Money Rehab with Nicole Lapin - Masterclass on Private Equity (and Bananas!) with David Rubenstein

Episode Date: September 8, 2022

David Rubenstein is co-Founder and Co-Chairman of The Carlyle Group, host of The David Rubenstein Show: Peer-to-Peer Conversations on Bloomberg TV and PBS, and a casual owner of the Magna Carta. In short, he is one of the GOATs of finance— and today, he joins Nicole to talk private equity. Check out David's latest book here: https://www.simonandschuster.com/books/How-to-Invest/David-M-Rubenstein/9781982190309 

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today we're getting a masterclass on private equity with one of the goats of the financial biz, David Rubenstein.

We're going to get into David's background in just a moment, but here's a primer. David is the co-founder and co-chairman of the Carlyle Group, one of the world's largest and most successful private investment firms. How large, you might ask? Carlyle now manages $325 billion from 26 offices around the world. So David is a big deal. But now that he's on money rehab, he is a really big deal. We've talked on the show a lot about investing in the stock market, which is investing in public companies. But private equity is a whole other world that we're going to be visiting today with David. So let's go. I'm so excited to say, David, welcome to Money Rehab. My pleasure to be here.

Have you ever needed Money Rehab or did you just come out, I'm assuming like of the womb somewhere in Baltimore where the Orioles were still there knowing all the things about money? No, I wouldn't say that I knew all that. I came from very modest circumstances and probably didn't know a lot of the stuff I should know. I'm still trying to learn stuff in my age. How did some of those experiences, you're the son of a postal clerk, your mom worked for part of your childhood. How did those experiences shape your relationship with money? Well, when I was growing up, my parents always talked about money because they didn't have any money. My father, you know, mother, basically were blue collar workers. They didn't have college or high school degrees. And so they

were really subject to paycheck to paycheck kind of lifestyle. And so they were always talking about how things were expensive. They couldn't afford this or couldn't afford that. So, you know, I tended to recognize that, you know, money was an important part of life. But I would say my parents were reasonably happy with their life. They weren't wealthy, but they were happier with their life than many very wealthy people that I know are with their lives because their expectations were lower. But I was not obsessed with making money. I really didn't care about money that much because I was more interested in government and politics.

And then after the Carter White House kind of imploded at the end of the administration in 1980, I went back into the legal world and then eventually started Carlyle. And then when you're in the business world and you're investing, you tend to measure your success by your money. And so I got more involved in making money, but I really didn't care about it that much earlier in my life. Two of the big truisms on Wall Street, you correct me if I'm wrong. One is buy low, sell high.

And the second is it's better to beat low expectations. So do you feel like that's what you did? Well, my parents' expectations were really low because they were happy that I graduated from college. They weren't even sure I was going to go to college. They hadn't gone to college. They thought it was a different kind of thing than everybody would do in their time. And nobody ever thought I was a charming person, a great athlete, or a brilliant scholar.

So the expectations were relatively low for me. Though, if you're an only child, your parents do tend to tell you you're better than you really are because, you know, you're the only child. I found it really interesting that you also started quite young. I also started at Northwestern quite young, but I imagine that it's different for young men and young women to start at 16. Duke had a program that, I mean, not to, Baltimore had a program that my parents thought it was a great thing. They didn't know any better. Basically, you did junior high school in two years as opposed to three years. And I got into that when I was in the sixth grade.

So I could do this program. And I didn't realize it's not a good idea to start college when you're 16 years old, probably. And so I did it. And in hindsight, I wish I hadn't done that. Why? Well, because I was younger than everybody in my college class, pretty much. And, you know, you're less mature. I wasn't as good at certain things. I would have been if I was a year older. So in hindsight, I wish I had taken three years of junior high school. But obviously,

