Friday Letter: Total transparency

Should everyone get excited about David Rubenstein's vision for private equity’s see-through future?

Reviewing the slides David Rubenstein used at a conference this week was a reminder that the Carlyle co-founder continues to think deeply about the forces shaping private equity. His record when it comes to predicting the future is pretty decent, and it's fair to say that the firm he helped build could not have grown the way it has without some quality forethought. Rubenstein, therefore, is worth listening to. 

His prediction that transparency will make private markets virtually indistinguishable from public ones is intriguing. The Carlyle vision is of “perfect information” deriving from a combination of an all-pervasive use of technology, greater regulatory oversight, (social) media scrutiny and the widespread participation of retail investors. The outcome will see investors making like-for-like comparisons of private equity managers, their performance and their earnings in ways that used to be unavailable. 

“Everything will be known to the public,” the New York Times quoted Rubenstein as saying. “Everybody’s performance will be known. Everybody’s valuation will be known. Everyone will feel the industry is as transparent as the public equity industry is.”

Given how far private equity has traveled in this direction already, this may not seem very radical. But if you think about the current make-up of the industry, where the publicly listed multi-strategy houses sit at the top of the AUM pyramid with a myriad of smaller groups beneath them, the connotations of ‘everybody’ are worth considering further.

To point out the self-serving element of Rubenstein’s comments: in many ways Carlyle and its heavyweight peers have been living in this Brave New World for some time. That's not so much a criticism, but more a question as to whether such a one-size-fits-all formulation really is the only conceivable future for private equity as a whole.

Of the many GPs that are operating successfully today, some may not consider it materially advantageous to become publicly listed, even if their firms have the economic substance to carry it off. Some will continue to see a benefit in being positioned as far away from the rituals and routines of public markets as possible, even though, as Rubenstein rightly asserts, technology is going to make some of these (such as timeliness of reporting) more prevalent. And some will eschew a retail investor base quite happily, provided they can continue to fund themselves elsewhere.

The latter group will need to know where ‘elsewhere’ is. Which brings us to the question of whether there aren’t certain investor types out there who will also maintain a fondness for private market investments that remain resolutely off-market. Rubenstein commented on the irresistible rise of sovereign wealth funds (SWFs) to become the industry’s “dominant institutional source of capital”. But not all of those are as committed to openness and public scrutiny currently as Rubenstein expects the asset class to become. If he is right about how the story will play out, the learning curve for SWFs may be one of the steepest.

In the meantime, expect the folk at Carlyle to continue to think ahead. “The industry will be seen as mainstream”, Rubenstein predicts, and “the word ‘alternative’ will no longer be used.” Amongst many other things, this gives Carlyle’s branding consultants something to ponder. Because if the boss is right, “The Carlyle Group – Global Alternative Asset Management” (see won’t be a suitable description for the firm for much longer.