China: 'The Best Place to Invest in the Next Five to 10 Years'

Rubenstein: Private equity is seeking to get a 25% to 30% rate of return . So it is much more expensive than the capital where publicly traded firms might seek a return of only 6% to 7%. But why do people hate private equity capital? It's not as if I go to people, hit them over the head with a hammer and force them to take my money. They consider that private equity people can bear risk, can add value, make the firm more efficient. That's why the business operates. It operates very well because we are creating jobs, we are making a lot of money for investors. It is not operating because of government demanding or requiring people to take our money. I think we have done a very good job and get a good rate of return for our investors. In fact, if you have money to invest, probably the best thing you can legally do is to put it into a buyout fund. Because in the past five or 10 years, if you had put money into a buyout fund, you would have had a very high rate of return.

See "Private Equity No Longer a Private Club" on TheStreet.com.

China Knowledge@Wharton: A few technical questions. Early-stage companies will go to private equity, but why do some late-stage companies need private equity?

Rubenstein: You say early and late stage, do you mean venture capital or buyout?

China Knowledge@Wharton: Venture capital.

Rubenstein: The phrase private equity is used differently in different parts of the world. In the United States, private equity really means two things: buyout and venture capital. In some parts of the world, the phrase private equity only means buyout. Venture capital is very useful in helping new companies get off the ground. Very often when you want to start a company, you need somebody to give you the money. You can't borrow money because you have no assets that people will lend against. So you need either first-round or angel financing. Then the company might get a second round of financing. That's a very difficult business compared with buyout. I would say 19 out of 20, maybe 24 out of 25 buyouts work, whereas with early-stage venture capital, only 30% of the deals work. It is a much more risky business. It potentially has a great rate of return. If you were an early investor in Google (GOOG Quote - Cramer on GOOG - Stock Picks), you would be very happy. But good deals come along infrequently.

China Knowledge@Wharton: Another hallmark of private equity is the widespread adoption of limited partnerships . Could you talk about their importance?

Rubenstein: The concept of limited partnerships is relatively traditional in the investing world. When you form a partnership, investors put their money in, but they are limited to how much money they can lose. They can only lose the money they put in. They are not responsible for the debt or things beyond the money they invested. The advantage of the limited partners is that you have the general partner to take all the risks. He or she has the liability . Limited partners don't have additional liability. But you also get the tax benefits. Tax benefits can be passed directly to the partners at the federal level of taxation. So the conventional way that you operate in the investment world is through limited partnerships.

China Knowledge@Wharton: U.S. buyout markets are very crowded right now, with too much money pursuing investment opportunities.

Rubenstein: Well, you say it is too much money. I say it is a lot of money. But there are a lot of opportunities as well. If you were to take the value of all the stock on the New York Stock Exchange (NYX Quote - Cramer on NYX - Stock Picks)and Nasdaq (IXIC Quote - Cramer on IXIC - Stock Picks), add it all up, the amount of money available for a buyout would be around 2% or 3% of the total value. In other words, there is plenty of money for buyouts to be sure, but relatively, the total number of publicly traded companies is still small.

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