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Carlyle co-founder on markets in 2023: ‘It’s actually a good time to invest’

Carlyle Group Co-Founder David Rubenstein joins Yahoo Finance Live to discuss market uncertainty, investor sentiment, M&A dealmaking, and the outlook for the U.S. economy.

Video transcript

JULIE HYMAN: Well, as we've been talking about during our coverage here in Davos, one of the buzzwords of this World Economic Forum is "polycrisis." Another, of course, is "recession" and the debate over whether we're going to have one. Joining us now is David Rubenstein. He is the co-chairman and co-founder of Carlyle.

And of course, he is well poised to talk about this because you talk to a lot of people. You do a lot of deals. You talk to people not just as part of your job, but also as part of your job hosting and interviewing people. So you have a pretty diverse set of voices in your head, so to speak. What are you-- how are you synthesizing all that? What do you-- what's your feeling about what the economy is doing?

DAVID RUBENSTEIN: The press that has been written about Davos suggests that people here think that we're going into a recession for sure, and things are pretty gloomy. I don't really agree with that. The numbers that we have in our own companies at Carlyle don't suggest a recession is imminent. And we also think that the US policy to get inflation down is probably working. And so I don't really think it's clear we're going to go into a recession in the third or fourth quarter. It is clear that the Fed will increase interest rates again, probably in February and March, but not by so much so that will put us in a recession. I think the Fed will probably target inflation down to about 3%, not 2%. Their current public position is 2%. I suspect in time, they'll go to 3%.

JULIE HYMAN: And do you think they'll be able to get it there?

DAVID RUBENSTEIN: I think they will by the end of 2023. I think they get it to 3%, 3 and 1/2%, yes. And I think that's tolerable. I mean, 2% is good. We had it for 25 years. But 3% is tolerable.

BRIAN SOZZI: David, if we're not going to get a recession, is this a stagflationary environment? Still high inflation, slow growth, and what would that mean to the investing public?

DAVID RUBENSTEIN: Well, clearly, inflation will be bigger than it was the last 25 years or so. So it's going to be lower growth than we probably had a couple of years ago. But remember, an economy of our size, $23, $24 trillion, it's hard to grow at 4% and 5% and 6%. So I suspect we'll probably grow at 3%, 3 and 1/2%. And I don't know if I'd call that stagflation. It's a reasonable growth for the economy of our size.

JULIE HYMAN: We're coming off of, obviously, a pretty lousy year for markets. And I think a lot of people also are coming off a period where they were paying more attention to equity markets, in particular, during the pandemic, when they were home. Going into 2023, if you're talking to somebody who's 25, or 45 for that matter, and they want to build their wealth, they want to think about retirement, what do you say to them? Is it a time to get into stocks? Is that the best strategy?

DAVID RUBENSTEIN: Of course, if somebody is 25 and worried about their retirement, you have to say, what kind of person is this?

JULIE HYMAN: Maybe not worried, but, you know, it's a good idea to think about it.

DAVID RUBENSTEIN: I guess what I would say is the best time to invest is when markets are depressed. And right now, the markets are a little depressed. The stock market was down between 20% and 30%, depending on how you measured it last year. So I suspect that it's a pretty good time to invest. You never can time the bottom of the market exquisitely well, or the top. But you should basically say, look, the economy has some problems. People are pulling money out of the market. That makes it cheaper, and therefore time to get in. So I think it's actually a good time to invest.

BRIAN SOZZI: David, of course, you're a seasoned, experienced investor. But throughout the COVID pandemic, we've had a lot of new investors come into this market, meme investors, whatever you want to call it, a lot of new retail investors. How do they go upon improving their financial literacy and picking good stocks to own?

DAVID RUBENSTEIN: Well, you can't read too much. So I think people should try to read more about what they're investing in. Very often, they might hear a stock tip from a friend. All of a sudden, they're buying the stock. They should read about it, learn more, and don't rush to do something. But there's nothing more important than reading, knowing what you're investing in, and making certain you keep current with it. And I tell people in a book I recently wrote about investing that you have to really know what you're doing before you give your money to somebody.

