<html><body>American Enterprise Institute November 27, 2007 [Edited transcript from audio tapes] Proceedings: R. Glen Hubbard:  We are deliberately starting a little bit late to give everybody a chance to get settled, but start we need to do because, again, it is an excellent program.  I think yesterday s introduction of the conference both as getting some facts on the table about the private equity business, a discussion of the economics, and Mike Jensen s rendition of Jonathan Edward s Sinners in the Hands of an Angry God last night, all of that, I think, was an important first day for the conference. Today we are going to be burrowing in in three areas:  One in terms of the market for corporate control and entrepreneurship, the topic of the first session.  Second, to look at global developments as a tendency to think of this as principally an American phenomenon; historically, that was true but there are exciting developments around the world and they are different.  And third, to talk to practitioners about key issues they see, both business issues but, also, hopefully, policy issues regarding taxation and regulation.  The first panel, Karen Wruck will be the speaker and I will turn the program over to Alan Viard and to Karen. Alan Viard:  Thank you all for coming out here.  It is always good to see so many people here so early in the morning.  I think we have a very interesting set of remarks ahead of us.  The topic of this particular session is how private equity has affected, reinvented, in our speaker s terms, the market for corporate control.  We will have a speaker followed by two discussants.  Karen Wruck is the associate dean of the MBA program at the Ohio State University, Fisher College of Business.  She is also the dean s distinguished professor there.  Our first discussant will be Peter Klein, who is a professor in the Division of Applied Social Science at the University of Missouri, and the Associate Director of the Contracting and Organizations Research Institute.  Our second discussant is Annette Poulsen from the University of Georgia Terry College of Business where she is the head of the Banking and Finance Department and holds the Augustus H. "Billy" Sterne Chair. So we will allot about 25 minutes for Professor Wruck, followed by ten minutes for each of the discussants.  And that will leave us some time for what I m sure will be a number of questions. Karen Wruck:  Thank you.  Good morning.  I want to make sure -- can everyone hear me?  Okay, super.  I m very happy to be here today.  My charge is to talk about Private Equity and the Market for Corporate Control.   I m going to call it a reinvention of the market for corporate control and I will tell you a little bit about why that is the case.  And it is one of the ways in which I think this private equity cycle is different than what we experienced in the 80s. We have seen a lot of statistics over the last few sessions.  I will not reiterate or read mine but I will call your attention to the bottom line of my slide, which is really what I want to talk about.  There was an article not so long ago in the Wall Street Journal where Henry Cravis was quoted as referring to this period as the golden age of private equity.  And so one of the things that started me thinking about is what does it mean to have a golden age and is this really one of those? So what is a golden age?  Just look it up - a standard definition: A period of great happiness.  Well, I think there are probably a lot of happy people in private equity out there.  Prosperity and achievement -- and the question I really focused on is what has been achieved.  If this is a golden age, we get the happiness and the prosperity part, but what has really been achieved?  My conclusion is it is not about the gold in the golden age.  Although, as people have talked about there has been plenty of gold created, and lots more to be created and spread around.  But there are really two achievements that I think are worthy of note.  And I m going to spend a reasonable amount of my time talking about those. The first is a reinvention of the market for corporate control which I think, again, is a distinguishing feature of this round of private equity from the last and is something that I think will be a permanent feature of the way the market for corporate control works here in the United States.  And the second, which I think is equally important, is what I m calling the routinization of an approach to reorganizing for value creation.  And one of the things, if you think back to some of the conversations we had yesterday, is this notion of private equity players being that bridge between capital markets and management and strategy.  Part of the way that is coming about is by having an influence on the way firms are reorganized.  And if you want to look to where you think there are going to be problems in deals in the future, it is where this capability to affect change on organizations is missing.  And I will talk more about that later as well. I want to go back to the classic definition from a paper by Jensen and Ruback about what it is that we are calling this thing, the market for corporate control.  So this is the traditional definition that financial economists like to use to talk about the market for corporate control.  Stripped down to its essence, it just says, This is the market where management teams compete for the right to manage corporate resources.   And so, the market for corporate control is really an extension and augmentation of the managerial labor market. The issues that have arisen, however, that I think have caused the market for corporate control to be reinvented are that there were some serious issues and some of those still remaining capital markets.  In particular, this inadvertent separation between risk bearing and the governance functions in the firm.  So what you had were too many situations where public shareholders where indeed specializing in bearing the risk, but their governance rights where essentially captured by managers.  If you want to think about more theoretically how that would work - I m sorry the pictures are not clearer - the notion here in an abstract sense is that there are three important functions that need to take place in a firm.  Someone needs to make decisions - the decision management function; someone needs to bear the residual risk of the organization, and someone has to have decision control or governance rights in the organization.  And very broadly speaking, it is easy to see why I would want to separate the management rights from the governance rights.  In other words, I do not want risk bearers out there in the market place with no access to governance; I do not want managers capturing the governance process.  But in a sense, what ends up happening, particularly, pre-private equity is rather than having this separation between decision management and governance and risk bearing, you had what amounted to a situation where managers ran the firm and had captured the governance process, and shareholders are out there bearing residual risk with really no options but to vote with their feet.  And that could lead to substantial degradation and value.  And it puts a lot of firms and organizations in jeopardy.  So how does the new market for corporate control solve that problem?  A new definition that I have just kind of thrown out there is the market in which the providers of capital compete for the rights to govern the corporation.  It is not a management-driven definition and it is not about the right to make decisions.  It is about the right to govern the company.  What does that mean?  The governance rights succinctly summarize the rights to hire, fire and set the compensation of top managers; the right to veto or ratify major strategic initiatives, and to serve as internal consultants in developing the strategy and direction of the firm.  It is not a competition among management teams, although it does have very strong implications for how a firm is managed. So take as an example -- you have a publicly treated target; you have two bidders.  One is a public corporation and one is a private equity firm.  In the 80s, the way we would think about that is we would say, well, there is a strategic buyer who has the potential for synergies with the target and the strategic buyer may be willing to pay a premium to capture those synergies.  And then, there is a financial buyer who is investing in the firm only because they are financially driven and looking for the returns; they do not particularly have operational expertise.  And so it is a competition between strategic buyer and financial buyer. That distinction is really being blurred because of the way private equity shops are organizing themselves.  So the corporate bidder may have perceived synergies. And as anybody who has looked at the literature in mergers and acquisitions knows, it is extremely hard to capture those hoped-for synergies due to issues with post-merger integration.  It has to win the battle for the right to govern the firm first.  And private equity shops, as Steve Kaplan pointed out yesterday, are developing what he calls this operational engineering capability.  But the good shops have always had that.  If you go back to the 1980s and look at, for example, Clayton and Dubilier, they always had operating partners that sat on the board of their portfolio companies and brought guidance and strategic direction to their portfolio companies. So it is not a new idea but it is an idea that has permeated the market to a greater extent so that the private equity players can bring about operating improvements, synergies, and have shown a capability to put together more than one firm in an industry to exploit operating synergies.  So the distinction between a corporate buyer and a financial buyer -- very, very blurred at this point and which is one of the phenomenon, I think, we are going to have to deal with and live with in the market for corporate control.  It is no longer sufficient to say, I m a corporate bidder; I can over bid because I have synergies.   Private equity guys can capture a lot of those as well. So what does this look like in practice?  The way that I think about it is it essentially acknowledges the problems associated with traditional governance structure in U.S. publicly traded corporations; essentially, it admits defeat and says, If you cannot beat them, join them.   And so, what I m going to do is I m going to bundle risk-bearing with governance rights, and governance rights that actually work and stick. So one way to think about it is in the Old World, you have a world where shareholders in theory had access to governance but in practice are easy to deflect.  In a private equity world, you have shareholders who are buying these shares because they intend to vigorously exercise their governance rights.  And so, this idea that we can peel those apart and function is not an issue; it is not going to happen anymore and everybody has going to have to deal with that. There is an old quote that many of you are familiar with -- goes back to Adam Smith where he talks about the problems of joint stock companies.  And he says, Being the managers rather of other people s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance which the partners in a private co-partnery represent.   So one of my bullet points there is that it puts anxious vigilance back into the corporate governance process. And if you talk to managers who work with private equity partners on their board, I think that they will think that anxious vigilance can sometimes describe their world.  It is a much more intense process and it is more than just having a boss, right?  It is having to engage in open dialogue in a very highly charged environment where performance is necessary: Are you doing a good job?  What is going on?  