grace and frankie, hemlock grove. season one of... show me house of cards. xfinity watchathon week starts april 3. get unlimited access to all of netflix and more, free with xfinity on demand. ♪ jason: it's a $2.5 trillion industry populated by some of the biggest and most influential investors in the world. i am jason kelly and i am here in berlin at a conference, the biggest gathering of private investors of its kind. over the past few days, we talked to some of those investors about what's on their minds. in a world awash with money, they make dealmaking more difficult going forward. our first conversation is with

david rubenstein. the cofounder and co-ceo of the group. one of the most important voices in the equity industry. i started asking him about the effect that president trump has had on his business. david: we are enjoying what the president is talking up. i don't think anybody anticipated this from the day of the election. obviously, a lot of stocks are up. in the financial services. i think equity has benefited from that. when public equity goes up, this is good if you are selling things. it makes things more expensive, but this conference indicates private equity is bullish about the economy. jason: what has the president said or said he is going to do that makes people enthusiastic? david: people from all over the world are here. they are not affected by the united states completely. but the united states is dominant in the private equity. i think the reason people are excited about it is they feel there will be less regulation. the animus that some people have

for private equity might not be there. some people don't like private equity. some people think private equity people don't do great things. therefore, they feel there is some feeling we are not as good as we think we are. the feeling is now the administration will focus on other things and not beating up on private equity. not that the previous administration did. but the atmosphere is private equity is welcome and it and the regulations coming out of washington, there may be some lower taxes. jason: an overall bullish view? david: very bullish on private equity. i've been coming to this for 20 years and i've never seen anything quite as bullish. jason: a topic that has come up a lot and the president reiterated it last night in his address to congress is infrastructure. this is something we haven't heard a lot about. suddenly, it is everywhere. how realistic is this trillion dollar figure he is talking

about? david: i think it's unlikely for it to go into effect. it takes a long time to build infrastructure and get congress to authorize it. then you have to figure out where the money is going to come from. so far, no sources have been identified. i think it's possible the money that comes from u.s. companies overseas could be used for infrastructure. that might only be $200 billion. that's a lot. but get a trillion and that is a lot. a trillion dollars may take many years to get done. there may be some private partnerships. our firm is involved in investing in infrastructure. the interesting thing is in the old days congress infrastructure was called a pork barrel and people used to say we were building bridges and dams. now we recognize we need these things and it's not called porkbarrel. it is called infrastructure. and infrastructure is a word everybody likes. jason: the enthusiasm is overall for the industry, fund raising hitting new record levels, dealmaking seems robust. how sustainable is that? are we at the peak of a cycle?

david: you never know when you are at the peak of the cycle until the cycle has peaked and you are in the bubble being burst. i don't know that we are in of peak, but i do think people think there are good returns coming out of private equity did they had drifted down a little bit, but we are 800 basis points over public equity returns on average. as long as those average a stake, people will put money in private equity and there will be more value than there used to be. we have operating managers that add value to companies. i think the industry's bullish nature is justified. jason: given the perennial overhang of capital, how quickly can managers like yourself put it to work? is there a lot of presure? david: when you take the stock markets around the world, it's probably $85 trillion. private equity is maybe $4 trillion total that has yet to be invested. it still a relatively small percentage in terms of the

overall market. the money can be invested. five years or six years to invest this amount of money. so, it can be invested, yes. jason: is money still very easy to raise? david: if it was that easy, i wouldn't be around the world all the time. it takes some time. you can't just call it in. i like to say that i wish i could just call people up in abu dhabi in singapore and say send me the money, but i have to show up. people want to put money in private equity because they think the returns are higher than any other asset class and they think the risk reward is better than anything else. money is coming in and people are saying -- we want to be the first closers of your fine because we do not want to be shut out. people used to wait until the end and now they want to mkae sure they get their fair allocation. it's a good time to raise money. jason: that was david

rubenstein. of the carlyle group. one of the themes was the amount of money pouring into the industry. i asked hugh macarthur, the global head of private equity what that meant for dealmaking going forward. hugh: fundraising returns to be strong and returns are up. the dealmaking has been very difficult because of tremendously high prices that have continued to persist in the industry. that provides a lot of headwinds for people trying to get a lot of money. that lps would like to see them put to work. jason: that's what we are hearing in the hallways. let's talk about fundraising for a second. especially for the mega buyout funds, 5 billion plus funds raised since the crisis, how long can this go on? this robust and raising environment. hugh: it's going to get harder. we call this the snake problem. and the elephant problem. the deals have been monetizing over the last four years. the lps have had their coffers filled with tremendous amounts of cash and what to put money back into the industry. because the returns have been better than people feared. as the fundraising markets have been very strong, putting that

money back into the market over the last few years, we have seen the elephant pass through the snake. there will be fewer distribution sales lps going forward. everybody is thinking it's late in the day in the economic expansion. at some point in the next five years, we may have a macroeconomic shock that may drive things down. there may be a perfect storm in the future of less cash flowing. and returns being compressed by the adverse macroeconomic conditions. that will lead to potentially tougher fundraising environments down the road. jason: you mentioned the challenging dealmaking environment as well, valuations are extremely high. we have had a huge run up of the u.s. stock market. what is the outlook? hugh: dealmaking is tough because prices are high. we have dry powder in the industry. well over a trillion dollars. we have a tremendous amount of what we call shadow capital which is institutional money. in the form of coinvestment and cosponsorship.

