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Carlyle Co-Founder Defends Private Equity

David Rubenstein suggests that private-equity firms buy back loans made during the boom times.

David Rubenstein, co-founder of the private-equity behemoth Carlyle Group, defended his company and the industry he stands for just moments after being harrassed by disgruntled union organizers today.

In his keynote presentation to the Society of American Business Editors and Writers annual conference in Baltimore, Rubenstein said, "the biggest cost-cutting efforts in the U.S. have nothing to do with private equity."

He noted that the idea of private equity is to make companies more efficient, but to do so outside of the glare of the quarterly earnings cycle to which public companies are subjected.

Despite the malaise in the credit markets and the dire situation in the housing sector, he said, the U.S. remains the most attractive place to invest in the world, and "will probably remain so, at least as long as I am alive," due to the "transparency, the rule of law, deep management talent and great investment professionals" in the country.

But he said the emerging markets of Brazil, China, India and the Middle East all look good too.

A Public Future

He shrugged off criticisms about lack of transparency in the world of private equity -- such firms are typically not public and don't have to publish freely available financial statements -- and said inquisitive investors should be able to find a large amount of financial data through


filings associated with public debt offerings.

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He added that private-equity firms would likely follow the investment banks in going to the stock market.

"In five years, the 10 largest private-equity firms will all be public," he said -- but he was careful to add that he wasn't committing Carlyle to any such action.

In answer to a question regarding the health of the broader economy, he said the U.S. isn't out of the woods yet.

"We could be closer to the bottom

than we were, but we could stay at the bottom for a while," he said.

In terms of tactics that private-equity firms might want to employ now, he said buying back loans made by banks at the top of the boom times, when lending standards were much looser, might be a good idea.

Because the terms of legacy loans were often so inferior to those made currently, banks needed to mark them down substantially, thus weakening their own balance sheets. Thus, there is often a desire to get the original borrower to pay back the loan immediately, even if it means taking a substantial loss.

Sometimes private-equity firms can get the banks to lend them even more money to buy back the original loans at amounts vastly below their original face value, he explained.