What are the short term implications?  What are the long term implications of your decisions?  And being open to challenge, which is something that many top managers, at least, historically, are not very good at.  But it is something that you can think about it as kind of a personal trainings sort of analogy, right?  You could work out by yourself or you could hire a personal trainer.  If you hire a personal trainer, the reason you are hiring them is because they are going to push you to do things that you could not do by yourself or on your own. And it is the same kind of concept in one of these aggressive governance environments.  While managers should welcome the opportunity to be pushed and coached, it is often a hard sell.  But it is becoming a reality and a way of life and resisting it could mean that you end up with an aggressive set of directors that do not have anything to do with the choices you might make.  So I think we are going to have to see the top management suites opening up to more aggressive inquisition by their directors or risk having it imposed upon them against their will. So the nice thing about this system is that it does put anxious vigilance back in the governance process without requiring managers to own so much stock - a 100 percent of a large enterprise - that they are overwhelmed or cannot put together the capital.  And so you are able to have some efficiencies and risk bearing as you would have in a public corporation but also have a governance process that works much better than the process in a typical U.S. publicly traded company. So what are the implications of that?  In a broad sense -and people have talked a lot about the evidence - more competitive liquid dynamic effective market for corporate control.  I think that is one of the big positive legacies of the private equity world and I think it is a great thing.  You are going to end up with more efficient organizations along a variety of dimensions and not just firms who have direct private equity interest.  Because the threat, the standard of behavior is a motivator, or an example, depending on how you would like to put that, in terms of what is going to work to supercharge an economy.  If you have a competitor who has private equity as a significant owner and they are making huge improvements, you had better make similar improvements or you will not be competitive in your product markets either.  So it can have motivating effects even for firms that do not have direct private equity investors simply by changing the competitive dynamics in an industry.  And I think as you see private equity players take positions in industries and have bigger roles in industries, you will see them influencing the competitive dynamics of the product markets, which has an impact on everybody, okay? So one of the questions -- and this came up last night: Is this the eclipse of the public corporation?  Has it arrived but only 20 years late?  So one of the things that Michael talked about yesterday at dinner was what is the future of the publicly-traded company?  I do not think it is an eclipse in the sense that we are never going to see -- we re going to see a movement completely from public to private because predominantly, of the access to liquidity that public markets provide and they still serve an important role in terms of risk bearing.  They are, ironically, a desirable exit strategy or exit vehicle for private equity players.  But the reality is that with big deep liquid pools of private capital, the public market is not as important as it used to be.  It is not the only kid on the block; it is not the only way to get residual risk born and, therefore, it will play a more limited role going forward.  And so how that gets dealt with, both in terms of the capital raising process and in terms of public policy is an interesting set of questions because there will be, I predict, less dependence on public markets. So not exactly an eclipse but there is another classic article by Bennett Stewart that was called, Remaking The Public Corporation from Within.  It had a number of interesting ideas about how a public company could impose some of the discipline of a buyout on itself.  I think this is more a remaking from without, but you will see changes in public corporations brought about, I think, from pressures from this reinvented market for corporate control. So that is sort of category one: Reinvention of the market for corporate control.  The other thing I want to talk about is this routinization of ways to organize for value creation.  While I have done large-sample empirical work in this area, as well, a lot of my time has been spent inside the black box of the organization, working with managers of firms, and studying managers of firms who are trying to figure out how to run their business under the new private equity regime.  So it is very difficult to do that for thousands and thousands of firms but you can do it for a number of firms.  And so, part of my perspective is really driven by having spent time inside organizations two to three years, post-buyout or post-private equity, to try to understand where are these gains and operating profitability coming from.  What is really going on in terms of the management style and practices?  What do employees say about what their lives are like pre- and post- buyout?  Are they happy or are they unhappy?  And so on.  So I want to talk a little bit about those kinds of issues.  And this is what I think is an apparent contradiction or, perhaps, the ultimate irony of private equity because on the surface it looks like a very market-oriented transaction driven world.  And, in fact, when it works well, it is a very relationship-oriented organizationally focused business. And in that dichotomy really lies, I think, a way to understand what deals work and what deals do not work. Deals that are largely transactional in nature with no relationships that do not focus on the organizational dynamics or the management tend, I think, to be weaker than those that get it.  And I believe this is one of the things that distinguish the top players in the market from the B, C, and D players in the market on the private equity side.  And one of the reasons that I will think I will argue that it is very dangerous to invest with these B, C, and D players.  So what do I mean by that?  Reorganizing for value creation.  What assets should remain with the organization?  When I buy an organization, what do I keep and what do I sell?  And how do I make that decision of a value-based proposition?  Public companies are very, very reluctant to reform themselves, except under crisis circumstances.  This is something private equity shops are very good at is looking at what is the core of this business.  What can I unload to another buyer who could manage it better than I do?  And then, given what I keep, what should the internal rules of the game look like?  How should I allocate decision making rights?  How should I measure performance internally?  And how should I compensate managers in those organizations?  These are the key organizational decisions and the thing that, I think, bridges this gap between the capital markets and the strategic management.  It is not that the private equity guys know how to run the business; it is that they know how to set up the business to tap managerial talent and knowledge, and provide them with incentives to make good decisions, which is one of the reasons it is so important for private equity players to buy firms either with very strong management teams or have the capability to replace those managers very quickly if they do poorly. So what do we see in practice?  What we see are four pretty stylized facts about things that come up over and over again in terms of the way private equity guys work with operating managers to restructure organizations.  Governance by small board -- Michael talked about that last night.  Decentralization of decision making -- so how do I get the decision rights for strategic decisions and other important decisions into the right hands of managers?  And when I give them high-powered incentives, I can afford to be more decentralized in the way decisions are made because I m holding them accountable for outcomes.  I do not have to monitor their inputs as closely.  And that is a good thing because the private equity guys, a lot of times would not know what decisions ought to be made.  But they can help managers understand the value implications of their decisions and then let managers use their expertise to make decisions.  And most of the managers that I have talked to, who stick around for the private equity guys, really enjoy working in that environment in the sense that they feel they have more autonomy, more authority, and more freedom than they did in their corporate environment or as CEOs of publicly traded companies. Probably, selection buyers there but performance measures that emphasize cash flow and long-run value creation, that should not be surprising; we know nothing about let s grow earnings per share, we drop that completely.  And a new compensation package - higher level of compensation, bonuses based on cash flow measures, and significant equity ownership, but not crippling.  Okay, so that is the organizational proposition.  What do I mean by routinization?  Well, once you get good at this, I mean, every company is different but the principles remain the same.  So if I have done four, five, six, ten, a hundred deals, I m learning a lot about how to apply these principles of organizing in a variety of different circumstances.  And this approach to organizing is really a technology.  Glenn talked in the introduction yesterday about the role of technology in driving growth in the economy.  It is appropriate, I believe, to think about ways of managing and organizing that are powerful as a technology because it does drive growth and value creation and this I think is one of those.  The interesting thing about it is that it is not rocket science.  So one question is, is it a sustainable source of competitive advantage if you are good at it?  And the answer based on what we see from private equity returns and the fact that the top tier tends to significantly outperform the rest suggests to me that while it seems simple on the surface that it is, in fact, difficult to implement.  It appears to be difficult to replicate by new entrants into the private equity market and is certainly difficult, as Mike pointed out, apparently to implement in public companies, although again in principle, you could do this in a public company without going private. So is this an organizational explanation for differences in performance across buyouts?  I think it is.  That is my speculation.  So to recap these two achievements, reinvention and routinization, I want to just spend a few minutes talking about one part of the private equity market that we have spent no time on, which is the private placements and pipes which are not buyouts but which are a huge part of the private equity market, by some estimates about $39 billion in 07, headed towards $50 billion by the end of this year.  We know very little about the impact of these transactions on value.  And the question is how do we think about them.  Are these more like seasoned offerings of equity but big blocks of equity?  Or are they more like buyouts but without the automatic access to governance and the ability to reorganize?  And I think it is very important that we start to try learn more about these transactions, and how they were not given the size of that market and the growth in that market. And I will skip quickly through these.  So what is the relationship between [indiscernible] private equity investors and the firms in which they invest?  