October 17, 2012
Interviewed by: David Snow
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New Tycoons Author Jason Kelly

Just in time for huge uptick in public scrutiny of private equity, Bloomberg reporter Jason Kelly has authored the book, The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything. 

In an exclusive and wide-ranging interview with Privcap CEO David Snow, Kelly describes how a family trip to Legoland the inspired him to write the book, which “follows the money” flowing from institutional investors through private equity funds, into thousands of private businesses and back to investors, including public pensioners.

Kelly discusses the reception he received from GPs while researching the book, what he learned about the individual “titans” he profiles, what GPs are saying privately about the Romney presidential campaign, and why he things the wealth creation opportunities of private equity’s golden era are over.

Just in time for huge uptick in public scrutiny of private equity, Bloomberg reporter Jason Kelly has authored the book, The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything. 

In an exclusive and wide-ranging interview with Privcap CEO David Snow, Kelly describes how a family trip to Legoland the inspired him to write the book, which “follows the money” flowing from institutional investors through private equity funds, into thousands of private businesses and back to investors, including public pensioners.

Kelly discusses the reception he received from GPs while researching the book, what he learned about the individual “titans” he profiles, what GPs are saying privately about the Romney presidential campaign, and why he things the wealth creation opportunities of private equity’s golden era are over.

David Snow, Privcap: So the book is called The New Tycoons. What’s the full title?

Jason Kelly, Bloomberg: The New Tycoons, Inside the Trillion Dollar Private Equity Industry That Owns Everything.

Snow: Well, a lot of the viewers of Privcap are inside the private equity industry that owns everything. And so they’re going to be very interested in how this book came about, how it’s being perceived, how you researched it. So let’s talk about that. First of all, just 1,000 foot view, what is the book about?

Kelly: The book really started and ended up as an exploration of how private equity actually works at a time where it’s pervasive, ubiquitous, however you want to describe it. And in fact, the book actually starts with a family trip that I took to LEGOLAND with my kids and the realization I had shortly after walking through the gates that LEGOLAND was in fact owned by Blackstone. We’d had stayed at a Hilton the night before. And we had rented a car from Hertz, owned by Carlyle and CD&R.

And that actually got me thinking about this idea that even someone who spends too much of their waking life and probably sleeping life thinking and dreaming about private equity, it was even more pervasive than I had thought. And what I actually started doing about 18 months ago was keeping a list on my BlackBerry of all the things that I encountered on a near-daily basis, whether it was J. Crew or Dunkin’ Donuts or Miramax, things like that. And that really got me thinking about this idea of how it impacts a lot more people than maybe think about it.

And then taking a step further, and still from a personal perspective, I thought about my in-laws, one of whom is a retired school teacher, another of which worked for the City of New York. Both of them had pensions. Both of them are ultimately having at least a piece of those pensions managed by private equity firms. So that was the other leg of the stool.

And the third leg, I guess, would be given what they own, how many people private equity firms directly or indirectly, and it really is indirectly, employ. And I just sort of tried to explore sort of the chemistry of that as well as how it actually works once you get inside.

Snow: So Bloomberg pays you. You go on vacation. You pay $1 to LEGOLAND. That dollar goes to Blackstone and then they take 20% and then it goes to your in-laws. So it’s a nice ecosystem of the Kelly family.

Kelly: Exactly. Exactly. That’s exactly right.

Snow: As you have been researching the book, how did you do it? Were you mostly interviewing a lot of private equity guys? And was there any resistance, like, oh, what is it? Yet another expose on our business? What kind of feedback did you get?

Kelly: You know, I started really working on the idea in earnest in the summer of 2011. And having seen, as you have, a period over the last four to five years with these guys effectively wrestling with their own public image and wrestling with the notion that they do feel largely misunderstood, I think I benefited certainly from some of that sentiment.

Snow: So there was an eagerness to tell the story and a recognition that it had not been told well enough or enough at all.

Kelly: I think that’s right. There definitely was. And I think the approach of saying, I want to explore beyond the headlines and beyond even the headline deals, and really get into the nuts and bolts and sort of the guts of it, I think helped make the case. I had also written a story for Business Week earlier in 2011 that went sort of inside TBG’s ops group, and spent some time with them, again sort of private equity in practice.

And I think that helped pave the way to some extent in terms of the theme and feel of the book, because the book really does, as you can appreciate, in an almost cliched journalism terms, follow the money from the pension funds into the funds themselves into an acquired company. What happens there? Money’s raised along the way, but from a debt and equity perspective. And then sort of what happens as it goes all the way through.

Snow: I know the book has not yet fully been promoted and is just getting out. But what kinds of responses have you been getting so far? Anything in there that has surprised you or chagrined you?

Kelly: You know, the response has been good so far. And I think one of the things that has been rewarding for me as a writer is to hear from people who I respect within the industry that they learned things, especially about people that they have known, that they didn’t know before, people they’ve known for a long time, either details about where they came from or how they think or how their firms operate, because a lot of what I was trying to capture was a lot of the texture of the firms themselves. And as you know, unlike a company or even a Wall Street bank, these places have very distinct vibes about them. And it was surprising to me to some extent how different they were even when I got deeper and deeper inside and just the ethos of each individual place. And that was one of the really fun things to explore.

Snow: What is one of the interesting personal stories or background details that you dug up that surprised you?

Kelly: You know, one of the things that surprised me a little bit was understanding how, for instance, the Carlyle founders all came together and how they interacted with each other in the early days and what their own ambitions and reservations were about doing this in the late ’80s. And these were three guys who didn’t know each other at all before they did this. And yet, here is a firm that has lasted almost 30 years, 25, 30 years, with the same guys doing very distinct things, but with a chemistry, again, that has obviously worked from the perspective that this is one of the most institutionalized and successful firms. So hearing those guys talk about the early days I think was revelatory.

