♪ 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 this international conference, the biggest during a private equity investors -- gathering of private equity investors of its kind. over the past few days, we talked to some of those investors about what's on their minds during the trump presidency. it is a world awash with money, that may make deal more difficult going forward. our first conversation is with david rubenstein, the co-ceo and founder of the carlyle group.

one of the most important voices in the equity industry. i started by asking you about the effect president trump has had on his business. david: clearly, the market enjoys what the president is doing or talking about, so the market is very high. i don't think anybody anticipated this on the day of the election. a lot of stocks, particularly in the financial services areas, are up. i think private equity has benefited from that. when public equity goes up, this private equity goes up as well. it's good if you are selling things. if you are buying things, it makes things more expensive, but this conference indicates private equity is bullish about the economy. jason: why is private equity so bullish? what has the president said or said he is going to do that makes people so 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 what the private equity world does. i think the reason people are excited about it is they feel

there will be less regulation in private equity. the animus that some people have towards private equity might not be there. some people don't like private equity. they think private equity people don't do great things. therefore, there is some feeling that 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, it generally the atmosphere is private equity is welcome into the financial community, and the deregulation's coming out of washington, there may be some lower taxes will be favorable. jason: an overall bullish view? david: at this conference, very bullish on private equity. i've been coming to this for 20 years and i've never seen anything quite as bullish. jason: one of the topics that has come up a lot and the president reiterated it last night in his address to congress is infrastructure. david: yes. jason: 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, from your estimation? david: i think it's unlikely for it to quickly 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. not that it is not a lot. but get $1 trillion and that is a lot. $1 trillion may take many years to get done. jason: the enthusiasm is overall for the industry. fundraising is 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 having burst. i do not know if we are at a peak, i do think people think there are good returns coming out of private equity. privately equity does private equity returns have drifted down a bit, but we are 800 basis points above average. as long as those averages stay 800 basis point differential, 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 pressure you are feeling? david: i want to put it in context. when you take the stock markets around the world, it's probably $85 trillion. private equity is still 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.

it can be invested, yes. jason: is money still very easy to raise? you are out around the world all the time. 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 and 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 likely to be higher than any other asset class and they think the risk reward is better than anything else. money is coming in. people want to be in the first part of your fund. we don't want to get shut out. it used to be people used to wait until the end and only want to come in, they might not. now, they want to make 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 private equity 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. really providing a lot of headwinds for our investors trying to get a lot of money. jason: that's what we are hearing in the corridors. let's talk about fundraising for a second. especially for the mega buyout 5 billion plus funds raised since the crisis, how long can this go on, this robust fundraising environment? hugh: it's going to get harder. we call this the elephant and the snake problem. huge amount of deals that were done, in 2006 and 2007, have been monetizing over the last four years. as lps have had their coffers filled with tremendous amounts of cash from that, they want to put money back into the industry. returns have been much better from then when 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, if you will. there will be fewer distribution sales going forward. everybody is thinking it's late in the day in the economic expansion. at some point over the next five years we may have a macro shock that may drive returns down. we may find a perfect storm in the future of less cash flowing. and returns being compressed by adverse macroeconomic conditions. that will lead to potentially tougher fundraising environments down the road. jason: you mentioned the challenging dealmaking environment as well, valuations seem to be extraordinarily high. we have had a huge run of the u.s. stock market. what is the outlook for the rest of the year? hugh: dealmaking is tough because prices are going to be high. we have record amounts of dry powder in the industry, over a trillion dollars. we have a tremendous amount of what we call shadow capital which is institutional money. it is there is a form of coinvestment and cosponsorship,

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 still quite 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 in 2016 were in the tech space. both on software and hardware sides. i think technology offers a couple of different ways to add value that gps are particularly 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 that i am confident that's going to continue in the future, 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 that potentially with a lot of cost improvements because the go-go years of growth are gone. 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 is using both of those. jason: that was hugh macarthur. with that as the backdrop, i asked the managing partner at tbg capital 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 investing at the point that we have planned, and returning capital at almost three times that pace. 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 is pretty clear. we invest heavily in our sector teams and spent years thinking about not trends but themes, the investable themes in the sectors that we can deploy resources against and create an ecosystem around, to find opportunities that are differentiated. oftentimes in this world, proprietary is not proprietary. companies that we can grow once we own those companies. i think of us as long-term, sector driven investors. i think of us as growth investors. i think we spend those years looking for the management team and once we own that business we are a strategic investor, we're going to keep growing at until we create something special. jason: does dealmaking get harder with that money out there?