Talk briefly about a study that I have recently been involved in that looks at 2,000 private placements completed over a 10-year period and has the data on the placement contracts and the special filings.  So we know who the investor is and we know what their relationship is with the firm.  And what we find is that 64 percent of the placements are made to investors that we would call relationship investors, either managers, key business partners, or people who are already block holders or directors of the firm.  We also find that most of these placements are associated with the formation of a new relationship, either a new directorship, a new management position, and so on.  And only eight percent of these placements are made to what we would call true outsiders.  So what are the performance implications?  So what happens? For key business partners who invest in these private placements, they experience a very poor return at least over the six months following the placement after adjusting for risk and for market performance.  Why would that happen?  We are not really sure but one of the speculations that we have is that, for key business partners, they are investing in the firm because they are already tied to the firm; perhaps their prospects are poor and it is better to invest than not invest.  So invest going in knowing it is going to be bad news but the alternative being to go down with the ship. Outsiders without new relationship ties - and this is the one I really want to emphasize today - also do poorly.  So this suggests that even in pipes and private placements, the relationship connection, the governance access is important in terms of the performance of the investment after the fact.  Perhaps, not remarkably, managers who participate in private placements or pipes in their own firm do so at a substantial discounted experience and extremely positive return after the fact.  So they do demonstrate at least in our sample an uncanny ability to time the market. But looking forward, in terms of private placements and pipes, a hypothesis is that in order to earn a decent return, private placement and pipe investors are going to have to adopt at least some of the private equity practices, gain some access to governance; otherwise they are going to end up being shut out and experience poor performance after the fact.  Looking forward in private equity overall, I want to talk about a few things that I consider to be bumps in the road and I will review in the time I have remaining.  So politics of finance, tax issues, ease of entry, which I think here is a problem and then a category of things that I m going to call the necessity and importance of eating one s own dog food. Okay, politics of finance.  It is clear that after a sector of any kind earns economic runs that there is an incentive to enter, and we have seen that in private equity.  But we also know that high economic rents [sounds like] attract political scrutiny.  You think about windfall profit, taxes in oil; it is not just about private equity.  It is about obscenely high profits in general.  And there needs to be an understanding, and I think there is, that the political responses are not necessarily rational and they are not necessarily based on the overwhelming proportion of the scientific evidence on the topic.  So while we may have lots of scientific evidence that these are productive transactions for the economy, overall, that is not the same as addressing the political issue or the politics of it because sometimes legislative responses are driven on a handful of egregious examples.  And there are people who would argue that Sarbanes-Oxley was a response to misbehavior by about six companies.  So thing to beware of:  We can have all the scientific evidence that we want but as I m going to argue at the end, unless there is some effective educational process going on in the background to get the people to understand what the role of the sector is, all the evidence in the world may not be able to solve the problem. This is just the tax angle.  One of the things that we need to just mention out there is that a big part of what drives these transactions are the tax deductibility of interest, which there are economists who think that is kind of silly proposition to begin with.  But just to beware that the tax man giveth, the tax man taketh it away.  Ease of entry is a problem.  I do not know what your experience is, but almost every retired businessman that I meet these days is in private equity; many of my colleagues are also now in private equity.  So everybody is in private equity but they are not all Henry Cravis.  And therein lies the problem because if I m right about the importance of that bridge between value and strategy, about the organizational restructuring that has to take place, then this disembodied third party investing will not work.  So hedge funds are not going to do well here because somebody somewhere underneath all these financial structures and investment decisions has got to be actively engaged in governance or the value proposition disappears.  So if I m a hedge fund investing in a private equity deal, I had better hope that somebody somewhere in there is doing the organizational and governance shtick because if they are not, then I got a problem.  And that is where I think, we are going to see some falling out in the sector. So eating one s own dog food -- so one of the things that I have been thinking a lot is some of the issues and concerns that have been raised about incentives in private equity and how those compare to what private equity managers ask the managers of their operating companies to do.  So I want to end by putting forward some of these examples. So let s just talk about non-performance-based fee structures; those came up last time.  So my question to the private equity world is:  Would you take your operating managers, buy them out of their equity stake, and leave them simply with options on the future upside?  Or would you take the managers of your operating firm, pay them a straight salary, and a bonus based on sales growth?  And if the answer to that is no, then you are not eating your own dog food when you pay yourself a largely fee-based compensation because you are asking managers to have pay at risk and you are not. Investment through special dividends -- these are heads-I- win, tails-you-lose kind of contracts.  I understand that most of them are debt-financed and I understand that the bankers are big boys.  But what you are really doing is you are taking the sort of risk assessment and you are putting it back on the lenders.  And it is not just about the lenders, it is about the survival of the organization altogether.  So if you took the analogy -- would be if you had your managers and you said, Okay, you guys as a group own 15 percent of your stock.  I m going to cash you out today at today s prices and leave you with only upside potential.  And every time you make a dollar, your options values go up.  And when it goes down you are already cashed out, so no problem. And if you think this is not happening, I mean just take a look at Burger King, which is a great example of this.  It is a $388-million equity investment, a $400-million special dividend, $762 million out in the first couple IPO rounds.  They still own 58 percent of the firm and are thinking about doing another IPO.  So they are out of that company five times and still own over half the firm.  Now arguably, the firm has done well, but where is the downside?  There is none.  Right?  Because I m clean many, many times over and that changes your incentives.  Any private equity person would tell it would certainly change management s incentives if I wrote that contract.   Going public, we have talked about that; Michael talked about that last night.  But think about the first picture that I showed at the very beginning of my talk, the problem that is associated with not separating decision management from decision control, letting managers capture the governance process.  If that is where private equity is creating its value by correcting that problem, then they should not be creating their own organization in the image of the problems that they are solving.  So if I go public and access public markets and give my residual claimants no access to governance, I m creating the problem that I made money solving.  It is kind of ironic and, again, represents not practicing what you preach, if you will. So I m going to end with just a plea or a call to the challenge and importance of education here because the not eating one s own dog food is what people are going to pay attention to.  If you are worried about policy issues that is where the policy is going to get made, and it is going to be very hard for all of the carefully done scientific evidence in the world to overwhelm the apparent egregiousness of some of the breakdowns in a small handful of firms. So it is really important that not just Wall Street and policy makers, but that Main Street understand what the value of private equity is, the role in reinvention and the role in routinization of the way to organize.  That it is not about markets and transactions; it is about organizations and relationships.  And it is really incumbent upon the profession to take that mission seriously.  If you look at even a company like Blackstone, they directly and indirectly employ 300,000 people.  It is a huge organization with huge impact, and people do not understand that.  And so the one major contribution would be to think about how to get that message across so that the sector can continue to create the value and do the good work on the economic and productivity side that it has done in the past. Peter G. Klein:  Good morning.  It is a great pleasure to be here and to comment on Karen s presentation, which I found extremely informative.  I think she did a terrific job laying out the basic issues associated with governance, with private equity as an organizational and governance phenomenon.  I recommend that you get a copy of the slides if you can, and I found in particular her bumps on the road section to be extremely informative and provocative.  As we move from yesterday s discussions to today s, we have a little bit more of a micro economic focus, looking inside the black box, so to speak, of the organization and governance of the portfolio companies, and to a lesser degree of the private equity firms themselves.  Karen s presentation emphasizes the links between ownership, governance and organization.   And sort of her main take-aways are these twin ideas, that buyouts are best understood as a kind of reinvention of the market for corporate control and a routinization of a particular process for reorganizing the firm to increase value.  I will come back to the routinization point in just a moment. Again, just to recap what I found as the most salient points in Karen s presentation, this redefinition or reformulation of the basic corporate control problem that the market for corporate control is best understood not simply as a competition among management teams for the right to manage corporate assets but, rather, a competition among capital providers for the right to govern the firm.  So there is a critical distinction between management and governance that is sometimes lost in the practitioner literature on buyouts. What does Karen mean by governance rights?  In this context, the right to hire, fire and set compensation for managers; the right to veto or ratify major strategic initiatives, and the performance of particular kind of services.  Karen describes the general partners as internal consultants providing particular governance expertise to their portfolio companies.  Or to summarize, the way Karen leaves us that this new market for corporate control is ultimately about organizations and relationships, not simply markets and transactions, and not simply tax advantages, for example, although those clearly play an important role as she just emphasized.  