David Rubenstein, co-founder of the buyout firm Carlyle Group LP, said ordinary savers may someday be able to invest with firms like his, a business that so far has been limited to wealthy individuals and institutions.
Savers would be better off putting some of their retirement money into leveraged buyouts and other alternative-investing opportunities because they often produce higher returns than the public markets, Rubenstein said in an interview with Arthur Levitt that aired yesterday on Bloomberg Radio.
"I think it will be possible in the future where 401(k) check-off plans will be able to say you can take a certain amount of your money a year and go into an illiquid private- equity fund," said Rubenstein, 63. "However, they shouldn't be able to put too much of their money into anything that is illiquid."
The biggest private-equity managers have been diversifying to reduce reliance on traditional buyouts, and some are considering funds for individual investors as they seek more capital to continue growing. Only institutions or wealthy individuals, so-called accredited investors, have been allowed to put money into into buyout and hedge funds, to protect less- sophisticated investors who may underestimate the risks.
Buyout funds typically lock up client capital for about 10 years to make illiquid investments, and hedge funds can bet on rising as well as falling markets and invest in a range of assets. The funds, which are lightly regulated and pay a substantial part of profits to the managers, have come under scrutiny as Mitt Romney, the former head of buyout firm Bain Capital LLC, seeks to become the next U.S. president.
An accredited investor, by U.S. Securities and Exchange Commission standards, has a net worth of more than $1 million; earned more than $200,000 in each of the past two years, or $300,000 including a spouse; or is involved in the management of the fund.
Americans held $3.29 trillion in 401(k) plans as of June 30, according to the Investment Company Institute, or ICI. Carlyle, whose assets have almost doubled in the past five years, oversees $156 billion across 99 funds and 63 fund-of- funds vehicles, making the Washington-based firm the second- biggest private-equity company after Blackstone Group LP.
KKR & Co., the New York-based investment firm run by Henry Kravis and George Roberts, plans to open two debt funds that have lower cash standards for individual investors, according to documents filed with the SEC in July.
The funds -- a mutual fund that plans to buy non- investment-grade debt and a closed-end debt fund -- will be managed by KKR Asset Management, a San Francisco-based unit created in 2004 to focus on public investments. KKR hired William Sonneborn in 2008 to run the unit as the firm expanded into equity hedge funds and mezzanine lending.
The SEC is considering relaxing the rules by which hedge funds and alternative-asset pools solicit clients. Under a rule proposed in August and driven by President Barack Obama's Jumpstart Our Business Startups Act, firms would no longer face restrictions on how the fund offerings are advertised, meaning they could market to customers they aren't familiar with as long as they take "reasonable steps" to verify those investors are accredited.
The proposal, which is in a comment period ending Oct. 5, has drawn criticism from investor-protection groups and the mutual-fund industry, including the Washington-based ICI. The groups have said fewer restrictions may expose investors to misleading advertisements by some private funds.
Misleading private offerings are the No. 1 fraud leading to enforcement actions and investigations, according to the North American Securities Administrators Association. The number of cases involving these types of investments jumped to 410 last year, according to NASAA preliminary data, a 60 percent increase from 2010.
BlackRock Inc., the world's largest asset manager, supports removing the ban on general advertising, according to a letter the firm sent to the SEC in May. The firm oversees $3.56 trillion of assets, including $104 billion in alternative vehicles such as hedge funds, private-equity funds and funds-of- funds.
"This prohibition has unnecessarily limited the methods by which issuers can reach sophisticated investors," Barbara Novick, BlackRock's co-founder and vice chairman, said in the letter. "Investor protection concerns are adequately addressed by existing regulatory requirements."
Rubenstein, who from 1977 to 1981 was deputy assistant for domestic policy to President Jimmy Carter, co-founded Carlyle in 1987 with Daniel D'Aniello and William Conway. Rubenstein said if Obama is re-elected in November, he should work to improve relations with businesses.
"What he should do in the second term -- and I would strongly urge him to do so -- is to bury the hatchet with the business community, to invite them to the White House and say, 'We had our differences, now let's see what we can do to help the country,'" Rubenstein said.
Levitt, who interviewed Rubenstein at Bloomberg's headquarters in New York, is a senior adviser to Carlyle and a director of Bloomberg LP, parent of Bloomberg News. He was the longest-serving chairman of the SEC, holding that title from 1993 to 2001.
Rubenstein, asked who may succeed Treasury Secretary Timothy F. Geithner, said Erskine Bowles, co-chairman of Obama's budget-deficit commission, BlackRock CEO Laurence Fink and White House chief of staff Jack Lew would be credible candidates. Geithner, in a January interview with Bloomberg Television, said if Obama is re-elected "he's not going to ask me to stay on, I'm pretty confident."
Bowles "would be very well liked by the Republicans, with whom the administration will have to negotiate many things," according to Rubenstein. Fink, who has led BlackRock since its founding in 1988, is a "very smart, very credible person," and Lew is popular on Capitol Hill, Rubenstein said.
The presidential campaign appears "well decided" to Rubenstein, a lifelong Democrat who said it's unlikely Republican Romney can reverse the polls in the remaining weeks before the election. Romney, who co-founded Bain Capital in 1984 and ran the Boston-based private-equity firm for 15 years, should have better explained to voters his experience in the buyout industry, Rubenstein said.
"When history is written this campaign will not likely go down as one of the best ever run by a Republican nominee for president," he said. "It would not be the finest hour for the Republican Party to have had a candidate who doesn't defend what he had done for much of his career."
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