that is also there and that adds 20% to the dry powder that is already in the marketplace. so the amount of equity chasing deals is huge. the number of companies to buy is not growing at that rate. the amount of cheap debt is plentiful. prices are going to remain high in the future. that makes it tough to get the returns. that gps and lps expect. jason: one of the areas you pointed out in your report was technology, and a huge amount of money chasing those deals and deals getting done. what is behind that? hugh: it is interesting. seven of the largest transactions were in the tech space. both on the software and the hardware side. i think technology offers a couple of different ways to add value. that gps are really attracted to. one is, particularly on the software side and the server side, it has a growth rate that will support the multiples required to buy these assets. if i have a double-digit growth rate i am confident that's going to continue in the future and it makes me feel better about paying up for a good asset. on the other side, we see a lot of maturing technological

hardware where it's not so much rapid revenue growth, but reasonable growth with cost improvements because the go-go years of growth are gone. and we have not focused on the cost structure as we grew very quickly. now it's time to get more efficient and focus on the cost structure and get more lean and that is a way to add value as well. the tech sector has been very attractive. jason: that was hugh parker. with that as the backdrop, i asked the managing partner todd sisitsky how that changes his pitch to investors in berlin? todd: i've been hearing this for at least the last 20 years of my career. but it's true. it's even more true today because in some respects, we are returning capital. we are returning it almost three times. as a result, there is a lot of capital and people want their allocations in private equity.

what we need to do, and what our lps and important partners talked about, we need to stick to our knitting and stick to our strategy. for us, it's clear. we invest in our sector teams and spend years thinking about not trends but themes, the investable themes in the sectors and the sectors and deploy resources and create an ecosystem to find opportunities that are differentiated. oftentimes, even in this world, proprietary is not proprietary. companies can grow once we own those companies. i think of us as long-term, sector driven investors. i think we spend those years looking for the management team and once we own that business, we're going to keep growing at until we create something special. jason: does dealmaking get harder with that money out there? todd: you have to stick to what you are good at.

there is a tension between what is interesting and what's actionable. the actionable is the investment bank companies that go to 10 or 12 of your closest friends and you get a chaperoned dinner and a couple of hours with management. we found we are not very good at the actionable without angles or a perspective. we will spend a ton on interesting. some of the deals that i've been involved with, and for us, it is worth that pay off. in environment like this, it's more important to figure out what your strategy is and build your ecosystem. you invest in your ecosystem. and you curate that ecosystem and then you take your time and find the things where you have a differentiating angle and the deals we have filled out our portfolio with have been consistent with what we're trying to do, even as the world has gotten more competitive.

jason: one area where it has gotten competitive is technology. seven of the last 10 deals from last year. this is a space you played in. can you continue to be competitive given all the money that is there? snap is going public this week. what is the field there? todd: i think we can be very competitive. we have an excellent team there. if you think about technology, you have to go to the subsectors. just thinking about cybersecurity for example two crimes people fear identity and computers being hacked. this is important and it's becoming more so. we've been focused on that for years. we have a series of smaller investments for our growth fund that have helped us understand the landscape. after years of knocking on the door, we have now taken mcafee with the parent company, intel, in what was a proprietary

dialogue and we are totally convinced that we can take it to the next level. we have an ecosystem for it. we have a plan. it was not the competitive process. again, it's the importance of focusing ahead of time. content media, our investments in caa, our investment in cirque du soleil, these are the results of years of working in what we think of as different segments of tech knowledge he where we can have a differentiated approach. jason: that was todd sisitsky. coming up after the break, who is buying and who is selling? we hear from more voices at the conference here in berlin. roberto: we need to get through brexit. i don't think we're going to get anything else in the short-term. we need to stay calm. and focused. ♪