So just as Mike Jensen reminded us last night that the private equity firm or the privately held portfolio company is ultimately a kind of an organizational structure, not merely a firm that has been through a particular kind of transaction.  I think it is critical that we try to understand the private equity phenomenon in this organizational and governance context, not merely in the transactional context. There is a lot of support, both theoretical and empirical, for the view that private equity has reinvented the market for corporate control, as Karen explains.  Just yesterday some of the theoretical literature was discussed.  If we try to conceive the basic corporate governance problem as a kind of multi-level principal agent problem that you have the agency problem between shareholders and the firm, which is mitigated by the [indiscernible] the board so the board acts as an intermediary helping to alleviate some of the agency problems associated with managers.  But then, we have an additional agency problem between the shareholders and the board, given that the board is easily captured by management, as Karen explained in her slide with those little circles and the slashes. If you think of private equity as simplifying or streamlining this contracting problem by turning the ultimate owners, the equity holder from what Mike Jensen calls, passive investors to what he calls, active investors, giving them an active relationship in governing the organizations.  Now, of course, there are some additional complications as Josh mentioned yesterday.  There is a potential agency relationship between the limited partners and the general partners.  And as Karen has just reminded us in a few cases like Blackstone where you have public equity holders on the table as well, there is certainly a potential agency relationship there.  But there is lots of good theoretical work beginning with the basic principal agent problem suggesting that the creation of active investors through private equity transactions reduces agency costs in organizations. There is a lot of good empirical work that has already been discussed, much of it by Karen herself and by others as well.  Providing strong evidence that buyouts do create value and the way they create value is through organizational redesign and restructuring, things like governance by a small board, decentralization of decision making, performance measures that emphasize cash flow and stronger pay-for-performance relationships or sensitivity of manager s compensation packages. A couple of challenges or things that we might think about in moving Karen s view forward -- one has to do with the idea that I find intriguing that PE companies add value by making this particular kind of reorganization process a routine; that reorganization can be conceived as a process or a capability possessed by some but not all private equity companies, or possessed to a greater or lesser degree by some companies.  As Karen explained -- mentioned referring to work by Steve Kaplan that this may provide a good explanation for the variation that we observed in performance across PE companies.  As Karen said, not everyone can be Henry Cravis.  As Steve mentioned yesterday, empirically that we see a lot of persistence or clustering of returns across funds or across investments within particular P.E. companies.  So some private equity firms have figured out a way to do this better than other firms. We should note sort of from a point of view of research design that when we describe the sort of explanation for differences in performance across P.E. companies, we really mean empirically that a sort of residual or kind of unobserved heterogeneity -- there is something about particular P.E. companies that we cannot quite put our fingers on that seems to make them perform better than others.  It is a residual, in other words; it is the part that we cannot explain by observable characteristics. And that sort of suggests that it would be valuable to sort of flesh this capability out in greater detail.  In the management and strategy literature there is a great deal of emphasis on capabilities, routines, core competencies, and so on.  But the truth is we really do not understand them very well.  We have very weak micro foundations for the notion of the capability; it is something that we think we can identify when we see it but we cannot tell you exactly what it is ex ante, sort of like the famous definition of pornography.  Can the kind of capabilities that Karen describes be purchased as services on the market?  If the ability to reorganize and restructure is ultimately a question of specific knowledge, as was mentioned yesterday, does that knowledge have to be bundled with a particular set of ownership claims?  Or can you simply hire consultants to come in and do these things?  Mike Jensen mentioned last night that he has faced an uphill battle in trying to get public companies to adopt some of the organizational and managerial practices that are routinely imposed on portfolio companies by private equity firms.  Why is it so difficult to get public companies to do this?  In principle, consultants should be able to implement very similar kinds or at least some of the same restructuring attributes. In other words, why not make what Karen calls internal consultants?   Why not make the general partners actual consultants simply by hiring them rather than giving them ownership claims?  Well, that suggests that there must be some relationship between management and governance.  In other words, the governance rights that Karen talks about must inextricably be linked somehow to ownership of assets.  This brings up the notion you get in Oliver Hart s work on ownership as residual rights of control.  In other words, in a world in which contracts are complete, if we can foresee possible contingencies and include them in contracts we designed, then, in principle, residual cash flow rights and residual ownership rights can be separated and these restrictions imposed on the managers of portfolio companies could be designated by contract.  The Hart model assumes a world of incomplete contracting. In other words, there are particular contingencies that may arise but cannot be anticipated by the party s drafting agreements, cannot be specified ex ante in contract.  Therefore, the role of ownership is to step in and fill in the gaps to make decisions under contingencies that were not covered by some prior agreement.  So I would be curious to hear Karen s thoughts on how the governance rights that she talks about might relate to this notion of residual control rights under incomplete contracting. Second point is when we look at the private equity company itself, we see some unusual characteristics of its portfolio.  Karen mentioned in the case like Blackstone and with some other firms, you have the problem that the P.E. company is not eating its own dog food, that it is not structured the same way it wants its portfolio companies to be structured.  But sort of a related point is that, for example, P.E. companies are typically quite highly diversified.  This is some data that John Chapman and I collected a few years ago; this is data from 2000 on, certainly, a non-random sample of prominent P.E. firms.  As you can see, we counted how many portfolio companies they had.  This is a cross sectional analysis; this is in 2000 and how many different 2-digit S.I.C. industries their portfolio companies were in.  As you can see, these guys are pretty highly diversified -  an average of about 15 and a half portfolio companies in some eleven two-digit S.I.C. industries where the average for public companies during this time is under three operating units or business segments and a little over one two-digit S.I.C. industry.  So P.E. firms tend to be much more highly diversified in the product space than the typical public company.  Well, I have lots of examples, some of these from Karen s own work.  It is sort of interesting as you look at the variety of different industries that some of the most important buyout firms have been in KKR [inaudible] counted 82 acquisitions in the late 1970s, 80s, and 90s and a huge range of different industries. So one question this raises is:  Does governance routine or capability that Karen describes -- is a generalist skill in the sense that one does not need a great deal of operational expertise to pull it off?  It made me think of the old conglomerate-era management by the numbers technique associated with people like Herald Janine.  I did my dissertation research on conglomeration in the 1960s and sort of the conventional wisdom amongst scholars today is that the kind of unrelated diversification that proliferated in the 60s and early 70s on average did not add value to operating companies because there is a specific operational aspect to governance and management.       If P.E. companies can do what they do, how is it similar to and different from the headquarters, the general managers of an old 1960s-style conglomerate - an ITT or Litton, or LTV?  Mike Jensen in his talk last night went over some of the key differences between a public conglomerate and a P.E. firm, but what strike me in looking at that comparison is not the differences but the similarities. And there are many similarities that I think we have not tended to explain extremely well.  Is there a so called diversification discount, sort of a lively debate in the empirical corporate finance literature as to whether diversified firms traded at discount relative to more specialized firms controlling for selection and other complications?  It would certainly be interesting.  And I have not seen anyone do this, looking for differences in the evaluation of P.E. firms themselves according to the degree of diversification.  And as Steve Kaplan mentioned yesterday that in the last few years, there has been a trend towards greater industry focus on the part of the P.E. firms themselves.  And think that is right, though I have not seen a lot of systematic evidence on this.  I think this overall question of to what degree operational expertise is required to make this routine of reorganization successful is an open question that deserves a little bit more research.  Finally, going back to this question of whether public companies can adopt some of these features without themselves going private, one could imagine sort of a hybrid form of public company that has a small headquarters that gives managers substantial equity stakes in which the central management can somehow credibly commit not to subsidize across operating units.  One could imagine decentralization and appropriate performance-based compensation, and so on.  A public company that has a lot of private equity portfolio company characteristics.  Mike suggested in his talk last night that the ultimate barrier in making that work is that CEOs in public companies do not want to have a boss and that is clearly an important barrier.  But one might also wonder:  Are the kinds of governance characteristics that we are describing and ownership in Oliver Hart s notion of residual rights of control inextricably linked, such that all of these attributes go together in a bundle or a syndrome.  One cannot pick and choose just a few; one has to have all of them to make any of them work.  If so, then actually going private is the only option. Okay, I will conclude with just a couple of comments about the relationship between the phenomenon we have been describing and entrepreneurship.  The term entrepreneurship has come up several times in our discussions.  I have been doing some work on entrepreneurship and innovation in recent years and I have the impression -- my sense is that the academic literature on entrepreneurship and innovation tends to focus too narrowly on the start-up company as the locus of entrepreneurship, and on a particular form of innovation, on technological innovation measured by patents and so on, rather than organizational innovation.  