David Rubenstein, CEO of Carlyle Group, joined Bloomberg Television's Stephanie Ruhle and Erik Schatzker today live from Davos to discuss philanthropy, income inequality and the state of private equity.
Rubenstein told Bloomberg TV he sees plenty of opportunity for private equity, having only "touched the surface in the emerging markets."
To follow Bloomberg's coverage of Davos: http://www.bloomberg.com/davos/
Rubenstein on billionaires that are not so philanthropic:
"Well, I don't think I can control what other people do with their money, but I do think it's important that people who have a fair amount of money do something useful with it other than just buying, you know, homes or yachts or things like that. At some point in life, people realize they need to do something, I think, to give back to society, so there is a lunch here that Bill Gates and I are hosting for people who have signed the giving pledge, but also for people who might sign the giving pledge, and we had that last year, and it worked quite well, and I hope we'll be successful this year."
On the giving pledge:
"The giving pledge -- the giving pledge is something that Bill Gates and Melinda Gates put together with Warren Buffett. It's designed to get certain people to give away, during their lifetime or at death, at least half of their net worth. And it has now about 120 people who've signed up to do so around the world, but most of them are in the United States. We're increasingly working to get people outside the United States to do so. Philanthropy is more of a United States preoccupation that probably people outside the United States, so it takes a little more work to convince people outside the United States to give away half of their net worth. But we're making progress."
On how to get the next generation to make a real philanthropic commitment:
"Well, for one, if you are doing something as a leader of a firm, and maybe you can set an example for other people, so if you can be a role model, other people who might want to follow your example, see somebody that they might want to emulate, that's one thing. Secondly, if you talk about this and explain what you're doing, you might have some impact on people who work for you. Well, there are people in our firm who are quite philanthropic, who are quite, you know, junior, relatively speaking, but also we have a program in our firm where we match what people give away, so for a young employee in our firm wants to give away X dollars, we will match that up to a certain amount."
On whether philanthropy is the answer to inequality:
"No. Philanthropy is -- we have to remember, philanthropy isn't going to solve all the world's problems. Right now, philanthropy in the United States, people give away roughly -- about 2 percent of GDP, so it's a small percentage of GDP that's involved in philanthropy. It's important, but a small percentage. To solve income inequality, we need to educate people better. When you have 25 percent of the people who enter high school in many urban areas not completing high school, you're now creating people who are not going to get better jobs. They might often wind up in doing things that are not socially acceptable. And a higher percentage of people graduate -- do not graduate from high school wind up in our prison system, which is the largest in the world. So I think income inequality cannot be solved overnight. We have to commit to do it over a period of time, but education is probably the key."
On whether our capitalist system allows people to make too much and accumulate too much wealth:
"Well, our capitalist system isn't perfect. No system of capitalism -- there are different types -- is perfect, but our system has enabled the United States to build, I think, the greatest economy in the world and the greatest country in the world. So there are some imperfections. When Adam Smith more or less invented capitalism, he didn't say it was a perfect system. I think it's a better system than any other system, but every system has imperfections. I think our country now allows a lot of people to make a great deal of money, but many of them are quite philanthropic and they are giving it back to society. You can't be buried with the wealth, and many people recognize that."
"But what we need to do is make sure that the R&D in our country, the education in our country, the other things that make people come up from the bottom, as I did -- I came from very modest circumstances -- and people come up from the bottom, eventually people see the merits of our system. It's possible to rise up in our system."
On income inequality and whether it's fair that talent move from Wall Street banks to Carlyle because of higher compensation, when that money could go to those who have important jobs, like teachers, but get paid less:
"You can always cite examples of how the world would be better off if teachers got paid more money, and teachers should get paid more money. Probably teachers deserve more money than private equity deserve money, but the system is what it is. I can't overnight change the system. Probably the highest paid people should be interviewers on Bloomberg. But I can't change that system overnight. So I think I have to work through this very slowly with you and others trying to convince people that people who do public service and teachers do deserve higher salaries, but I don't think overnight we should say the whole system is bad because there are a lot of people who do make a lot of money."