♪ jason: welcome back. i am jason kelly here in berlin at the superreturn international conference. on stage and in the hall, there has been a mood of optimism and part of the caution comes from concerns about regulation that may be headed for private equity in europe and back in the united states. i asked pam hendrickson, the coo of riverside what that might mean for her investment going forward. pam: when you think about some of the things that need to happen or that might happen, it's hard to get things done. no government in the world short of a dictatorship can really move things along quickly. so let's talk about border tax or a vat tax. that came out and now there is a

deluge of people going wait a minute, you can't do that. mary barra of general motors going if i import the parts from china and assemble the car in detroit, what does that do to me? on deductibility of interest, you have really a lot of small businesses going wait, this is how i have financed my -- the creation of my company. so the fact is to lower tax rates, you need to pay for it. the pay for it either needs to be interest deductibility or border tax. they have to get that done. tax policy doesn't adjust that much. my suspicion is we get little r reform before big r reform. jason: you have been to capitol hill as an advocate. how do you play out how something like deductibility of

interest, how does that affect your business? pam: private equity people, we been doing this a long time and investing for multiple cycles. we will amend our structures to deal with what gets done to us in washington. as long as the interest rates stay low, it probably doesn't impact us terribly much. i think you heard capital structures largely won't change that much because interest is still a cheaper form of financing than equity. if interest rates go really, really high, that could change. but we will figure it out. jason: where do you see corporate tax rates going? will they move meaningfully down?

pam: i think there will be effort to bring them down. but, to do that with budget reconciliation, you've got to pay for it. there is so much controversy around the pay for it that what i see most likely happening is you get a holiday on repatriation. that's the kind of thing you see happen more than an overall reduction in rate. jason: when you think about the general geopolitical landscape right now, how is it affecting your dealmaking? pam: i said this the other day, we owned a italian gelato ingredients company. and we own pace cookies in the united states. people will probably eat gelato and cookies regardless of who is in power. we find ourselves as a very micro firm looking for great companies that are going to do well through different environments. i think where we are probably more cautious is on issues where the supply chain is reliant on

another country, particularly china or mexico, or where the growth strategy is reliant on being able to sell it in some of those countries where there is talk about what is going to happen. jason: the stock market has gone robustly up certainly since the u.s. election. what affect has that had on valuations and your ability to do deals? pam: it has -- valuations are incredibly high. we have for a couple of years been modeling a lower exit and entry multiple. we don't think we can make money. once in private equity you could do that, now it's about having a well articulated and well executed growth strategy. i think we heard somebody this morning say it's really about controlling the factors you can control and only investing when

you can control those factors. that is the way to think about it. jason: politics is a topic that was in every conversation here in berlin. elections in the netherlands, france and germany are on the minds of everyone in europe. i asked roberto quarta what this means for him in terms of navigating his deal. roberto: i think we are to have to get used to uncertainty. uncertainty is the order of the day. last year, 2016, we were worried about latin america, columbia, the u.s. election. here we are now with what you describe, the trump effect in the u.s., postelection and what's going to happen here in europe. private equity has been very good in the past at adapting to change. frankly, i think we have to step up to the plate. we have to -- i think we have to have a degree of caution and

thoughtfulness relative to where we should be investing, but the opportunities will be there. but the challenges will be even greater in this environment. jason: you mentioned the trump effect, how much is that bleeding over into europe in terms of dealmaking? roberto: i think we are more focused than europe. we are more focused with what's happening with brexit. that is just beginning to sh its effect. the elections in germany and the elections in france are being watched very carefully. the focus for those of us in europe is primarily europe. we do acquire companies that are global. they may be headquartered in europe but be heavily in the u.s. one has to keep an eye on both sides. first and foremost, we are looking in our backyard.

perhaps we are taking more cautious views until we see the outcome of those elections and we see a bit more of what this brexit is going to look like and what the implications of brexit are going to be for us as investors. jason: valuations are still very high, stock markets are going up. how does it play through to your investment strategy right now, both as a buyer and a seller? roberto: i think those who follow private equity, we have had golden years. you will see more and more exits given the high valuations. for those companies that are on the public market. i think from a buying perspective, that is something we need to think about. jason: there are a lot of big dealmakers here, a lot of big voices in berlin. what struck you? is there anything a surprising you would point out?

roberto: first of all, i heard this morning as i came in that this is the best attended super return in 10 years time. so what does that tell you? it tells you that the private equity is thriving. it's facing the challenges we discussed before. certainly, it is focused on some of the issues that are being discussed here. the themes of lots of capital, lots of dry powder, everyone will tell you that. the challenges will be in deployment given what we talked about earlier. the valuations. we need to be selective and focused. jason: another theme we heard a lot about and even in the halls is regulation and taxation and policy that may or may not change business.

how do you feel about that? you are a privately held firm. you have been in business a long time and you've been there for more than a decade. roberto: does anybody really have the answer? the best thing is to stay cool and watch and see how it develops. it is a big issue. we will have to see how that plays out. i mean, the implications of that as you know would be far-reaching, not just for our industry, but elsewhere. so i think it's a wait and see. there are a lot of moving parts. the surprises are not over. lots more surprises coming up. we did not guess the u.s. election, we did not guess brexit. i don't think we can guess anything else in the short term. we just need to stay calm and stay focused. jason: thanks for joining us for this special program from berlin. i am jason kelly, and until next time, so long. ♪

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