On the other hand, when one looks at the classic contributions to the economic theory of entrepreneurship from Joseph Schumpeter, from Frank Knight, Israel Kershner [phonetic] and others, one finds a much broader notion of what the entrepreneurial act ultimately consists of.  If we think of entrepreneurship more broadly not as an occupational category, i.e. self-employment, nor as a particular firm or market structure - small firms, new firms - but rather as a function such as the bearing of uncertainty, the creation of innovation, alertness to proper opportunities, and so on, a function that is manifest in a variety of forms, not only start of the --establishment of new ventures but also the creation of new organizational forms, such as the P.E. Company itself.  And this is something that John Chapman alluded to in his discussant remarks yesterday.  Though we can think of the private equity phenomenon, the emergence and establishment of this particular means of reorganization that Karen describes as itself an entrepreneurial innovation, a form of entrepreneurship that has added tremendous value to the economy.  So thinking about it this way, emphasizes that we should look at governance not only at the level of the portfolio company and how the P.E. firm governs its particular holdings, but also at the level of the P.E. Company itself.  How is the P.E. Company structured and governed?  And it makes us think more broadly about the relationship between entrepreneurship, broadly defined, and the ownership that control of assets.  I have a book coming out with Nicolai Foss next year on the relationship between entrepreneurship and the economic theory of the firm in which we argue, following Frank Knight, that entrepreneurship is always inextricably linked to particular rights of ownership over assets.  And then an entrepreneur is ultimately an owner and owners by necessity in a world of uncertainly must act entrepreneurly. So I will close with that, thank you. Alan Viard:  Annette? Annette Poulsen:  I thank you all very much for the opportunity to be here.  I particularly thank John Chapman who has done an excellent job of setting up this conference today.  I came into this process because John asked me to talk about Karen s talk, and Karen and Peter have both done an excellent job of talking about corporate control aspects and how the private equity process is changing that corporate control in portfolio firms. If you look at the agenda for the day, the title of today s topic was actually Private Equity s Impact:  Corporate Control, Capital Markets, and Entrepreneurship .  So rather than spending too much time talking about the corporate control part that we have already heard quite a bit, I thought I would just talk a little bit about capital markets and entrepreneurship also.  But to start of with corporate control, the eclipse of the public corporation was a topic that was broadly talked about in the late 1980s, and I think what we are seeing now is the modern eclipse of the public corporation that the process is still continuing.  There are lots of funds sitting in private equity firms that are able to go in and look at a corporation, decide if the organizational form that had existed for so many years was, in fact, the correct organization form. So I think with these pockets of money or boatloads of money that are able to look at these companies, we are seeing companies that can go ahead and change that organizational structure as described by Karen and Peter and our speakers yesterday.  I think it is very -- I really liked Karen s summary of -- this is about -- it is not about markets and transactions; rather, it is about organizations and relationships.  That what is changing is the organization; what is changing is the relationship, the way that the corporations are doing their business.  Just a few examples -- executive compensation tied to shareholder value.  This is something that has been emphasized and emphasized.  We have seen it in the public corporation but in the private corporation [indiscernible] able to move more directly to tying that executive compensation, an important aspect of what the P.E. firm is able to do. Changing the board of directors -- so many studies have looked at boards of directors.  How involved are they in the company?  The directors are in six different boards; are they really involved?  Are they doing what needs to be done for that corporation?  When we have the private equity firms get involve, we see those direct investors on the board of directors; they are there at the meetings; they are participating; they are at the company more often; they are actively involved in the business activities.  This has got to help with the organization -- Mike last night talked about that the CEO now has a boss; the CEO works for the board of directors rather than being the chairman of the board and the de facto board by his or herself.  So that is an important part of what is going on.   And then it is not really the financing, the private equity, that is the key here; it is the involved nature of the new management team.  That capital is an important part of it but it is not the fact that it is private capital.  There is nothing distinct about private capital; it is rather that the organizational form has changed. Karen s evidence from the private placements of equity by public firms is a very nice complement to those private equity literature.  We tend to focus on the buyouts and that is clearly an important part.  But we can look around the financial sector and see other instances where the direct tying of the buyer s relationship to the firm s performance and showing that the related buyers, the ones that have a direct interest in the company -- that is where those performance improvements occur is very important. Moving away from the corporate control, though, the capital markets have greatly benefited from the existence of the private equity firms.  The idea that the capital is out there for innovation, for entrepreneurship, the huge pools of money that are now available for new enterprises, for new technology, for entrepreneurship is clearly an important development that has come with private equity.  We spend a lot of time talking about corporate control but we cannot ignore that the financial markets and, therefore, the innovation markets are benefiting greatly from this phenomenon.  This is the alternative source of capital, more than 500 billion dollars in private equity in 2007.  And with that private equity, we are getting the anxious vigilance; we are getting the routinization of how to run these firms.  So it is a huge part of what is going on in private equity that I do not think we have talked about too much.  Just the idea that if we have well-working liquid capital markets, we can do more in this country. The private equity markets -- in some sense, we talked about Sarbanes-Oxley and trying to get out of the public market to avoid the regulation.  Being a former SEC economist, I know that that regulation can be burdensome.  But what private equity funds allow the investors to do -- they are investing in funds that are somewhat outside of the SEC regulation but it does not necessarily mean that the buyout firms are also outside of that regulation.  We have done some analysis looking at companies that have been bought out or companies that have gone private, not necessarily through private equity firms but have taken themselves out of the public equity market. And you get into the question of what defines a public versus a private firm, if we say a private firm is one that does not have public equity, okay, that is one definition.  But we find that about 25 to 30 percent of the companies that go private, in a sense that they retire the public equity, whether through a sale to a public equity firm or just going dark, 25 percent of those companies are still filing SEC documents.  So the private equity phenomenon is not necessarily about avoiding regulation.  There are still many firms; Toys R Us is still filing their 33 and 34 Act disclosures every quarter.  So the data are still there for many of these companies.  Not the data - that is the economist/academic talking - but rather, the regulatory burden is there for these companies.  They have not totally escaped that. Private equity is taking an increasing role in the takeover of public firms.  In 2003, eight of 128 takeovers of public firms and that is defining them from SDC, at least $50 million public equity.  By 2006 that number had gone up to 52 of 222.  So the PE firms are there in the takeover of the public firms, and this is another point where the policy makers have started to get involved. Yesterday, I think Josh mentioned the Department of Justice.  Is there clubbing?  Is there some collusion going on in the bidding for public targets by private equity firms, especially for the very largest takeovers of public companies by private equity firms?  We are seeing two or more private equity firms getting together and if you just simply look at the premiums that are paid for the stockholders in those companies, there is, in fact, a slightly lower premium than in other takeovers.  Then, of course, the question arises:  Is there a collusion?  Colleagues of mine, Harold Mulherin and Audra Boone, have looked at some of these data and have found and confirmed that, yes, those premiums are somewhat lower.  But, in fact, once you control for the size of the target, for the industry of the target, for news releases before the target acquisition, that those premiums are essentially the same as in any other market. So this is one of the ways that the Department of Justice or that the political machine can turn against private equity.  But if you look more deeply at the facts, you do not really see the evidence that there is collusion amongst these firms. I think an important part that we have not talked about too much either is the role of private equity internationally.  That if we look at the developing markets, emerging Asia had 62 percent of the funds in private equity in 2006 were targeted towards developing countries.  And it is very important to get the capital there; it is a valuable source of capital for these firms.  What private equity can do is to help develop these international financial markets.  It is clearly important for the development of China, for the development of Brazil, for the development of Russia, to have well-functioning capital markets.  There is evidence that privatization of state-owned enterprises have helped to develop those markets.  Private equity coming into these markets is going to encourage better exchanges, other markets, encourage liquidity in international markets.  It is going to encourage those governments that they want to have economic development to improve the rule of law, to improve the transparency of the corporate governance and the international markets.  So this is another valuable benefit that is coming along from private equity. The third point that was in the title of our agenda for this session was entrepreneurship.  I think, again, Peter and Karen have talked about that very eloquently.  But just the idea that the PE firms are again going in to buy these firms, to sell them or turn them around in some way, that they are renovating, reorganizing, reenergizing, incentivizing management, streamlining, figuring out what you need to do to make these companies be more productive. Yesterday, we talked about the industry specialization, the in-house consulting, the organizational engineering; all of those aspects are going to into the entrepreneurship that comes along with the PE firms.  