On whether a private equity firm can afford to define success in terms that are not purely financial:
"There's no doubt that early on our investors only cared about the rates of return, but I think our investors now care a fair bit about whether we're creating jobs, whether we're paying our share of taxes, whether we're shipping jobs offshore, in the case of U.S. investors, so it's more complicated than it used to be. But there's no doubt we are a capitalist organization, and as a capitalist organization, our goal is really to make profits, take those profits, and do something useful with them. And hopefully we're doing that."
Rubenstein on his investors and how to balance their concerns with his own:
"There's no doubt public pension funds in the United States are more motivated to worry about some of these considerations than, say, individual investors, but public pension funds increasingly talk to us about things like ESG concerns, and they want to make sure that we're doing things that are environmentally safe, and we want to do those things, as well. It takes a while. Life is a balance. That's what life is all about. So we try to do things that balance things. We don't say we'll get no return, but we'd be perfect on environmental factors, but we try to have a balance."
On how much return would have been compromised if he had factored in these concerns in the early years:
"It's hard to say, but there's no doubt that we're trying to get returns that are higher than you're going to get in public fixed-income or public equities. And we have been able to do that. And private equity overall over the last 5 years, 10 years, 20 years has outperformed public equities, public fixed-income, and I think that will continue to be the case. I can't say whether we'd be better off or the world would be better off if we didn't get 25 percent rates of returns, but we got 22.5 percent. I can't really judge it that way. I do think, though, the important thing that I want to get across is that now private equity firms are very sensitive to the fact that investors want you to worry about more than just the rate of return. That's an evolutionary change. It hasn't happened overnight."
On private equity firms getting into new businesses and whether they can handle the risk tolerance:
"Well, Bloomberg started off as a terminal company, and now, as I recall, it's in the interview business, it's in the news business, in the television business. Can Bloomberg handle all this and can you manage all these problems and all these different things that you're doing? Well, my point is that lots of companies start out with one thing, and then they -- if they're good at one thing, they can do other things, as you're doing successfully, and we think we can do successfully. You can't do it by just wishing it; you have to have good people. We think we've recruited good people to oversee these other businesses."
On whether there is a limit to how big or diversified Carlyle can be:
"Well, I don't want to sound silly by saying there's no limit, and I don't want to say we know exactly what the limit is. We're trying to do things where we know we can get a good rate of return for our investors, and as long as we continue to do that, we'll keep expanding a bit, but we do it very carefully. We don't have 50 new things a year, one or two new things a year, make sure it works well, and then we'll add to that."
Rubenstein on whether Carlyle could be a $500 billion firm:
"Well, I wouldn't say in a few years that would be ridiculous. Remember, BlackRock has $4 trillion under management, and nobody's saying that that's ridiculous. They're doing a very good job in what they do. So who knows how large these firms could be? When we first started, we thought $1 billion was a gigantic amount of money, and now $185 billion is large, but it's not as large as it could be."
On whether there are enough valuable assets to invest in if Carlyle did get to $300 billion, $500 billion:
"Well, remember, right now, private equity is roughly a $3 trillion business, about $2 trillion in the ground, $1 trillion in dry powder, but the public markets are roughly $70 trillion. So we're still a small business, relatively speaking. There's still plenty of opportunities out there, and we've only touched the surface in the emerging markets. About 85 percent of all the money invested in private equity is still developed -- invested in the developed markets, so we still have a long way to go before the emerging markets are saturated with private equity investing."
On whether you can invest in the Middle East while there's political unrest there:
"Well, there's not unrest in every part of the Middle East, and we do look at parts of the Middle East. We have a fund to invest in that part of the world. And, obviously, like any part of the emerging markets, you'll have to be sensitive to certain issues, but we think we can do it and we are doing it."