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Founding Partner of The Carlyle Group Looks at Private Equity Today

Despite recent financial crises, four factors remain positive for private equity, said William Conway Jr., ’74, founding partner and managing director of The Carlyle Group. Enormous liquidity is still available in the world, all-time high corporate profits will likely revert to their mean levels, the world’s financial system has proven to be “wonderfully resilient,” and the world is less U.S.-centric than before, Conway said during the lunch keynote at the Sheraton Chicago at the seventh annual Beecken Petty O'Keefe & Company Private Equity Conference, presented by the student-led Entrepreneurship, Venture Capital & Private Equity Group and the Michael P. Polsky Center for Entrepreneurship, February 22.

Meanwhile, the negative factors include enormous direct and indirect leverage within the financial system, incredible price inflation, regulators’ inability to “reflate’ the market, and complacency, he said. “The latter is the biggest problem of all,” Conway cautioned. “People ought to be scared out of their minds right now. This is a situation you have never seen before, and people ought to be very, very careful about what’s going on.”

A big sign of concern is the fall of pricing of major financial companies, who are going to the Middle East, Asia, and other regions to raise billions of dollars in capital, he said. “A bubble has burst,” Conway said. “The world has changed and people are far too complacent about what has happened and what is likely to happen.”

No matter what happens, the fundamental principles will remain the same in private equity, he said. Conway has guided Carlyle successfully with 10 rules focusing on the obvious and worrying less about subtleties:

  1. Develop an independent idea of what a business or asset is worth and constantly reassess the valuation. “[This is] the single most important skill in our business,” Conway said.
  2. Avoid auctions. “I don’t want a fair fight,” he said. “I want something that is tilted way in our favor.”
  3. Keep several choices. “Another bus is going to come by in five or 10 minutes,” Conway said. “If you miss this bus, catch the next one.”
  4. Approach every potential transaction with overwhelming force.
  5. Price does not matter if the deal is good. “The single most important thing about our business is that 90 to 95 percent of the return comes from the deals you do and the deals you don’t do,” he said. “It’s not the price you pay.”
  6. Get help. “The best people want the most help,” Conway said. “The weakest people want the least help.”
  7. Keep your emotions in check. “This is not a business of emotion,” he said. “It’s not personal.”
  8. Develop the trust of managers and visa versa.
  9. Make sure managers concentrate on the few vital objectives, not everything.
  10. If management is not working out, change it – sooner rather than later.

“That last one is the one I get wrong most of the time,” Conway said. “I’m very human and I like to think with my personal involvement I can make things better, so I try to help my managers. I admit I’ll be making this mistake on my last day in private equity. I always wait too long.”

--Phil Rockrohr