I think Peter s data on the diversity of the holdings of the buyout firms portfolio is very interesting.  We will see how that plays out. At the bottom line, we have got this importance of the IPO market.  If we are going to turn around these firms, most of these buyout firms will be looking for the exit strategy.  Is it selling in the IPO market?  We have to keep our markets liquid and well-functioning to have that market work?  Or are we looking at selling to another company, selling to another PE firm?  Whatever, we have to get that turned around. Basic strategies of the PE firms -- it is the concepts from every MBA class - use debt, watch cash flows, streamline the company, figure out what works and do it.  It is not rocket science to put it up on a slide; it is probably rocket science to get into the firm and do it and that is what the PE guys are helping us figure out. In private equity markets internationally, again, the private equity is probably a little bit more like venture capital rather than traditional private equity going in and helping the starting firms.  But that is going to be very valuable. So overall, private equity s impact - corporate control, realignment of incentives, the routinization of the process, the idea that these are professionals coming in and running these companies.  Capital markets - raising capital in both the United States and overseas; helping to develop the capital markets, especially, overseas, I see that as tremendous impact to private equity. And entrepreneurship -- we are going to have that emphasis on value maximization that needs to be there.  Thank you for your time. Alan Viard:  Karen, if you would like to take 60 seconds to make a quick response, then we will get a few audience questions. Karen H. Wruck:  I want to talk about Harold Geneen just for a minute because his name came up.  I think it is worth mentioning that the -- at least from my view, the organizational capability that I m talking about is a general skill in the sense that it applies broadly to a wide variety of companies.  But I think it is worth noting that it creates value because it is the antithesis of the world of Harold Geneen for at least three reasons: One, because there is no cross-divisional [sounds like] subsidization.  The second is because there is no horrifyingly painful and corrupt annual budgeting process of target setting and sandbagging.  Thirdly, because there is a serious degree of equity ownership and strong governance involved.  So it looks nothing like Harold Geneen and ITT managing by the numbers, and the fact that it does not look like that is where a lot of the power comes from. Alan Viard:  Okay.  Let s take audience questions or comments at this point.  If you can wait for the microphone to be brought to you, and give your name and your affiliation -- also, anyone over towards that end of the room, you may need to walk over into this section to make sure that I can see you. Mark Wilser:  Hi.  It s Mark Wilser with Global Capital Markets.  Karen, I found your data on the private placement and PIPE returns quite interesting and the fact that they were pretty negative in a six-month timeframe.  I was wondering whether there were any data that related to returns upon realization.  The reason I ask that question is because most of these investments take place in non-common-stock-type formats.  So you have a whole bunch of attributes that are what I ll call protected and preferred returning characteristics, liquidation preferences and the like that I think would enable them to, upon exit, probably have much higher returns than would be apparent if you look at them just after six months, and the presumption being that they had common-stock-type investments. Karen H. Wruck:  Yeah.  A couple of things -- the returns that I presented were returns to the public shareholders after the placement was made, so they are not the returns to the investors.  So you do want to make that distinction if only because a lot of times, the investors get a different price than the market price; the shares are sold at a discount so the return to the investors is going to be higher. It also focuses on a historic time period where the modern PIPEs are not really in the sample.  So the historical facts about private placements of uncommon stock is really -- the only place you can get the data in terms of performance are positive response to announcement, really negative post placement returns.  Whether that turns out to be the case in the more recent era of PIPEs, I think, is an interesting question.  I do not know of a study that tracks the non-common stock investments, but I agree with you that may be a different picture. Tully Friedman:  Tully Friedman, Friedman Fleischer & Lowe.  Karen, I thought that was a very good presentation.  I think based upon a couple of decades of experience, I agree with the bulk of it.  There was one point you made that I think I do not agree with, which is your notion that recaps and IPOs somehow violate the model or violate the compact.  The deal is investors, you have private equity [inaudible] money; it is locked up for 10 years and the idea is to balance risk and return and get appropriate returns.  Recaps are part of that. So I m going to take it in pieces.  So two, three, four years into an investment, in our case the company has improved.  There is an ability to raise additional debt or recap existing debt and add some, and it makes sense.  That does not change the risk-reward profile in terms of how we think of our ownership.  It does take money off the table.  Yeah, it buffers the risk but there is nothing wrong with that; it is part of the deal.  Taking it public actually is worse than you think because, guess what?  We are on our way out.  We are working as hard as possible, as fast as possible to get 100 percent liquidity but I do not think that is a violation of the model either.  I think that is part of it.  So either explicitly or implicitly, you present this as a negative series of actions.  It is intrinsic to the business, and neither the LPs nor the GPs would view it as unusual or wrong. Karen H. Wruck:  My position would not be that it is wrong in general, but that it is dangerous in the sense that you can on the margin really have some issues with having cashed out your equity position, leaving the carcass of the firm to the banks if the firm collapses.  Whereas if you have money on the table, at least it is there if something happens in the extreme.  So I understand access to liquidity is important, and that is a way to get access to liquidity and to get out of the investment.  But I think there is an incentive concern there. Tully Friedman:  Well, I agree with that statement, but it is a real value judgment that does not comport with reality.  You took Burger King.  So the recap if they take it public, they only have 58 percent of the company left.  I guess if they got down to zero, it would be really bad.  It is just not the way things work. Karen H. Wruck:  In what sense? Tully Friedman:  The deal is not that you are locked in indefinitely to take the risk. Karen H. Wruck:  I know.  I understand. Tully Friedman:  The deal is you do whatever you do for a set number of years.  You deliver to your investors, hopefully, what they expect.  You take a return yourself and then you go on to the next thing.  So there is this very explicit, I guess, idea that there is something wrong with that.  I do not understand -- I hear the words; I just do not get why that is-- Karen H. Wruck:  Yeah.  Well, would you agree -- so let s see if there is a class of situations where we would agree that it was a bad idea.  So, for example, if you were in a world where the equity were overvalued and you were borrowing and paying out cash at too high a price, would you agree that was problematic? Tully Friedman:  Yeah, but that is a risk you take.  Whereas, when we look at it we essentially re-underwrite [sounds like] the position; think about what the business will do over the next five years; think about a sensible level of debt.  And then if it makes sense, we will recap it.  We do not say, Hey, the lenders will lend us too much.  Let s go out and get as much as we can and the devil take the hindmost, which is a situation you are talking about.  But, yeah, I would agree with you. Karen H. Wruck:  Okay.  All right.  So we can agree on that small subset. Tully Friedman:  Yeah. Karen H. Wruck:  I understand. Tully Friedman:  Okay. Karen H. Wruck:  I understand your point. Tully Friedman:  I understand your point. Karen H. Wruck:  I m concerned.  Okay.  That is fair. Alan Viard:  We have time for one last question. Male Voice:  Just a shortcoming.  It seems to me that the issue here is not the recapitalization and taking down the equity; it is taking it out in a way that is not proportional to all of the equity interests. Karen H. Wruck:  But he does not do that.  That is [cross-talking]. Male Voice:  I understand, but that is what I heard Karen objecting to most strongly.  And that is a really big deal. Alan Viard:  Well, I do not think we have exhausted everything that could be said about this important topic, but we have exhausted the time that has been allotted to us on today s tight schedule.  So I hope you will all join me in thanking the panel.   Panel Four:  European and Global Developments in Private Equity   Nick Schulz:  Good morning.  Thank you for joining us today.  My name is Nick Schulz.  I m a research fellow here at the American Enterprise Institute.  I m also the senior editor of AEI s flagship business and economics magazine, so I ll give a plug for that right now; it is called The American.  We should have copies widely available around here.  So while you are here enjoying the conference, if you would like to pick up a copy, please let me know or let any of the AEI staffers know. I m delighted to be moderating what will be, I m sure, a most interesting panel today.  Our focus at this conference yesterday and the first part of today has mostly been about the domestic private equity industry.  But now we want to take some time to turn our gaze overseas and we are gathered to discuss European and global developments in private equity. We are happy to have with us today as our presenter, Mike Wright.  Mike is a professor of financial studies and director of the Centre for Management Buy-out Research at Nottingham University Business School.  He has written over 25 books and more than 250 papers in academic and professional journals on management buyouts, venture capital, corporate governance and related topics.  He served two terms as an editor of Entrepreneurship Theory and Practice and is currently a joint editor of the Journal of Management Studies.  Mike, thanks for being with us.  I m going to introduce our other guests first before calling Mike up here. Our discussants today are David Ravenscraft.  David is the Julian Price Distinguished Professor of Finance at the University of North Carolina Business School.  He is the associate dean of the Bachelor of Science in business administration program and the former associate dean of OneMBA, the innovative global executive master of business administration program offered in partnership with top schools in Europe, Asia and Latin America.  Mr. Ravenscraft s research interests include mergers and acquisitions, antitrust, game theory and hedge funds.  He has served seven years at the Federal Trade Commission. After David, we will hear from Adam Lerrick.  Adam is a visiting scholar here at AEI and a Professor of Economics at Carnegie Mellon University Tepper School of Business.  He is studying international capital markets, particularly the role of hedge funds, international financial crises, sovereign debt restructuring, and economic development, including the impact of aid and the role of multilateral institutions.  