Why Rubenstein Believes SWFs May Become the Biggest Single Capital Source for Private Equity

Posted on 03/05/2014

David Rubenstein is the co-founder and CEO of the Carlyle Group – a well-known alternatives manager that has carved out a significant corner in the world of private equity. At one of the popular private equity conferences in Berlin, SuperReturn International 2014, Rubenstein laid out his perception on the current and future state of private equity – with an obvious tinge of optimism. A key message during the presentation is that private equity firms should look to sovereign funds as a source of capital. The asset growth rates of sovereign wealth funds has outpaced U.S. public pensions in the last five years.

In the future, David Rubenstein sees sovereign wealth funds as the biggest single source of capital, replacing U.S. pension funds.

When Rubenstein opines, private equity professionals tend to listen. Why? The publicly-traded private equity firm has been able to attract goliath-like limited partners such as large U.S. pension funds, endowments and sovereign funds. The billionaire philanthropist often makes forecasts in the private equity community – highlighting that more private equity firms may go public.

2014 – A Private Equity Renaissance

2013 was definitely a promising year for the private equity industry as deal flow and capital raises maintained upward trends since 2010. In fact, 2013 became the biggest private equity fund raising year ever since the global financial fallout of 2008. Deal volume in 2013 carried on in a positive direction, but remained around half the level of 2006.

Global Private Equity Deal Volume – Billions USD

Deal Flow Private Equity
Source: Thomson One & S&P Leveraged Commentary Data – December 2013

Sovereign Wealth Funds and Emerging Markets

In the past decade, private equity firms have relied heavily on U.S. public pensions as limited partners – examples include: NYSTRS, CalPERS, CalSTRS, etc. This significant source of public capital is still a viable option for many private equity firms, but the importance and growth of sovereign wealth are impacting the landscape in institutional investor capital sourcing.

According to his presentation, in the future, David Rubenstein sees sovereign wealth funds as the biggest single source of capital, replacing U.S. pension funds. The reasons are numerous including the growth of the sovereign wealth fund investor class, currently at US$ 6.3 trillion in assets. Second, is the number of sovereign wealth funds increasing allocation to private equity – expanding into other alternative asset classes. Wealth funds like the Abu Dhabi Investment Authority have been frustrated with the low-yield environment. From the beginning of 2000, only a handful of sovereign wealth funds allocated to private equity, by 2013, even the smaller sovereign funds participated in the asset class. Last, is the slight pullback from some large pension investors like CalPERS. Recently, CalPERS modified its asset allocation, lessening allocation to private equity, a hearty blow to U.S private equity firms. Some of the reasons include the fees and unclear costs paid to private equity firms, causing ire among some board members and the public.

The last major trend is that mega asset owners have sought separately-managed funds with the large private equity houses versus allocating to commingled funds.

Keywords: California Public Employees Retirement System, New York State Teachers Retirement System.

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