Funds News

UPDATE 1-Carlyle exec sees lower returns for private equity

(Adds comment on likelihood of U.S. tax changes)

HONG KONG, Nov 15 (Reuters) - Private equity is likely to see lower returns in coming years as it faces challenges including more costly debt, Carlyle Group [CYL.UL] co-founder David Rubenstein said on Thursday.

Such a dip in returns would not be surprising given that the industry enjoyed a “golden age” from 2002 to this year when “everything went perfect for almost everybody in the industry”, the private equity veteran added.

“Right now I think return levels are probably going to come down. I think it’s unlikely that we can do as well as we’ve done. I hope it can be possible,” he told an industry conference in Hong Kong.

“Clearly, when I’m fundraising I probably emphasise that we can probably do as well as we’ve done in the past, but the truth is it’s probably unlikely.”

Carlyle, one of the world’s largest private equity firms, manages $75.6 billion in assets.

The global credit crunch has sent the private equity sector into a “pause mode”, he said, but added investors should be aware the industry weathered similar lulls in 1990-91 and 2000-01.

Rubenstein, who co-founded the Washington-based firm in 1987, said that while more expensive funding had slowed deal flow, the industry could look to alternative sources such as cashed-up sovereign wealth funds, as well as pension and hedge funds.

Other challenges facing the industry include the uncertainty resulting from a U.S. campaign to have carried interest earnings of investment managers taxed at a higher income tax rate, rather than the present lower capital gains rate.

“Clearly people think that we aren’t being taxed highly enough and I suspect that there will be some changes in the next year or two to address this issue,” he said.

Rubenstein, who worked in the White House during the Carter administration, said one of the biggest challenges the industry faces is the need to improve its public image.

“The industry’s image is very bad. It’s hard to think of any industry where the people who work in the industry have such a favourable view of what they’re doing, and the people outside the industry have such an unfavourable view,” he said. (Editing by Louise Ireland)