Adam is an adviser to the Congressional Joint Economic Committee.  He served as the senior adviser to the chairman of the International Financial Institution Advisory Commission where he analyzed the workings of the World Bank and reassessed its role in the global economy.  Previously, he was an investment banker with Salomon Brothers and Credit Suisse First Boston. Just a quick note about ground rules before we get going, Mike will present for about 20 minutes followed by 10 minutes or so of discussion from David and then another 10 minutes or so from Adam.  We have a very tight schedule so we hope once that is said and done, we will have some time for Q&A.  With that, Mike, the floor is yours. Mike Wright:  Okay.  Nick, thank you very much.  Thank you for inviting me.  Thank you, John, for organizing this splendid conference.  To speak for 20 minutes about the globe is a bit like Monty Python summarizing Marsel Proust in two minutes, but I shall attempt to do that.  This is the history of the universe in 20 minutes. There is a paper that is based around this.  You will see our website address on the slide there.  The lengthy version was a report we did for the OECD, which you can all get from our website or from the OECD website.  And there is a more focused presentation that, if you want, I can send it to you.  Just a very brief word on those; I m not going to into detail.  We have been around since 1981.  We organized the first conference on buyouts in the U.K..  In those days, my head of department told me - he is a very junior faculty member - that I was wasting my academic career on this.  So I followed his every word, as you can see.  In those days, it was very much saving jobs and entrepreneurship in the U.K. context.  So how we got to this, I do not know.  But we have a database of over 25,000 buyouts, and that is what I m going to try and base my talk on. I ll kick it off with some discussion of international trends, just basic numbers and values and where these deals come from because I think it is useful to see some contrast with the U.S. position.  I ll say a little bit about the structuring and pricing as well as changes in types [sounds like] of exits.  We have been mentioning IPOs and the exit form [sounds like] the last day or so.  In Europe, an IPO on exit [sounds like] is pretty remarkable.  Then, I ll look at some of the evidence and draw some comparisons relating to some particular issues that have exercises [sounds like] in Europe. As you know, it has become a worldwide phenomenon; we have done this various work on summarizing that as I mentioned.  Much of the debate of the European context has been based on some pretty, shall we say, unusual anecdotal examples, some of which have been somewhat misrepresented even as regards the employment factors.  We have had locus [sounds like], as we heard yesterday.  We have had unions parading in front of the church with the head of Permira with a camel and a needle - make you work out the biblical reference there.  I believe a firm in Germany has a crucified locust hanging outside its factory gate.  The chairman of the TUC in the U.K. has referred to private equity as amoral asset-strippers; amoral is probably better than immoral, so that is all right.  We had a senior executive of one private equity firm boasting that he paid less tax than his cleaner which goes down to British history as a [indiscernible] moment which I can explain later on. So in that context, let me try and get a handle on some of the recent evidence.  You can see from the charts, the top one is the U.S. numbers of private equity in buyouts; the bottom one relates to Europe.  And you can see that the value chart which is the black line follows a similar kind of pattern.  The numbers, again, have been growing over the last few years.  But it is this last year that is most important.  The numbers do not fall off the cliff because it -- has fallen off the cliff; it is just that it is the first half of 2007.  If you actually take it to the end of 2007, the total will be bigger than last year. Within Europe -- and I m afraid from a distance that is probably quite difficult to see the chart.  But we see a considerable variation between countries; the U.K. is by far the largest.  And I think for this purpose I ll assume that we are part of Europe, although do not quote me in England for saying that.  Within Europe then, we have France and Germany and the Netherlands as pretty significant markets.  But then, as my soccer team did last week, it fell away from home, and the numbers fall away after that. The bottom chart, I think, is quite interesting because it shows that while we have some pretty big economies like Germany, Italy, Spain, the size of the buyout markets are relatively underdeveloped given the size of the economy.  In some other countries like Netherlands, Sweden have rather more developed markets.  Denmark, which [inaudible] small economy, seized a few big deals and that changes the rankings.  So it is a picture of undeveloped markets, institutional constraints affecting some of those factors. Nevertheless, we have seen this big increase in large deals over the last decade.  The data we put together gives you some idea of how these -- for this purpose, 500 million euros, we would describe as big in a European context.  You can see how that has grown. Just to try and encapsulate the whole raft of factors influencing the emergence of the market, which are in the papers, you can see that if you take a 20-year run, then it has been a gradual process of erodings [sounds like], if you like, some of the resistance to private equity deals in terms of the deal supplier at the bottom, encouraging people to consider succession in family firms, which is a big issue in Europe I have come on to.  Privatization, particularly in the U.K., and then stimulating the demand but it is the willingness of managers to buyout these firms.  There has been a considerable resistance until fairly recently in some countries, Germany being a particular example. Then, you can see at the top there is a whole raft of relaxations of regimes to facilitate these transactions and to deal with the incoming [sounds like] of debt and so on and so forth.  This kind of concept - this [indiscernible] context and notions of locusts and so on in an environment where there has been a traditional resistance perhaps to the market for corporate control, let alone venture capitalists and private equity firms. Again, just where these deals come from -- again, this is probably difficult to see at a distance but the most important source of transactions in Europe are either from succession in family firms or private firms or divestments by corporate groups in numbers term.  In value terms, divestments from corporate groups become most important.  The small number of public-to- private transactions which has been increasing becomes important. But what has really emerged - and we have not talked about this really - is secondary buyouts have been one of the most important source of transactions in the European market.  So you do the first private equity deal.  You then re-leverage [sounds like] it with the first private equity firm exiting and another one coming in.  I think that is also pretty important in the U.S. as well and that, I think, raises particular issues about prolonging the private equity model.  It also raises issues about how you continue to get the gains in those transactions.  I ll come back to that. These four charts just give you an idea of the growth of public to privates globally.  The top left is the U.S.  The top right is the U.K..  Then, bottom left, Europe and then the bottom right is Japan, which, perhaps, surprisingly, has seen these public to private equity transactions. The European context there, again, is pretty erratic perhaps because big capital markets, stock markets, rather than develop compared to, certainly, the U.K.  If you actually went back, it starts in 1985.  In fact, if you think this is a recent phenomenon, if you actually go back to the 19th century, you can identify public to privates, but that is another story. The pricing and structuring-- what we have seen -- this is European data.  In the top and in the bottom in terms of structuring is a general trend over the last 16 years in pricing multiples.  I have shown there that -- what we call the mid-market and the upper parts of the market; the red line is the mid-market.  [indiscernible] really too much about the precise figures, but pricing multiples have increased by probably between a third and a half over that period. The structuring -- the leverage part of it is very much in the European context focused on these larger deals where we see probably two-thirds to 70 percent debt in the structures.  If you go below that, then the debt is probably around about 50-55 percent.  So it is quite a different market.  That is important to bring out that we have quite a segmented market between these very few large deals at the top 10 and this raft of several hundred at mid-market transactions. [indiscernible] I touched on a few minutes ago.  The top charts break it down by five-year periods from the mid 80s.  You can see that there has been quite a shift in exiting patterns over that period.  The IPOs in the U.K. [indiscernible]  in the mid to late 80s, we saw a lot of IPOs and buyouts, mid-market deals and so on.  By now, the current period, very difficult to IPO a buyout.  They do occur but very few of them in the European context. Strategic sales -- pretty important, as you can see; in fact, the most single important source.  But what has come through from being fairly obscure in the mid- 80s are these secondary buyouts.  Private equity firms selling to each other.  That is emphasized by the bottom chart where, again, you can see this growth, not just in trade sales but secondary buyouts and the IPOs are virtually disappearing. Just a very quick thumbnail sketch of the market.  Let me just try to say a little bit about some of the evidence from a European context.  You can perhaps relate that to some of the evidence that Josh and Steve were presenting yesterday, primarily in relation to the U.S. From a funds level basis in terms of returns, there is rather less evidence in Europe.  But what evidence there is broadly tends to confirm this notion of the experience of fund managers being extremely important in driving the returns.  But within Europe and further afield, the returns [indiscernible] the coming that -- then you get returns depending on the strength of the legal conditions in different countries.  So all markets are not created equal in that context, and that feeds back to what I was saying earlier about the growth of the markets which these legal factors which determine access to information as well as getting security and enforcement of contracts and so on do very quite considerably across markets. Looking to public to private conditions then, the premier that we are seeing is pretty much in line with the U.S. figure. But we do see a little bit of difference in some of the rationale.  Undervaluation, in particular, is being seen as one of the major factors driving the public to private activity, both the premier and the rationale for going private.  What we see is that although the board composition of outside directors is not out of line with companies that remain on the market, we do see less separation, if you like, more duality of the CEO and the chair.  This is a corporate governance issue, and that is associated with higher CEO stockholdings prior to the buyout and more significant outsider block holdings.  Part of that, I think, is a frustration on the part of institutional investors investing in firms with relatively illiquid markets in those shares and the private equity deal is a way to get out, and so on. What we also see is that these deals have better asset collateralization, less debt prior to the deal, and to be more diversified.  