David Rubenstein Talks Private Equity Industry

David Rubenstein Talks Private Equity Industry
Image source: CNBC Video Screenshot

CNBC Exclusive: CNBC Transcript: The Carlyle Group Co-Founder and Co-Executive Chairman David Rubenstein Speaks with CNBC’s Leslie Picker Today

WHEN: Today, Monday, February 25, 2019

WHERE: CNBC’s “Closing Bell” – Live from the Forbes/SHOOK Top Advisor Summit in Las Vegas, NV

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The following is a CNBC EXCLUSIVE interview with The Carlyle Group Co-Founder and Co-Executive Chairman David Rubenstein and CNBC’s Leslie Picker on CNBC’s “Closing Bell” (M-F 3PM – 5PM) today, Monday, February 25. The following is a link to video of the interview on CNBC.com:

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U.S. economy in 'reasonably good shape,' says David Rubenstein

All references must be sourced to CNBC.

WILFRED FROST: Welcome back to the "Closing Bell." Our own Leslie Picker is at the third annual Forbes/SHOOK Top Advisor Summit in Las Vegas. She’s joined now by David Rubenstein, Co-Founder and the Co-Executive Chairman of the Carlyle Group. Leslie, over to you.

LESLIE PICKER: Hey, Wilf, thanks so much. And David, thank you for joining us.

DAVID RUBENSTEIN: My pleasure to be here.

LESLIE PICKER: So, President Trump Tweeting a little bit ago that the China Trade Deal is in advanced stages. Do you believe they get there?

DAVID RUBENSTEIN: I do think there will be a deal because I think both sides really want a deal. I think the Chinese recognize it’s necessary for them to really get their economy in the shape that they want it to be in to have a deal. I think the Americans are ready for a deal, too. So I think a deal will likely get done in the next few months or so.

LESLIE PICKER: Is it a deal that America needs to see?

DAVID RUBENSTEIN: I think it’s going to be probably a deal that everybody will like. No deal is perfect but this is the deal that will not have to be technically approved by Congress. There will be hearings but with U.S.M.C.A. for example, you have to get Congress to approve that, which hasn’t happened yet. This is not a deal that will have to be technically approved by Congress.

LESLIE PICKER: Now, Jay Powell, you know him well. You’ve hired him at Carlyle. You interviewed him recently on-stage. What do you hope to hear from him this week when he testifies in front of Congress?

DAVID RUBENSTEIN: Well, I think he’s probably going to say somewhat what he said before, which is that the Fed is monitoring the data, but right now the data indicates that the Fed is right on course to kind of stay where they are. I think he would surprise people if he were to say, ‘Well, we’re going to make a reversal. We’re going to increase interest rates or decrease interest rates.’ I think people are expecting him to say pretty much what he said before when I interviewed him, and what he’s also said recently other places, that ‘steady as she goes right now.’

LESLIE PICKER: Is that what your data says? As Carlyle, you own businesses and you look at different pockets of the markets. You have a really good read on what’s going on in the economy right now. Does what you see with your underlying businesses at Carlyle match up with where you think the Fed is?

DAVID RUBENSTEIN: Yes. We have the data and we share that data with some government agencies when they want it from time to time because we have a pretty good look on the global economy. We own more than 200 companies or partial stakes in 200 companies, in some cases, all around the world. And we basically feel that the U.S. economy’s in reasonably good shape. It is not going to grow at 4% this year or perhaps not even 3%. I think probably closer to 2.2 or 2.3%. That’s still reasonably good. Remember, we are in a ten-year growth cycle and to be growing at 2.3% after 10 years is pretty good -- for an economy of our size, certainly.

LESLIE PICKER: And obviously the markets have reflected that, at least in 2019. What do you think is something that could help propel the markets higher, the equity markets higher? And what do you think are some of the risks that could derail it at this point?

DAVID RUBENSTEIN: Well, clearly the markets are feeling pretty good. The fact that there is likely to be a China Trade Agreement. I think that Congress is not likely to change the tax laws that we have currently. There’s been discussion recently about tax changes. I don’t think the Congress is likely to do anything in that regard in the next two years ago. I think the President has been very good in deregulating some of the overregulation in the economy, at least that’s the perception of the business community. So I think the economy is in reasonably good shape and the business community has a fair amount of confidence, and there’s a fair amount of consumer confidence, as well.

LESLIE PICKER: I want to ask you about modern monetary theory.