other people have done OK skipping a year of high school or junior high school. So it's not the end of the earth. Did you skip a year of school? Yeah, two years. Okay. So if somebody is listening to this and they don't even know what Carlisle is, can you help explain Carlisle? And can you help us understand what private equity is? Yeah. Private equity is a two-word phrase that means different things to people in the United States and different things to people outside the United States. But in the United States, it basically means investing private money as opposed to publicly traded stock money into companies with the purpose of either growing them if it's venture capital or improving them if it's buyouts. And it's designed to make a good rate of return but also make companies grow into the Modernas or the Facebooks or the Microsofts of the world or to restructure companies and make them more efficient than they would have otherwise been. dramatically is that the rates of return for investors who invest in venture capital or

private equity or buyouts have been so high that it has given people a higher rate of return than any other legal kind of investment over the last 5, 10, 15, 20, 25, 30 years or so. So Carlyle is a private equity firm or buyout firm that I started in 1987, it's grown to be one of the largest in the world. Is it possible for anyone to put money into Carlyle or another private equity group? How does that work? For large investors, high net worth people or institutions, of course, they regularly invest in organizations like ours or Blackstone or KKR. For the average person who has a modest net worth, as a general rule of thumb, the U.S. government has said, we don't want you to go into something that is as risky as private equity. So very often, they are not allowed to go in because

they're not considered, quote, accredited investors, which means more or less you have a certain net worth and certain income. It's a little unfortunate that we do it that way because very often, the people that need the higher rates of return are people that don't have a lot of money. And the people that don't need the higher rates of return are very often wealthy people. But that's the way our government has worked. The average person who wants to invest in private equity probably can buy publicly traded stocks of private equity firms. That's not the direct correlation with the private equity investments, but it's a proxy for it. And that somebody can do that by just buying shares in the public exchange of firms that are publicly traded that are in the private equity

business. A lot of money that private equity companies, yours, and you mentioned some of the other biggies taken as from pension funds. So could people be invested and just not even know? Of course. Most people in the United States have some kind of pension fund. And the pension funds are the biggest investors in private equity. So CalPERS or CalSTRS, the two biggest pension funds in the United States and from California or New York State Common Fund or other funds like that, they are invested. And then if you're getting a pension from one of those, then obviously you are invested, even though you may not know it. And if somebody wants to get into private equity, how do they do that? To get into private equity, I think it's useful to get a college degree.

I think it's useful to, after college, work in a large bank program, Goldman Sachs, JP Morgan, Morgan Stanley. They have very good two-year training programs. Then after that, I would say you can either go work for a year or two in a private equity firm or go to a business school, get an MBA, and then go to a private equity firm later. But it's not usually the case that private equity firms that are large hire people that haven't had some training at some kind of financial service institution before they get into private equity. There are a lot of industries that you don't need a college degree. Is finance still one that you think you do? If you're a genius and you have a talent for numbers or business, you don't need any degree. Bill Gates doesn't have a college degree.

Mark Zuckerberg doesn't have a college degree. They're not in private equity. They've done okay. Steve Jobs didn't have a college degree. So obviously, if you're very talented and you have a drive, you can do well in anything. But as a general rule of thumb, if you play the odds, you're more likely to get a job in private equity if you have a college degree, some training and financial experiences or financial institution, and then an MBA than if you drop out of Harvard and just go look for a job. That's possible, but it's harder to get in private equity that way. We're in a bear market. I've heard you talk about whether or not we're in a recession. I believe you said that Carter called it a banana, tomato, tomato, banana,

banana. I don't know. What is your prediction for where the economy will head in the rest of the year? The banana reference was the fact that Carter's inflation advisor said we were going to be in a recession. And Carter said, don't use that word. So the advisor kept saying, we're going to go into a banana. But as to whether we're in a banana now or not, nobody really knows. Traditionally, two consecutive quarters of negative growth will give you a banana. Well, while we've had two consecutive quarters of negative growth, the other indicators are not indicating a recession. So we've had very high tax receipts. We've had very high GDP, very high retail sales. And we've also had very, very low unemployment. Normally, in a recession, you have unemployment being higher than it is today, 3.5%. So we're not in a recession now.

