin, and show me their iPhones and all the cryptocurrencies they’re following. You have to wonder if that’s a sign of the top of the market. But if you go back to the beginning of the internet, people never foresaw the way it would change our lives. It may be that, right now, we just can’t see how crypto is going to change them.

Did you invest in FTX?

I didn’t. My family office team looked at FTX at the $30bn valuation [earlier this year]. It didn’t move forward, and the memo never reached me, but the other day they showed me what they had prepared. The memo pointed out all the concerns about conflicts of interest. There wasn’t a lot of transparency.

We recently got some data points suggesting that inflation might be turning the corner. Could that lead the Fed to pivot on interest rates?

Powell isn’t an economist. So, he has the advantage of not speaking in Fedspeak. He’s good at explaining what he’s doing. He’s a numbers person, and, as he says, he’s going to follow the data.

That said, 2% [inflation] might be a bit tough to get to. Normally, when the unemployment rate goes up, inflation comes down. This is an unusual labour market. You normally have 66% of the adult population in the workforce, and now it’s 62%. A lot of people 55 and older haven’t come back, post-Covid. I don’t know whether we can get the unemployment rate to go as high as it needs to be to get inflation down.

But if inflation falls another month and another, people will feel, OK, it doesn’t have to go to 2%. The right trend is all we care about. The Fed is likely, at some point, to get off the 2% target and maybe accept inflation at 3%. By the end of next year, inflation will be going in the right direction, and if it does, you’ll probably see some easing by the Fed.

Where do you see investment opportunities right now?

Right now, at Carlyle, an enormous percentage of our investments go into healthcare, not only in the US, but also around the world. It is one of the fastest-growing and likely most stable areas of economic growth. When I worked in the White House in the late 1970s, 7% to 8% of US GDP was in healthcare. Today, it’s roughly 20%. People realise if they spend money, they get better treatment and are going to live longer. As more people around the world become wealthier, they increasingly have the same view that Americans do.

Any other sectors?

Financial services. As people get wealthier in the US and around the world, they want to use their money more efficiently. There are a number of areas in the next five years that will do well in growth capital and venture, including artificial intelligence, computational biology, quantum computing, and Crispr-related investments. Despite the cryptocurrency-related challenges of today, things related to blockchain technology are likely to see a fair amount of growth, as well.

For individual investors, would you say the same thing?

The average investor shouldn’t try to be Warren Buffett. It’s just too difficult to beat the markets. If you do for one or two years, you’re going to think you’re a genius, just like when you go to Las Vegas and you win for a couple of days, you think you’re a genius, and then you lose it all. If you get some pleasure out of it, that’s a different situation. But if you’re only looking for a rate of return, an index fund is the best bet.

What is your outlook for private equity?

It’s harder to raise money in the US than it was a couple of years ago. US public pension funds have less money to allocate because the markets are down 20%. Sovereign wealth funds are a different kettle of fish. In the Middle East right now, there’s an enormous amount of capital available to invest in alternatives, because oil prices have been high for some time. If you have a very good track record, and you’re a well-known commodity, you can raise money readily. There’s more competition than before. You have to spend more time raising it. But there is money out there for good funds.

Is it getting harder to find good places to put that money?

When buyouts first came along in the ’80s and ’90s, people were looking for net internal rates of return of 20% a year. Today, because interest rates have been low for a while, and because there’s more competition, people are willing to accept lower rates of return, say, 17%. Is it harder to find deals? It’s not easy, but people are willing to accept somewhat lower rates of return, and therefore, you can probably still get deals done. Today, it’s hard to do large buyouts because the debt capacity isn’t quite there in the markets. But there’s still a fair amount of deals getting done, midsize deals.

Among the investors, you interviewed for your book, what were some common traits that made them successful?

They tend to be pretty good students. A lot of them have graduate degrees. One of the good things they have that I don’t have is the ability to forget their losses. They make mistakes and get over it quickly. They also have an intense, incredible intellectual curiosity. They’re not just reading things that relate to areas of investing. They’re reading everything. You never know what information will be useful to you. And they tend to be doing this because they enjoy it. The people that I’ve interviewed all made a lot of money. They don’t need to be working for a living.

What’s the missed opportunity that you have trouble forgetting?

Well, when Mark Zuckerberg was at Harvard, my son-in-law, now, and my daughter were there as students, and they described this company that he was starting, and I said, it’s a dating service. They said, yes, but it’s not going to be only for Harvard students. It’s going to be a dating service for all kinds of schools. And I said, I’ve seen these dating services before. They’re not going anywhere. So I didn’t invest. I’ve made a lot of mistakes.

This article was published by Barron’s, part of Dow Jones

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