ExaminingtheUbiquityofPrivateEquity

dealbook.nytimes.com /2012/09/17/examiningtheubiquityofprivateequity/
ByPeterLattman InvalidDate
JasonKelly,asareporteratBloombergNews,hasbeenchroniclingthemovesoftheworldslargestbuyoutshopsandtheirbillionairefounders
longbeforetheprivateequityindustrybecameapoliticalfootballinthepresidentialelection.

OnSept.11,Mr.Kellysbook,TheNewTycoons:InsidetheTrillionDollarPrivateEquityIndustryThatOwnsEverything,waspublishedbyJohnWiley&Sons.He
spokewithDealBooklastweekaboutthebookandthelegacyofprivateequity.Theinterviewhasbeencondensedandedited.

Q.

AtthebeginningoftheTheNewTycoons,youdescribeamomentwhenyourealizedthatprivateequitymightberelevanttoabroaderaudience,andnottojust
financialjournalistnerdslikeus.

Wiley

A.

IwasatLegolandwithmykidsandrealizedthatBlackstoneownedit.ThenightbeforewehadstayedataHiltonhotel,whichBlackstonealsoowns.Weweredriving
aroundinarentalcarfromHertz,anotherprivateequityownedbusiness.EvenforsomeonewhospendsmoretimethanIcaretoadmitthinkingaboutprivateequity,I
hadntrealizedtheextenttowhichthesefirmswereembeddedinourdaytodaylives.

Q.

Itsquiteacoincidencethatyourbookhascomeoutatatimewhenprivateequityisinthespotlight.

A.

Itis.NeitherBainnor[Mitt]Romneyisprominentlyfeaturedinthebook,althoughtheRomneycandidacyiswhyalotoftheseguysandtheirbusinesspracticeshave
beenbroughttothefore,liketheissuessurroundingtheirtaxesandjobcreationordestruction.ButthepointofthisbookwasnottobeaboutRomneyoraboutprivate
equityinpolitics.Itisreallymeanttoillustrateandexplainboththedepthandbreadthoftheindustry,itsubiquity,andsomeexplanationofwhattheseguysactuallydo.

Q.

IthinkthatyoushouldhaveconsideredputtingMr.Romneyinyouracknowledgmentsbecausesurelyhiscampaignwillhelpyousellmorethanafewcopiesofthisbook.

A.

Thatsprobablytrue.IguessthatIamindebtedtohim.
Q.

Youbegancoveringprivateequityjustastheleveragebuyoutboomwascresting.Mostexpertspredicteddireoutcomesforthosedeals,yetithasntquiteturnedoutthat
way.

A.

TakeHiltonforexample.IalwaysrememberthedateoftheHiltonbuyoutJuly3,2007thesamedaythatK.K.R.filedtogopublic.Itturnedouttobethelastbigdeal
ofthebooma$20billionplusdeal,abig,brandnamecompany,andalotofdebtusedtobuyit.

AsthefinancialcrisisdeepenedHiltonappearedtobeintrouble,yettheywereabletodosomeprettycleverfinancialmaneuvers,fixtheirdebtsituationandrestructure
theirbalancesheet.Thebusinesshassinceimprovedandatthispointitappearstobeafairlyhealthycompanyandonethattheyvesaidtheylltakepublicinthenext
coupleyears.

Q.

Youspenttimewithalotoftheheadsofthesefirms,includingStephenA.SchwarzmanofBlackstoneandHenryR.KravisofK.K.R.,DavidM.RubensteinofCarlyleand
DavidBondermanofTPG.

A.

Evenasthesefirmshavegottenbiggerandbiggerovertheyears,theyarestillverysharpreflectionsoftheirfounders,andtheseguysareallnowmostlyintheir60s,
closinginon70,andarethinkingalotabouttheirlegacieshavingcreatedwhatseemtobereallastinginstitutionsatthispoint.

Q.

Privateequityfundschargeexpensivefeesandlockyourmoneyupforadecadeormore.Aretheyworthit?

A.

Theirinvestors,especiallypublicpensionfunds,aredesperateforreturnsrightnow.Inazerointerestrateenvironmentandasituationwhereapensionneedstoget
returnsof8percentonaverage,someonewhoiscomingbyandsayingtheycandeliverupwardof20percentisveryattractive.Butreturnshavesufferedandwere
seeinginvestorsstarttopushformoretransparencyandmoreclarityonfees,anditwillultimatelybealesslucrativebusiness.

Q.

Whatdoesthebusinesslookslikedecadesfromnow?

A.
Asthebiggestofthesefirmshavegonepublic,theyhavereducedtheirrelianceonprivateequity.AtBlackstone,privateequitynowaccountsforlessthan20percentof
thefirmsprofit.Theyreasmucharealestatefirmoramoneymanagerwhodirectsmoneytohedgefundsoracreditinvestorastheyareaprivateequityfirm,yet
theyrestillbestknownfortheirprivateequity.Itshardformetoimaginethat20yearsfromnowweregoingtobethinkingofthemandK.K.R.andCarlyleasprivate
equityfirms.

Q.

Listentothepoliticalrhetoricoutthereandyoudeitherbelievethatprivateequityiseitheraforceforgoodoraforceforevil.Yourbookseemstotakeadownthemiddle
approach.

A.

PartofthereasonIwantedtowritethebookwastogobeyondtheheadlines,whichdefinitelytendtowardheroicorvillainousextremes.

Aswithsomanythings,theanswerstothebigquestionsarentneatandtidy,whetheraroundjobs,debtortaxes,andpeoplewildlyandloudlydisagreeonalotofthose
issues.

Q.

YouhaveaquoteintheepigraphofyourbookfromJohnKennethGalbraith:Theresacertainpartofthecontentedmajoritywholoveanybodyworthabilliondollars.
Whydidyouincludethat?

A.

IwaslookingaroundforquotesrelatedtobillionairessinceallofthemaincharactersfitthatdescriptionmanytimesoverandIwantedtounderscoretheeyepopping
wealththisindustryhascreated.

Thatquotestruckmeasironictothepointofhilarious,especiallyin2011and2012.Hehadmeatcontentedmajority.Givenwhatwasgoingondowninthefinancial
districtandatplacesfromPhoenixtoChapelHill,allofwhichIhappenedtovisitforonereasonoranotherwhileIwaswriting,IalsoconsideredalyricfromtheR.E.M.
songWelcometotheOccupation.

Q.

Whatsthelyric?

A.

Youaremadandeducated
Primitiveandwild
Welcometotheoccupation
Herewestandandherewefight
IloveR.E.M.andlistenedtotheirmusicenoughwhilewritingthatIfeltcompelledtoincludethemintheacknowledgments.

Q.

SoyouthankR.E.M.butnotMr.Romney?Letsleaveitatthat.