The following is a Harbus exclusive interview with David Rubenstein, co-founder of The Carlyle Group, one of the world’s largest private equity and alternative asset management firms with $174 billion under management. Rubenstein, who is a member of the Harvard Corporation as of July 2017, addressed the community at Spangler Auditorium in an event co-hosted by the Venture Capital & Private Club and Conversations at Harvard before sitting down with The Harbus to share his perspective on leadership, education, and markets. This interview has been lightly edited for brevity and clarity.
Sumit MALIK: You’ve had the opportunity to meet a lot of management teams over the course of your career. What are the qualities that stand out in effective leaders and common pitfalls that you see in leaders that are less effective?
David RUBENSTEIN: In the buyout world, the principal difference in my view between a successful buyout and an unsuccessful one is the CEO of the company. If you overpaid dramatically, it’s hard to overcome that, but you can overpay by five or ten percent and still do quite well if you’ve got the right CEO. CEOs make all the difference in the world.
I think many people would say that the biggest mistake that people in the private equity world make is staying with the wrong CEO too long. While we have a reputation of changing management maybe too frequently, in fact many people in the industry think that we probably don’t make as much change as we should. Getting a good manager will make a gigantic amount of difference.
So will making certain your due diligence is as thorough as possible, and trying to figure out whether you really are buying this company because you have plenty of money to invest or because you really think it’s a great opportunity. Today there’s a lot of money out there, and a lot of deals are getting done that are secondary buyouts. You have to wonder whether secondary buyouts are going to be as attractive as deals that haven’t been bought and sold many times before.
The principal difference in my view between a successful buyout and an unsuccessful one is the CEO of the company.
MALIK: When you’re evaluating management teams, what do you think are the ways to ask the right questions? Part of where that question comes from is that MBAs are now put on the other side of the table, whether they’re going to private equity or other industries, where they have to evaluate the caliber of other individuals.
RUBENSTEIN: Track record is a good indicator. Very often the best managers of companies in buyout mode are people who have done it before. So if we find—and Blackstone and KKR and others do the same thing—if you find somebody that’s very good at being a manager in one of these levered companies, if he or she has done it well before, they probably can do it well a second time.
Very often you recycle these people. You’ve got to make sure they have the right economic incentive, and make sure they’re as aligned with the investor as possible, and also that they really have the drive to still do this a second time, or a third time in some cases.
It’s like anything in life. If you spend an hour with somebody, you can probably have a sense that they are the right personality to lead a company, but it obviously takes more than an hourlong interview. You can look at their track record, but if you meet somebody and you’re very skeptical that person is the right person, that’s probably not going to be the right person.
MALIK: I’d love to hear a little bit about what drew you to the Harvard Corporation.
RUBENSTEIN: I had been the Chairman of Duke University, and so I enjoyed being involved in a Board. I was also on the Board of Johns Hopkins and now still the University of Chicago, so I probably have been on more university Boards than most people—four of them now.
My daughters went here, and so I got involved. Then I was involved with the Kennedy School and their capital campaign, then involved with the parent Harvard University capital campaign, and then I helped to start, at Drew Faust’s request, the global advisory council. These are Harvard’s most prominent alums from around the world, and we meet once a year and talk about various Harvard things.
I think Harvard is a great university, and if Harvard does well, my theory is other private universities will do well because Harvard sets a very high standard. My theory was if I can be involved with Harvard, helping Harvard to get better in a modest way, then other universities would up their game as well. I thought it was a way of helping the American private education system, or maybe the education system.
Also, you get to meet extremely smart people, and they can inspire you, and you can learn a lot just from being around the Harvard environment. The Harvard Corporation is a small organization, so you can really bond with the other people and really have an impact.
MALIK: What career advice would you have for current Harvard students, or Harvard MBAs in particular, whether they’re going into alternative asset management or another field altogether?
RUBENSTEIN: Experiment. You won’t know exactly what you’re going to do for a while. A person I interviewed for my TV show today, Robert Frederick Smith, didn’t start his company Vista, a very successful private equity firm, until he was 39. I didn’t start Carlyle until I was 37. I think Steve Schwarzman didn’t start Blackstone until he was 39.
So experiment. Try different things in your 20s and 30s. You don’t have to be Bill Gates, who drops out of college and starts a company that works perfectly, from the time you’re 20. That’s unusual. If you can do that or do what Mark Zuckerberg did, great, but it’s not the norm. The norm is to experiment and find something you ultimately love, so I would say to young people: try things you think you like, and if you don’t like it try something else, and keep trying until you find something you really like.
MALIK: Over the course of your career in alternative investments, the private equity industry evolved dramatically, and it grew dramatically. How did your approach to investing change over those years?
RUBENSTEIN: Today it’s much more competitive. In the old days, it was 5 percent equity and 95 percent debt; today it’s going to be 50 percent equity and maybe 50 percent debt, or something in that range. When I started Carlyle, there were 250 private equity firms in the whole world; today there are 6,500 or so.
You have to accept the fact that rates of return are probably going to be lower than they were 20 years ago; because of the competition, prices are higher. You have to accept the fact that the ability to improve the company is the key to the buyout world today. It used to be that if you levered something up 95-5, and US GDP is growing at four or five percent, and you’re buying things at five and six and seven times EBITDA [earnings before interest, taxes, depreciation, and amortization], you don’t have to work that hard for the leverage and the macroeconomic environment to help you.
Today, when you’re buying things at 11 and 12 times EBITDA, you’re probably putting in 50 percent equity, and US GDP is growing at two percent. You’ve got to work a lot harder, so you have to make sure you really have a plan to effectuate change and grow the EBITDA, not just cut some costs to make your projected returns.
MALIK: What would worry you the most looking forward? Is it primarily valuations?
RUBENSTEIN: I worry that there is going to be an economic downturn at some point. We have recessions every seven years in the United States on average. We’re now nine years into a growth cycle, 103 or 104 months, so at some point there will be a downturn. I don’t know when it’s going to happen, but I want to make certain that in the deals we look at, we are anticipating that something will slow down, and we’re not assuming “hockey stick” projections in terms of economic growth.
MALIK: What about the other side of the coin? Anything that particularly excites you about the private equity industry today?
RUBENSTEIN: I am excited about the fact that good, young people like you and others still want to go into the industry. If we don’t get smart people coming from the best business schools wanting to go into the industry, then we’re not going to have the intellectual capital to do these kinds of things, so I’m happy that people still want to go into private equity. Not everybody wants to be at a tech startup. That’s pretty good.
Secondly, I’m happy that the industry is generally recognized as adding more value to society than it was 20 or 30 years ago. People do think that private equity people can make companies better. I do think that it’s more recognized than before that we are helping pension funds and endowments, which often serve very good social purposes, and I’m very happy that today ESG [environmental, social, and governance] is much more of a factor in the analysis of a company than it was 20 years ago. We spend a lot of time with ESG elements of our investments, and I think everybody’s doing that.
MALIK: Wonderful. Thank you so much.
RUBENSTEIN: Thank you so much, appreciate it.
Sumit Malik (MBA ’19) is an investor, writer, and entrepreneur. Professionally, his background is in venture capital and private equity at Warburg Pincus, strategy as a board member of Santander Asset Management Chile, and investment banking at Goldman Sachs. Personally, he writes for academic and popular publications and performs music and poi (light- or fire-spinning). He previously received an A.B., summa cum laude, from Harvard College and an S.M. from the Harvard Graduate School of Arts and Sciences. Follow him on Twitter @sumitxmalik.