American private equity firms have expanded overseas, to the benefit of themselves and their hosts, says David Rubenstein. But that process will reverse, and America will have to be ready

In less than two decades, private equity has grown from a small and local form of investment to a gigantic business with brand-name firms, possessing seemingly unlimited capital, investing throughout the globe.

The movements of the private equity “industry” now dominate business news, in large part because the industry is not only Wall Street’s largest source of fees, but also the employer – directly and indirectly – of tens of millions of employees.
How did all of this happen so quickly, and is this phenomenon one to be applauded, scorned, feared or welcomed?

Local to global

In its infancy, private equity was a small local business – Americans buying companies in the US with American capital, or Europeans buying companies in Europe with European capital. In the 1970s and 1980s, the returns generated for investors by these activities were generally eye-popping – double and triple the returns yielded by public market investments.

The inevitable result was an unprecedented flood of money into private equity, helping thereby to create both large private equity firms to manage this capital and the investment by these firms in thousands of buyout and venture capital transactions.

Inevitably, there were excesses, resulting in some downturns in the usually attractive investment returns achieved by private equity. But, over every three-, five- or 10-year period, returns to investors were better than anything else that investors could find. So even more money cascaded into private equity.

To deploy some of that money, many of the larger private equity firms began to look to the seemingly greener pastures abroad.

Principally, this phenomenon involved American firms – with largely American capital – looking to invest in Europe (in the 1990s) and in Asia (in the 2000s).

The result was the mushrooming of American private equity firms into global investment operations, spreading their capital, expertise and brands to areas previously untouched by private equity capital and by private equity business practices. Evidence of this phenomenon is reflected in the fact that American private equity firms invested 50 times as much outside the US from 2000 to 2004 as they did from 1990 to 1994.

For investors in the funds managed by these firms, the results have been generally positive. While investing outside one’s own country is always fraught with danger, the typical dangers were mitigated by these firms generally employing local professionals and substantially adopting local business practices and customs.

For countries in which this “foreign” private equity capital has been deployed, there have been some concerns about “globalization”, a word used to describe what is viewed by many as “Americanization”. There has, understandably, been a concern about the ingrained tendency of private equity firms to focus on investor returns at the expense (at times) of local social and labour practices. And, in a few countries, these concerns have resulted in the imposition of some tax and regulatory barriers to the unfettered investment of foreign private equity capital.

Overall, the markets in which globalized private equity capital has been invested seem to be prospering from the focus on streamlining business practices, growing globally competitive businesses, enhancing local employment and driving local company expansion.

To be sure, all local companies will not prove to be competitive on the global scene. And some local social and labour practices will adjust slowly or poorly to changes brought by the advent of global private equity capital.

On the whole, the benefits to local companies, workers, managers and tax bases appear to outweigh considerably the inevitable transition problems associated with global change and modern business techniques.

The consequence should be a continuation of globalization in the private equity world – with at least one major change.

A two-way street

While globalization has been led by the now well-known American firms: Blackstone, KKR, Warburg Pincus, Texas Pacific, Bain, Apollo and my own firm, Carlyle, their dominance is not assured over the longer term. European firms, like CVC, Apax and Permira, are also emerging as global investors. Asian firms will not be far behind, particularly if globalized investing reflects economic growth and capital availability.

Whether America will readily accept the fact that the globalized private equity phenomenon will, in short order, result in Chinese or Indian firms purchasing, with Chinese or Indian capital, important American businesses is unknown. The early indications are that Americans have not yet fully adjusted to the realities of the globalization phenomenon. It works both ways, and America cannot expect to have foreign markets open to its private equity capital without correspondingly opening the US to foreign private equity.

Whatever form future global private equity takes, globalization is here to stay, though the leaders of this phenomenon will be different five or 10 years from now. That is a healthy development, for change in business is essential.

Globalization here to stay

We cannot lose sight of the fact that private equity investing is at heart a business practice. But to the extent that this business practice becomes truly global and the benefits of private equity globalization become more apparent to all, it can be hoped that those involved in the much more significant sphere of international cooperation and diplomacy will also be emboldened to see globalization as a phenomenon here to stay. They will, as a result, adapt their own practices, thinking and words to encourage the further “flattening” of the world – bringing to all people the benefits of a global economy and global cooperation. That is already happening in the increasingly flattened world of private equity.

CV David Rubenstein

David Rubenstein is managing director of Carlyle. Prior to co-founding Carlyle in 1987, Rubenstein practised law in New York and Washington, DC. He also served as deputy assistant to the president for domestic policy in the Carter administration.