LESLIE PICKER: And this idea that the national debt is seemingly less and less important by policy makers on both sides of the aisle. Where do you stand on this as someone who lives in Washington, looks at issues related to the national debt all the time? Do you think that’s the right way to –

DAVID RUBENSTEIN: Well recently Larry Summers and Jason Furman had an article in “Foreign Affairs,” which is the publication of the Council on Foreign Relations. And it said that actually the debt we have is not as big of a problem as previously had thought. We have about $22 trillion of total debt and we are adding about 1.2 or 1.3 trillion a year. To me that’s a problem. It’s something we have to address some time, but it’s not an immediate problem. In part because we are able to sell our debt at pretty low prices. People really have to buy dollars. We are the only reserve currency. And we can print a fair amount of dollars and sell it at very low rates. So for the time being, it is not as big of a problem as traditionally people would thought. But it’s something that would have to be addressed at some point, hopefully by my children, if not my grandchildren.

LESLIE PICKER: And what’s – if we do go into some sort of a downturn, does that threaten the ability to keep running up the tab on our national debt?

DAVID RUBENSTEIN: Well if we went into a downturn, presumably interest rates would be lower, so it’d be a little bit cheaper to service that debt. But the GDP would probably be down, so it might be harder to get tax revenues. There’s no doubt that it would better to have less debt than we have, but right now, it’s not an immediate problem, it’s not the greatest problem we have.

LESLIE PICKER: Now, you practice something called ‘patriotic philanthropy.’


LESLIE PICKER: Looking at restoring various monuments, museums, different areas of the U.S. You donated a copy of the Magna Carta, for example, and helped restore James Madison’s estate in Montpelier. Lately there’s been more and more talk of Presidential candidates and politicians about this idea of wealth redistribution through taxation primarily. Do you see that as patriotic philanthropy, or is that something else?

DAVID RUBENSTEIN: Well, I’m not sure that -- patriotic philanthropy, in my view, is giving money or your time or your energy or ideas to remind people of our history, our heritage. That’s what I mean by patriotic philanthropy. To remind people of our past, the good and the bad. To remind people that Montpelier or Monticello were places where there were slaves and therefore think it’s good that those places are being rebuilt to know the good and the bad about the people that were there. In terms of tax redistribution, I think actually right now that it’s unlikely there will be any tax redistribution in the next couple of years. I suspect that the more we talk about it and the more moderates get scared about it, you probably are likely to help the people who are against it get re-elected. In other words, I don’t think there’s a big ground swell of support that’s likely change congress’ ability to tax in a way that some of the key candidates are talking about. Remember, we have had a tax system for quite some time. We don’t have a wealth tax in the United States. It’s not even clear if it’s Constitutional. And I think it’s unlikely Congress is going to imposes a wealth tax any time soon.

LESLIE PICKER: Do you think we should? Would you be willing to pay for taxes?

DAVID RUBENSTEIN: Well, I pay a fair amount of taxes I think by normal human standards and I think it’s important that everybody pay their fair share of taxes, so I do pay a fair amount of taxes and I’m happy to pay the taxes that I pay. But I do think that we have to remember that you have to have some money to let people invest. If you overtax, you’re not likely to have the money to invest. And I do think people in our country should get a fair tax and I think we have a system that’s not perfect by a long shot. It’s not a perfect system and we can always improve it and I think there always should be improvements, but I think it’s unlikely that Congress is going have a wealth tax or have marginal tax rates go to 70%. To the extent people talk about that, I think it’s more likely than not going to produce people who are saying, ‘Well, I don’t really want that. And therefore, while I might not like the Republican view of things, I’m more likely to vote Republican than I would otherwise do,” because they’re afraid the taxes could be imposed. So I think you have to be careful when you’re playing with fire in that regard. If you really want to make a change in government, you have to be careful in my view, if you talk about that so much, it’s unlikely to happen and could scare some people into voting the opposite way that you want them to vote.

LESLIE PICKER: Interesting. I think Wilfred Frost has a question for you back at the NYSE. Wilf.


WILFRED FROST: Hi David. Thanks very much for joining us. Just quickly, I just want to follow up on that particular topic, you said the tax system, never perfect, always ripe for improvement, but you have got to be careful what do. Would you say it’s fair for some people to say that private equity executives are one of the areas where it’s least perfect, since you pay a large amount under Capital Gains tax, because of carried interest, which is lower than income taxes for someone of your level of success?

DAVID RUBENSTEIN: Well, there’s no doubt that private equity taxation has gotten a fair amount of attention over the years. I don’t think it’s biggest problem in our tax system. Relatively speaking, it would produce even if you changed the system and went to a different type of system, ordinary income taxes, for example, instead of carried interest capital gains, it would produce relatively modest amounts of money for the federal government. If you really want to increase the amount of money the federal government is getting, you’re going to have to tax the middle class and that’s obviously very difficult to do. There aren’t enough extremely wealthy people to really have a big impact on revenue if you change their tax rates. Even if you went to marginally higher tax rates, there’s just not enough people in the Forbes 400 – obviously, there’s only 400 of them – that you’re going to make a big difference. So if you really want to have more tax revenue and have great fairness, you’re going to have to tax people who are much lower, closer to the middle class and obviously produces some political problems.

