Value Added: Carlyle's Bill Conway On The Bailout
Here's Tom Heath's latest column on Washington's business community:
It was just a few months ago when I was eating a hamburger with Carlyle Group co-founder Bill Conway at a Northern Virginia restaurant and he was predicting that the mayhem on Wall Street would get worse and last at least a year.
Credit cards. Home equity loans. Every form of credit would be affected, he said. He also said that the best time to invest would be when the economy and headlines were most gloomy.
On Monday, after one of the scariest weeks ever on Wall Street, I checked back with Conway. The Carlyle Group is one of the richest and most successful private equity firms in the world, with around $80 billion under management. As chairman of its investment committees, Conway has the final word on where Carlyle places its investors' money.
I wanted to know whether the economy had bottomed out and what he thought of the bailout plan proposed by U.S. Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke.
"I knew it would be bad, but the current situation is much worse," he said in an e-mail. "I fear that Americans may view this [the $700 billion rescue plan] as a bailout of Wall Street rather than a bailout of America."
He went on to outline some of his concerns.
"Here is the critical question: How much is the $700 B government financing of mortgage loans going to cost us [taxpayers]?"
Conway said that if the government buys the toxic assets from the banks just to take it off their hands, that would cost the government less. In fact, he said, the government may be able to make enough to break even on those assets.
If, on the other hand, the purpose is to recaptialize the banks and make them healthy, the government would purchase the impaired assets for more than they are actually worth. In that case, said Conway, the government should get an equity stake in the banks in return for recapitalizing those institutions.
"I fear that the package is being 'sold' as the former (liquidity), but is in reality the latter (equity recapitalization)," he said by e-mail.
Conway said he is comforted by the fact that Paulson, formerly of investment bank Goldman Sachs, is in charge.
"He is the right man for the job," he said.
And for three reasons.
Here's what Conway said in his e-mail:
"First, although I have only had very limited business dealings with him personally (when he was at Goldman), in those dealings, he was tough, but A MAN OF HIS WORD. Second, his background at Goldman prepared him (to the extent anyone could be!!) for the tumultuous MARKET CHAOS that we have and will face. Frankly, his market instinct for action may be the right counterbalance to Fed Chairman Bernanke's academic training. Finally, I believe that he is seen as someone who can work in the POLITICAL MIDDLE."
But Conway was quick to add that "even the right man needs some oversight. The original draft bill had no provision for an oversight board."
He pointed toward several issues that were also raised this week by Conway's partner and co-founder at Carlyle, David M. Rubenstein. Both said the buying and selling process involving the entity should be watched carefully.
"Whoever advises the Treasury in the asset purchase process, should NOT be a participant in the buying and selling (too many conflicts)," Conway said by e-mail. "Frankly, they also ought to let others other than the U.S. Government be buyers in the process (e.g., sovereign wealth, foreign banks, pension funds, etc.)---better prices, more transparency, more firepower focused on the process."
Carlyle is 7.5 percent owned by Mubadala Development, which is owned by the government of Abu Dhabi. Carlyle takes investments from several overseas sovereign wealth funds, as well as from big U.S. pension funds, universities, foundations and wealthy people. The California Public Employees' Retirement System (Calpers) owns a 5.5 percent stake in the firm as well.
Conway enjoys near mythical status as an investor, mostly among current and former Carlyle employees but others in private equity as well. He isn't perfect. Remember the costly implosion earlier this year of Carlyle Capital, an offshore public company that invested in mortgage-related securities?
But it's difficult to argue with Carlyle's results: 26 percent annual net rates of return for its investors. Conway has a novelist's eye for detail when it comes to investing, from the growth of food lines at downscale sandwich shops to the nuances of the home rehabilitation industry.
Prior to Carlyle's annual investor conference, which was held earlier this month in Washington, Conway sent a memo to the heads of his investment funds and the firm's top executives, including co-founders Rubenstein and Daniel A. D'Aniello, chairman Louis V. Gerstner, Jr., senior advisor James H. Hance, Jr., and managing directors Edward J. Mathias and Glenn A. Youngkin.
Here's what he said:
"FROM: William E. Conway, Jr.
"As you know, our annual Investor Conference commences this weekend in Washington. I want to be certain that you continue to understand my views and that we have consistent communications with our limited partners.
"In January, 2008, I sent each of you a brief note (attached) about my view of the global economy and the actions I wanted us to take. Generally, these actions were to intensely manage our portfolio and to invest in a few wonderful deals. These guiding principles remain in effect. If anything, I have grown even more pessimistic about the near term future. My pessimism is a function of the housing crisis, problems with financial institutions, energy prices and an over-stretched consumer. These problems are not confined to the United States. And, I expect the troubles to persist at least through 2009. Hopefully, we are ready."
(It's worth noting that Conway began his January note this way: "If you are not in a panic by now, it is too late..."
He signed off by saying: "P.S. If you are in a state of panic, now is the time to return to calm, and take good care of our investors, portfolio companies and employees.")
September 23, 2008; 1:45 PM ET
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