JULIE HYMAN: I also want to talk to you about the outlook for M&A since that is your business. We earlier talked to Paul Knopp of KPMG, where he said, particularly in the second half of the year, we might see more of an uptick in deals. What's your view?

DAVID RUBENSTEIN: Well, hopefully it'll be better in the second half than probably the first half. The first half is still going to reflect a little bit of what we saw in the last half of 2022. Right now, this is the phenomena you have. It's harder to borrow money for sure, but that isn't the biggest problem because a lot of deals don't need money. You have growth capital, venture capital.

The real problem is people who see the economy right now, they think the economy is going to come back, and they don't want to sell at a lower price. And the sellers-- or the buyers are saying, wait a second. We're going to recession, so you should sell at a lower price. So there's a big gap of, I would say, 20% to 25% between buyer and seller expectations. And that's the biggest problem we have right now.

BRIAN SOZZI: What's your go-to tool that you use to size up a deal and ultimately know when to pull the trigger?

DAVID RUBENSTEIN: Well, at a firm like Carlyle, you have gigantic investment committee memos. So typically, if we're going to do a deal, you'll have a 30, 40, 50-page memo, which you could argue that Warren Buffett doesn't use 30 and 40 and 50-page memos. But reading that memo and making certain you talk to the people who've done a lot of their due diligence is probably the best thing to do. For those people who don't have deal teams of the size of Carlyle, they obviously have to read materials to make sure they know something about what they're investing in.

JULIE HYMAN: I want to talk to you a little bit about Carlyle and the whole succession discussion at the firm. There have been a lot of rumors about the Citigroup CFO potentially, about a former Morgan Stanley executive, about different people who might come in to run it. How are you guys thinking about it right now? Where are you in the process?

DAVID RUBENSTEIN: I don't really think I can comment on that because I've been trained by my lawyers that I will go to jail if I say something. So what is your next question?

BRIAN SOZZI: Where would you like to see Carlyle a decade from now?

DAVID RUBENSTEIN: Well, the greatest private equity firm that's ever existed. That's what I'd like people to say. But I have to be realistic about it. A decade is not that long a period of time to really build a firm to that level. I think it's one of the biggest and one of the most successful private equity firms in the world. There are probably 20,000 private equity firms. It's one of the most successful. But sure, I'd like it to continue to be active and well-regarded. And people think that if you work there, you're going to get a good job and good training. And if you invest there, you're going to get a good return.

JULIE HYMAN: By what metric? If it's the best private equity firm in the world, by-- how do you measure that?

DAVID RUBENSTEIN: Well, it's one that my children would say they're proud that their father started, I guess. If my mother was still alive, she would call me and say, hey, you're doing a really good job. So but in terms of the metrics, you want people around the investment community to say, this is a firm that people should work at. It's a great place to work at. It's the place where you should invest your money. No perfect metric, but those are the ones I use.

BRIAN SOZZI: David, before we let you go, big fan of what you do interview wise. And you wear a lot of hats, like Julie mentioned. What makes you tick?

DAVID RUBENSTEIN: Well, I came from very modest circumstances. I'm trying to give back to the country and try to say, look, people from modest circumstances, they work hard. They can achieve things in life. And I'm motivated by trying to please what my parents wanted me to be, which is something useful with my life, so. And the country has been great to me, and so I want to give back to the country. And that really motivates me.

JULIE HYMAN: I'm sure that your mother would be very proud, I think it's safe to say.

DAVID RUBENSTEIN: Well, I hope so. But, you know, she lived to see a lot of what I've done. But, you know, I think she was happy. But, you know, I think she was never as happy as when Carlyle bought Dunkin' Donuts, and I gave her free Dunkin' Donuts coffee passes. And she would go into the Dunkin' Donuts place and say, my son owns Dunkin' Donuts. And the person would roll their eyes and say, sure. But she would give them the little pass, and she'd get free coffee. She was happy about that.

JULIE HYMAN: That is fantastic.

BRIAN SOZZI: That's awesome.

JULIE HYMAN: Thanks so much, David Rubenstein of the Carlyle Group. Thank you.