todd: i think it does, but what it really speaks to you is you just have to stick to what you are good at. in this world, there is a tension between what is interesting and what's actionable. the actionable is the investment bank company, intermediate company 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 without a perspective. we will spend a ton on interesting. even if we have to put 50 long leads in the water to get two over five or 10 years that end up turning into quintile, sca, some of the deals i have been involved with. and for us, it is worth that pay off. i think in an environment like this, it's more important to figure out what your strategy is and build your ecosystem, invest in your ecosystem, you curate that ecosystem and then you take your time and find the things where you have a differentiating angle and then you go. frankly, 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 been especially competitive is technology. seven of the 10 biggest deals last year were in tech.

this is a space you played in. can you continue to be competitive given all the money that is there? chasing after big tech deals -- snap is going public this week. what is the field larry? -- there? todd: i think we can be very competitive. we have an excellent team there. a lot of their recent activity has been there. if you think about technology, you have to go to the subsectors. think about cybersecurity. two crimes people fear the most is their identity being stolen and computers being hacked. this is an area that is obviously very important and more top of mind. we've been focused on that for years. we have a series of smaller investments for our growth fund that have helped us understand what the landscape is. after years of knocking on the door, we have now taken mcafee in partnership with the parent company intel in what was a proprietary dialogue and we and intel 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 technology where we can have a differentiated approach. jason: coming up after the break, who is buying and who is selling? we hear from more voices at the private equity conference here in berlin. roberto: we did not get the u.s. election, we did not get brexit. i don't think we're going to get anything else in the short-term. i think we need to stay calm. stay focused. ♪

♪ jason: welcome back. i am jason kelly here in berlin at the superreturn international conference. on stage and in the halls, there has been a mood of cautious 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 investments and firm going forward. pam: when you think about some of the things that need to happen or that might happen, it is really hard to get things done. things do not move quickly. no government in the world short of a dictatorship can really move things along quickly. so let's talk about border 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. or more reform, tax policy doesn't adjust that much. my suspicion is we get little r reform, not big r reform. jason: you have been to capitol hill as an advocate for the industry. how do you play out how those things -- especially something like deductibility of interest, how does that affect your business going forward?

pam: private equity people, we been doing this a long time and investing for multiple cycles. we will amend our structures to deal with whatever things get done to us in washington. as long as the interest rates stay low, probably doesn't impact us terribly much. i think you heard this morning, 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? are they going to move meaningfully down in your estimation from what you hear? pam: i think there will be significant effort to bring them down. but to do it through budget reconciliation, you've got to have a pay force.

and there is so much conflict around the pay force is that what i see most likely happening is you get a holiday on repatriation of profits. 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. we own taste cookies in the united states. people will probably eat gelato or taste 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 many 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 into some of those countries where there is talk about what is going to happen.

jason: the stock market has gone pretty 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. period. we have for a couple of years been modeling a lower exit and entry multiple. we just don't think we can make money on the buy. once in private equity you could do that, now it's about having a well articulated and well executed growth strategy. i heard somebody this morning say it's really about controlling the factors you can control and only investing when you know you can control those factors. that is the way to think about

it. jason: politics is a topic that pervaded 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 field. roberto: i think we are to have to get used to uncertainty. uncertainty seems to be the order of the day. in 2016 last year, 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. and what's going to happen here in europe. private equity has been very good in the past to be able to adapt to changes. frankly, i think we have to step up to the plate. 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 sort of environment.

jason: you mentioned the trump effect, how much is that bleeding over into europe in terms of dealmaking and exits and all of that? roberto: i think we are more focused on europe. we are more focused with what's happening with brexit. that is just beginning to show the 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. although we do acquire companies that are global. they may be headquartered in europe but may have a strong presence in the u.s. one has to keep an eye on both sides. first and foremost, we are looking in our backyard.

and taking different views, and perhaps we are taking more cautious views until we see the outcome of those elections and we begin to 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: despite all this political uncertainty, valuations still seem to be 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 relative to exit. you will see more and more exits given the high valuations. especially for companies that are in public markets. i think from a buying perspective, obviously that is something we need to think about. jason: obviously there are a lot of big dealmakers here, a lot of big voices in berlin. what has really struck you, anything surprising or any key themes you would point out? roberto: first of all, i heard

this morning as i came in that this is the best attended superreturn 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. high valuations. we need to be selective and focused. as i said earlier. jason: another one of the themes 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: there is lots of speculation but does anybody really have the answer? the best thing is to stay cool

and watch and see how it develops. if you are talking about deductibility of interest, obviously it is a big issue for this industry. 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. lots of moving parts. i think the surprises are not over. probably lots more surprises coming up. we did not guess the u.s. election, we did not guess brexit. i do not think we can guess anything else more in the short-term. we need to stay calm and stay focused. jason: thanks for joining us for this special program from berlin at the super return international conference. i am jason kelly, and until next time, so long. ♪

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