Private equity's rough rep

The private equity business is in "purgatory," and professional investors need to polish their tarnished public image, Carlyle Group cofounder David Rubenstein told the Wharton Private Equity Conference in Center City yesterday.

As if to underline his point, Rubenstein's talk to more than 300 investors and students was delayed half an hour when two dozen activists from the Service Employees International Union heckled the head of the $70 billion-asset investment firm, jostling Park Hyatt Hotel security and draping a giant banner in the meeting hall reading, "Carlyle, fix Manor Care nursing homes now."

Manor Care is a Toledo-based chain of 500 residences, which Carlyle bought last month for $6.3 billion. It's one of the most recent of dozens of public companies that have been taken over by private equity firms such as Carlyle, which invest money from pension funds, universities, and other wealthy investors, and which don't have to report detailed financial results as public companies do.

Manor workers worry Carlyle will be tempted to cut spending at the residences in order to make the deal pay, said protester Tricia Miechur, who said she worked at a Manor facility in the Lehigh Valley. Speaking after the group left the hotel, she said coworkers have asked the SEIU to help form a union because they are worried Carlyle can't afford to improve both profits and patient care.

The workers' complaints are typical of the reaction against private equity funds since last summer, Rubenstein said. "We have to be much more aware. We can't just ignore the labor unions and the media," and that also applies in foreign countries, where U.S.-based private equity firms are increasingly "exporting" their investment dollars, he said.

It's all very different from the years of 2002 through mid-2007, "when everybody wanted to be in private equity," Rubenstein said. "We were masters of the universe. Investors loved the returns," and state pension funds and other investors pulled money out of the stock market to gamble it on private equity funds.

"It was too good to be true," Rubenstein said. In July, "the music stopped," as trading in the mortgage bonds that banks had been using to finance private equity deals collapsed when rating agencies acknowledged these bonds included too many risky, high-interest home loans that weren't getting paid back.

With banks suddenly reluctant to lend at favorable terms, about $100 billion in announced private equity investments have been scrapped, and another $100 billion had to be renegotiated under less favorable terms, Rubenstein estimated.

Instead of the "golden age," private equity investors "are in the purgatory age," he said. "We have to atone for our sins a bit."

Rubenstein was a member of the Carter administration, and Carlyle once counted former President George H.W. Bush, former Defense Secretary Frank Carlucci, and other Washington insiders among its top officers, and military contractors among its clients, making it a lightning rod for critics of U.S. policies. The firm has diversified, and now includes consumer, manufacturing and service companies in its portfolio.

Rubenstein said private equity firms need to better publicize jobs they save, companies they improve, and the wealth they create for retiree pensions and university endowments. Managers who benefit from private equity's high fees should contribute generously to charity, he added.

Rubenstein was upbeat about private equity's prospects, predicting a "platinum age" as company prices fall to bargain levels, enabling investors to strike new deals, over the next year.

Sugar-coating can go only so far. Private equity investors, by forcing "flabby" companies to reorganize, cut costs and become more efficient, do tend to stir resistance, Rubenstein acknowledged.

"This is sometimes a combat sport," he said.