WILFRED FROST: David, on air this morning on Squawk Box Becky Quick sat down with Warren Buffett and they discussed the balance between public equity and private equity. Let’s take a listen.

WARREN BUFFET: They call themselves private equity but they’re really private debt to a great extent. But that trillion might buy as much as, say, 3 trillion of assets if it’s leveraged with 2 trillion of debt. Well, the total stock market is something like 30 trillion and if you take the top five companies, you know another -- or six companies, knock 4 trillion off that. So, you’re down to something where the buying power of private equity, plus just the normal buying power from companies who want to get – it’s just a huge amount of competition.

WILFRED FROST: David, do you think that’s a little bit of sour grapes there from Mr. Buffett, given the success your industry had in attracting more assets under management in the last couple of decades?

DAVID RUBENSTEIN: Warren Buffett is perhaps the greatest investor ever. He’s somebody that I regard as a great role model. He’s somebody that I regard as a friend. I’m not going to say that anything he says is wrong because I don’t know enough to be able to criticize anything he says. Let me just say that private equity has done a pretty good job of improving the efficiency of the companies in the United States for 30 or 40 years. And around the world, people like private equity, that come into their country to show them how to improve and modernize companies. And I think it has created value for the economies in which it operated. There’s no doubt there’s a fair amount of money in private equity now. That’s because the returns have been very good. The people aren’t putting money in private equity because the returns are bad. The returns are good. The returns may not be as good as Warren Buffett has achieved, nobody can probably get those kind of returns, but we’ve done reasonably good for our investors and we are proud of what we have achieved.

COURTNEY REAGAN: David, it’s Courtney, here at the New York Stock Exchange. I have a quick question for you. In regards to the trade talks, it does sound like you’re confident that we will have some kind of a resolution between the U.S. and China. But of course, the devil’s in the details as they say and we really don’t know where we are on any of those details. Is it possible that China could be unhappy with the final terms and possibly could change the way that they buy or hold U.S. debt. Is there any risk there that we should be considering?

DAVID RUBENSTEIN: Neither side will be completely happy with the deal. All trade deals, all deals of any consequence, have things that neither side really likes the most. But as I have had discussions over the years with the central bankers in China, they do not look at buying of U.S. debt as something that is a political tool. They think it’s an important thing for them to be able to take the excess reserves they have, the foreign reserves and put it into something safe, that they know they can get their money back with some interest. And there’s nothing else to find that’s equivalent to U.S. Treasury bills. So I don’t think it’s used by the Chinese whether there’s a trade deal or not. But I do think there will be a trade deal because clearly both sides want a trade deal and I do think something is imminent in the not too distant future.

LESLIE PICKER: Now, David, I know it’s a little early to be looking ahead to 2020 but still there are candidates coming forth pretty much every other day at this point.

DAVID RUBENSTEIN: Yes, I’m embarrassed to say that I’m one of the few people I know not running for President of the United States.

LESLIE PICKER: Okay, we’ve got some news here. He is not running for President of the United States.

DAVID RUBENSTEIN: Not running for President of the United States.

LESLIE PICKER: But a lot of your peers of business are running for President of the United States or are considering running for President of the United States. Do you believe that someone who’s more of an independent like, say, Howard Schultz should be running for President of the United States? Do you think that someone with that type of a background should be running as an independent or should be running at all?

DAVID RUBENSTEIN: Well, I don’t know if Howard Schultz wants my advice. But I would simply say that we have seen independence affect the outcome of elections. Clearly, Ross Perot I think effected the outcome in 1992. I think John Anderson had some effect in 1980, I would say, when he ran against Carter and Reagan. And I think Ralph Nader probably had some impact when he ran in 2000. So there’s no doubt that Independents can make a difference. Now the question is, do you have a Moderate to Republican Independent running or do you have a Moderate to a Liberal Independent running? If some Moderate to Republican Independent, for example the governor of Maryland – if he were to run as Independent Moderate Republican, he’d probably have a fair impact on the outcome of the election. He hasn’t said he’s doing that. But I think you have to be able to figure out whether you want to take votes away from a Democrat or votes away from a Republican. But it’s too early to say. As you say, it is very early. And we love politics in the United States and we love to talk about how early it is when people run this early. And a point I like to make to people is this: if you back the last ten presidential elections two years in advance and try to predict the President two years subsequent to that, you would be wrong almost every time. You almost never would predict who was going to be President you know, two years in advance. Nobody would have predicted two years ahead of the last Presidential election that Donald Trump would have been elected. People wouldn’t have predicted Jimmy Carter, they wouldn’t have predicted Barack Obama two years in advance, they wouldn’t have predicted so many people who were elected. So it’s just fun, interesting. But it’s just too soon to know the impact of all these candidates running around.

LESLIE PICKER: All right. David Rubenstein. Thank you so much for joining us.


LESLIE PICKER: I’ll send it back downtown to you guys.

Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)www.valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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