Throughout the last 50 years or so, the Federal Reserve has tried to raise interest rates, let's say, nine or 10 times to beat inflation. And in almost all of those cases, the ultimate result was a recession. A soft landing, so-called, is hard to do. Jay Powell used to work at Carlyle. I've known him for a long time. He's very smart. Whether he can engineer a soft landing, I don't know. So I don't think we're in a recession now. But I'd say the markets are suggesting that we'll probably go into a modest recession at some point next year. That's what the market indicators subscribe to. I don't know yet whether that's true. So for people with long time horizons who put their blinders on, that's no problem. But what about folks who are heading into retirement? Should people facing retirement within the next

five years switch up their investment strategy? The biggest mistake that investors make, everybody agrees with this, is they get in the markets at the wrong time, they get out of the wrong time. So when the markets are going down, as they have, as you suggest, we've had a bear market, they tend to get out. That's generally not the best thing to do. Generally, when markets are rushing up and going high, they get in. What you should generally do is try to do what Warren Buffett does, avoid transaction costs, avoid taxes by holding on your assets through thick and thin. Eventually, if you invest in good companies with good management, they eventually will do well when the economy comes back. So I would say for people

who are retired, the most important thing is to not squander what you have and not try to be an investment genius and not try to get outsized rates of return. Because in retirement, you generally don't need those outsized rates of return to live reasonably well. Where do you think there are some areas of investing interest that people should look toward? Well, I think health care is a very good one because, you know, we have a large percentage of our economy now health care related. When I worked in the White House in the late 70s, 7 to 8 percent of the GDP was health care. Now it's about 21% or 22%. As people age, they need more medical attention and they want more medical attention. And

that's a very good area to invest in. Financial tech, fintech as it's called, is probably another area where people are going to get their money managed differently and have their assets handled in a certain way. I think that's a very attractive area as well. I know you interviewed Ray Dalio from Bridgewater. He came out and talked about big holdings in J&J and P&G during these economic times. Would you agree with that, those consumer staples? I think some consumer staples will do well. They may not outperform the general economy. And now the problem with some consumer staples is that they have to increase their prices

because of inflation. And therefore, because they're very dependent on consumers and consumers generally tend to shy away from things that have price increases that are above what they think is appropriate, you might find that some consumer and retail areas are not going to do quite as well as they would before inflation became as big a problem as it is. You wrote a book called How to Lead. You've now written a book called How to Invest. What do great leaders and great investors in your work have in common? What they have in common is they tend to come from middle class families, not poverty stricken families. They tend to be good in numbers. They tend to like to make decisions. They tend to not like to delegate.

They tend to read enormous amounts of material, even if it's not relevant to their day to make decisions. They tend to not like to delegate. They tend to read enormous amounts of material, even if it's not relevant to their day-to-day job. And they also tend to be willing to defy conventional wisdom, which is to say they're willing to do things other people tell them won't work. And they have the strength of personality to do that and get away with it. But I think that's what they tend to have in common. You are very interested, of course, in history. Are there any insights from our past informing us of how you see our current economy?

Well, history is the best indicator of what's likely to happen in the future. And history would suggest today that probably we're going to be in a not wonderful investment period for a while because interest rates are going up increasingly. And that's probably going to produce lower stock market returns, and it's going to make the economy operate with more challenge. For today's tip, you can take straight to the bank. We flexed our financial muscles enough today. So as a palate cleanser, here's a snippet from before my interview with David started,

where one of my producers, Mike, jumped in with a very pressing question about the Magna Carta. My only question for you that I that I did want to ask because I thought it was astounding that you own the Magna Carta. I don't know how these I don't know if it's an auction or how it works, how you get involved in purchasing something like that. But was the Magna Carta your first choice? Or was there something, was there another document that you were interested in that maybe you had to say like, well, I can't get the Treaty of Versailles, so I can't get the Magna Carta. No, I didn't have any interest in it until I actually was invited to a viewing of it. It turned out they were auctioning it the next night.

And the curator from Sotheby's said it would probably be bought by somebody outside the United States. And I thought that it was important in our country's history. So one of the 17 extant copies should stay here. And so I bought it and put it on permanent loan at the National Archives. That's awesome. Thanks. That's a great story.

Thanks for doing that. My birthday's been made. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.