And one of the things I found as a journalist that was interesting was when you’re working on a book, people talk to you a little bit differently than they would if you’re working on a daily news story or even a magazine story, because there’s a certain weight to it, to some extent, to the conversation. But there’s also a strange comfort, because they know that it’s longer form, that you have a little more time to explain and a little more time to kind of talk through some of the more fundamental issues and really talk about things that they don’t get asked about a lot. And so for even some of the more junior guys, I spent a lot of time talking about, so what was it like the first time you met this founder?

And why did you come work here? And what was the process of getting hired like? And what do you remember from this time or that? And there were times where I felt as much a therapist as journalist.

Snow: Which pays more, by the way?

Kelly: It’s not a journalist.

Snow: Do you think that private equity guys, or at least the ones that  you spoke to for this book, and keeping in mind the backdrop of the presidential elections, do you think they understand why they’re getting beat up so much in the mainstream press? Are they befuddled by it, or do they seem to have a pretty clear understanding of why it is they are or that the industry is being maligned?

Kelly: I think they intellectually understand it. I think they still have an emotional reaction of either disbelief or confusion, depending on how you look at it. They certainly feel misunderstood and often mischaracterized. There’s also an understanding on many of their parts that this is in many ways their own fault. I mean, this is an industry that for a long time was more than content to be behind the scenes and working in a corner of Wall Street or in a corner of finance that people weren’t paying a lot of attention to and were operating, as you know, on a relatively small scale in a very lucrative business, but not commanding the sorts of fees or certainly the sorts of headlines that they came to command in the last decade.

I think they also understand but don’t like that a political campaign has different rules. And they privately, I think, are frustrated by the Romney campaign and its apparent inability to really fully tell the story of private equity within the context of what they’re trying to do. Specifically, one thing I heard, and I gather you might have heard it as well, is this whole focus on jobs. And I heard time and time again and there are several people quoted in the book to this effect, saying, we never really set out to create jobs. This is not a job creation business.

And yet it’s been a centerpiece of Mitt Romney, former private equity guy’s platform. I’m a job creator. I started a private equity firm. I ran a successful private equity firm. I can create jobs and fix the economy.

And the private equity guys seem to be saying, whoa, whoa, whoa. What? Because we were doing that at the same time. And it was interesting to learn that in many cases, jobs were not even something they really kept track, certainly in the aggregate. And so I think that’s been a surprise to them. And it’s obviously not an issue that’s going away at least for the next six to eight weeks.

Snow: How are people, or at least people in the industry, responding to the title of the book. Obviously, you’ve got to sell books, but it’s called The New Tycoons. Do they like it? Do they cringe?

Kelly: You know, there is both. I would say somewhere between cringe and chuckle is the usual reaction. I mean, certainly there were a number of people when they first heard it kind of went, oh, really? Seriously?

But at the same time, and maybe this is just me being a little pollyannish, I mean, one, who doesn’t want to be a tycoon? That’s sort of a cool description.

Snow: Nice work if you can get it.

Kelly: Yeah. I mean, I played Monopoly as a kid and definitely tried to be as tycoonish as possible. I think the other thing for me, and it’s part of the reason that in the front of the book I define the term, the idea that it conjures up for a lot of people is not just a robber baron, necessarily. And I didn’t call it The New Robber Barons, by the way.

Snow: That was nice of you.

Kelly: But, you know, when you think back to the tycoons of the last century and what they did in business, but also what they did toward the end of their business careers and what they did philanthropically, the book really ends on a different note. I mean, we start at LEGOLAND, but then we end up with me and my family again– not to spoiler alert you.

Snow: Spoiler alert. Do not watch this if–

Kelly: If you haven’t read the book. But we end up in New York City. And we’re walking down Broadway and we see the David Rubenstein Atrium at Lincoln Center. And I start to think about having done a lot of writing at the Schwarzman library. And so this is form a forward-looking perspective where a lot of this money is ending up.

Now, there are arguments to be made whether enough of it is ending up in philanthropic hands, whether these guys are giving it away in the right way or to the right places. But tycoon to me has that implication as well, of an almost social responsibility. And I think it’s an open question at the moment. Optimistically, I think they’ll do the right thing and that a century from now we will be looking at the legacies of these guys, either with their names on buildings or endowed chairs at this place or another, or maybe something even more interesting philanthropically.

Snow: Final question, just crystal ball time. What do you think will happen to the image of private equity after the elections? Will it fade into obscurity or will it improve or will it get worse? What do you think?

Kelly: I think it’s hard to imagine it fading into obscurity, just given what they own and who they’re investing on behalf of. It’s a bell that’s hard to unring given all the attention that’s been paid. If you look at what the industry has done through its lobbying group in Washington, they’ve been doing a lot of work which seems to be taking root a bit on the Hill in terms of educating members of Congress about what private equity looks like back home in the district. That will continue and probably could make a difference going forward.

The bigger existential questions, I think, around the business are about the economics. And it’s hard to imagine, given the size that it’s gotten to and the focus on issues like the tax rate and other financial elements of how deals get done, that it will be as lucrative going forward. I think we have seen the most lucrative period of private equity. And it peaked, like the deals did, in ’07, ’08.

These guys are smart guys. They will continue to make money and figure out new and different ways to make money. But the era of the megadeal is gone for at least a while. And I think it will create relatively less wealth going forward.

Snow: Gee, you’ve just made thousands of GP viewers very sad, Jason. Thanks for that. Well, best of luck with the book. It’s just getting launched now. And I hope that it is read wildly by people both within the industry and also people outside who want to look in and understand a little bit better. So Jason, thanks so much for being on Privcap today.

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