INTERVIEW: What’s Next for Private Equity

by Tom Taulli | September 27, 2012 2:00 pm

I recently read The New Tycoons[1], which tells of the emergence of the private-equity industry with behind-the-scenes details of top dealmakers from firms like KKR & Co. (NYSE:KKR[2]), Carlyle Group (NASDAQ:CG[3]), TPG Capital and Blackstone Group (NYSE:BX[4]).

To start, it’s definitely a great read. But I also had the chance to interview the author, Jason Kelly, whose day-job is reporting for Bloomberg. Here’s what he had to say:

Q. What are some of the big trends you see for private equity for the next few years?

A. Returns are going to be lower and private-equity managers are going to have to work harder to get them. Their own investors — pensions, endowments, sovereign wealth funds — are much more demanding about getting more information, and really getting what they pay for. That pressure, along with the political spotlight of the 2012 election, going public and owning all those high-profile brands, all add up to a pretty simple conclusion: The old days of quietly conducting this very lucrative business are long gone.

Q. In the book, you do a case study on Dollar General (NYSE:DG[5])? Could you describe how this is a new approach to private equity and how it might help the economy?

A. Dollar General seems to be a case where private equity — in this case KKR — went in and did something meaningful, then left the company — and KKR’s own investors — better off along the way. This was a company that had lost its way and needed a pretty radical reboot.

What appealed to me about the example in part was that it was relatively easy to see and understand what they did: Hire a new CEO who was going to leave nothing unquestioned, down to the flavors of Gatorade and the amount of shelf-space devoted to candles and toilet seats. This is also a company that’s expanding its footprint, opening new stores and making the old ones better.

It also seems like a reasonable way for private equity to get its money out and back to investors. Instead of a dividend recap, which many find fraught, they took Dollar General public and methodically sold off the shares — as the stock was rising.

Q. You cover the main players in the book like KKR, BX and Carlyle. Which ones do you think are the best positioned?

A. That’s a tough question. All of them have very committed investors in their core funds, which tells me they’re doing something right at least for their chief backers. All of them are also pushing to be something much more than private equity firms — looking at real estate, credit funds, hedge funds, capital markets businesses. If that’s the wave of the future, Blackstone is best positioned. They’re the least tied to a single business and have built an incredibly influential real estate business in particular.

Q. What surprised you when you went through the process of writing the book?

A. The breadth of what they own never ceases to amaze me, and it was definitely a surprise as I reported the book. The other day, someone was talking about Dave & Buster’s going public, and I realized it was private-equity owned.

I also was surprised at a lot of the stories of the origins of the firms and the men themselves. Especially in the context of the election, I think private equity gets lumped together in the broad category called “Wall Street.” And while it’s certainly intertwined in the world of high finance for better and worse, the backgrounds of some of the big names (Dan D’Aniello working at Marriott (NYSE:MAR[6]), David Bonderman with his work around historical preservation) are distinctly non-Wall Street.

Finally, I’m still surprised at the amounts of money we’re talking about when it comes to funds and compensation. Being a financial journalist, I’m pretty jaded, but … wow. It’s breathtaking.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[7], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[8] and “All About Commodities.”[9] Follow him on Twitter at @ttaulli[10]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. The New Tycoons:
  2. KKR:
  3. CG:
  4. BX:
  5. DG:
  6. MAR:
  7. IPOPlaybook:
  8. “All About Short Selling”:
  9. “All About Commodities.”:
  10. @ttaulli:

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