But not in the U.K. context [indiscernible] R&D expenditure. Profitability and productivity -- again, like the U.S., studies generally, we see this growth in profitability and cash flow post [sounds like] the transaction.  Industry specialization and deals specialization or deal experience by private equity firms driving some of those deals - both the study by Bob Cressy there and also some of our own work tends to support that.  And that term is not just in the U.K..  You see that elsewhere in Europe, in France and the Netherlands. Doug mentioned in his discussion yesterday the study we did on productivity.  But just to emphasize, we see the significant increase in productivity.  Entrepreneurship was mentioned quite a bit in the last session.  Entrepreneurship, to my mind, is an [indiscernible] ET&P tells me something about not just value creation but value creation through innovation and product introduction and so on.  I think it is sometimes forgotten that in buyout private equity deals, it is not just about improving efficiency, but you do see evidence of new product development, new market development, that could not have occurred prior to the transaction. We did some work back in the 80s, and there is some American work in the entrepreneurship literature on that.  More recently, we also see this improvement in new product development.  That is important to generate some of these gains as we are now late in the maturity of the industry when perhaps cost efficiencies perhaps cannot deliver the gains that one is looking for. Employment and wages -- this was again referred to yesterday.  I think that the key point here, particularly [sounds like] points first of all is that in the U.K., we tend to see an initial dip [sounds like] in employment in the first year after buyout, and then a recovery.  I think the data that Steve Davis was showing, you tend to get this longer delay before you get to recovery. Secondly is this importance of recognizing the difference between insider-driven buyouts, management buyouts, and outsider driven deals; what we would call the management buy-in, where the circumstances leading up to the deal are quite different.  I think it is very important to understand the debate to key into that difference, which may be a rather abstruse notion.  But we did manage in the U.K. to get radio and television programs to actually be making this distinction to get away from the rather lurid claims that all private equity is bad for employment.  I think it then began to realize the world growth stories that were restructuring stories.  And it was that [indiscernible] to understand what was going on behind them. Exited deal returns at the firm level -- Ernst & Young just published a study on some of the larger exits showing the growth.  We also did a study based on all the exits we could identify from our database, looking at both the equity return and the enterprise value return.  Even at the enterprise value return adjusting for stock market changes, we do see quite a significant return. IPOs, not surprisingly, outperformed.  The secondary buyout returns were the worst of the three forms of exit, perhaps illustrating that whilst these have grown quite significantly, generating those actual returns once the first round investors have been there is quite difficult.  Larger deals, that is important, and management equity stakes being very important in driving those returns.  There is upside incentive on management. We have not heard much about the failure risk, although [inaudible] to talk about.  From our data, about 12 percent of deals have ended -- in the U.K. we call it receivership or the bankruptcy process over that period.  The peak here for deals completed but then failed was the late 80s, which was the last boom and where there were a lot of high-priced deals done and so on. We did a separate study and we find that high leverage is associated with a higher probability of failure.  And then in terms of looking at what the secured lenders get out of these things when they went to bankruptcy, on average they get about 62 percent of their secured loans back, but yet, 30 percent of these deals are sold as going concerns. [indiscernible] accusations that have been made about private equity is that they are just short-term flippers of assets.  What we see from this data from our database is that if you take a 20-year run, on average the average exit time is for those that have exited somewhere between four and five years and on average that has been increasing over time.  In the late 80s, there was a much shorter period to exit.  That is on average.  Clearly, some deals do exit quite quickly, and some take a much longer time, but it is very difficult to sustain this flipping argument, as one might say.  It is the IPOs that tend to exit sooner.  The secondary buyouts take longer as at the bottom chart. The amoral asset stripper bit -- if you actually look at the amount of partial sales activity both in the U.K. and Continental Europe on this chart, then the number of partial sales -- obviously, it occurs.  You can see there is quite a bit of activity, but compared to the overall new transaction activity that is going on, then it is actually a relatively small part.  So there are certain parts of the sector you see it once you get into the mid-market, then there is relatively little asset restructuring in this context. So just to finish, if I might just summarize some of the key differences in the U.S. context versus the non-U.S. context, I think in the U.S. one can portray it as public to private large [sounds like] divisional [sounds like] deals.  In Europe and perhaps elsewhere, buyouts of family firms and mid-size divisions have dominated the market, although at the top end we see that changing.  U.S. has matured but elsewhere, considerable variety.  The premier in public to privates in the U.S. reflects the different factors compared to Europe.  Undervaluation has been a much more important factor with much larger equity stakes held by management.  There is some evidence in the U.S. that distress costs have frustrated deals going private.  Evidence from the U.K. suggests that it is almost the opposite, restructuring troubled deals. In terms of productivity, evidence from Don Siegel and Frank Lichtenberg a few years ago suggests that prior to the deal, productivity in U.S. establishments was not underperforming.  In the U.K., we see this underperformance at that sector. There is a lot more debate about the CAPEX R&D picture.  In Europe, I think because the industry is traditionally being seen as part of the venture capital industry and perhaps because we have relatively little venture capital, but [indiscernible] been aligned with that industry, then I think we have seen generally lower leverage, more upside growth attempt, particularly in divisions that have been frustrated by their former ownership.  So I think we tend to see a more general growth story. The employment effect, I mentioned -- important to appreciate this difference.  The second is longevity; it is heterogeneous in the two countries, U.S. and elsewhere.  I think the secondary buyout route is becoming one of the most important factors, which raises a number of issues both for private equity firms achieving their returns.  I think it also raises issues for LPs investing in the -- one fund invests in the first deal and then invests in another fund that invests in the second round deal.  And that raises certain issues about returns and pricing and so on, which has perhaps been on the scope of what I wanted to say today.  But for the market going forward and sustaining the market, then I think there are also some issues there that we have yet to work through.  So I ll stop there.  Thank you for your attention, and I ll take some questions. Nick Shulz:  Thank you, Mike.  Thank you for your brevity.  Next, we have David Ravenscraft. David Ravenscraft:  Thank you.  It was a pleasure to read Mike s paper; I have been a fan of his work for a long time.  There is really no one more qualified to look at global private equity than Mike.  It is a wonderful paper.  I encourage you strongly to read it.  It covers three decades and many countries, and it has more tables than most empirical dissertations I have seen. The fundamental conclusion you get from it as you read from it is that - and Mike talked about this - private equity is very heterogeneous.  I agree with that; I think it is well supported in the paper.  What is a little disturbing about that conclusion is that it is very understated.  Just look at the main research tables where he summarizes 46 non-U.S. studies; 35 of them are from the U.K.; five are multi-country studies pretty much dominated by U.S. and U.K.; six are from Australia, Holland and France.  So only six out of the 46 do not involve the U.S. and U.K., and yet we get a tremendous amount of heterogeneity.  Just imagine what we would get if we studied the whole world because the part he is talking about is not that different compared to Asia and Latin America. So I think the first thing that comes out of the paper is there is really a need for more research in Latin America and Asia.  And if anybody in this room can do that or could help researchers do that, I would strongly encourage you.  We have a huge need there.  My concern is that if we do those studies, we are going to find that the world is more heterogeneous.  Then, you begin to say, What can we say because this study says that and that study says this?   And it starts getting confusing.  I think, the more complex the world is, the more our job is to try to simplify it; if things were simple, we can make it complex.  But this is very complex.  So I think that is our job - it is to try to make it a little more simple.  I read through the paper trying to get out some of those more simplistic ideas.  I think one of them, if you just look at the data that he gives you across countries, you get that buyouts come in waves.  You have seen that data here with the United States. I think he gives a lot of reasons for it but I would like to summarize it more simplistically.  It is really availability of funding, the need to restructure and changes in government policy that drive those ways across different countries.  The latter one, changes in government policy, I think, is very important for this conference.  If you look at the data, it strongly suggests that government policy can affect either positively or negatively private equity deals.  It is a little disturbing that is true because you would hope they were a little more robust, but I think that there are two reasons.  One, a lot of times the public policy focuses directly on private equity; it is very targeted.  Secondly, private equity involves a lot of leverage.  If you have ever done valuation with a lot of leverage, a small change in the cash flows can make a huge difference in the returns.  So I guess it is not surprising that government policy really affects private equity. You should talk about the idiosyncratic patterns as well.  Privatizations [sounds like] are certainly an [sounds like] aside [sounds like] to say that is a driver.  What ends these waves is, I think, equally simple.  It is a reversal of these factors that started as well as recession, and recession is really the key.  You see a lot of them just drop off when you hit a recession. I also think there are some universal findings.  One of the ones that is most important that you heard Steve Kaplan emphasize, and Mike emphasize to some extent, is that pretty much across the board, you see improvements and post buyout performance.  I think that is a very important and powerful conclusion. The problem is -- that I just said and Mike said -- everything is heterogeneous.  Then, we say, It is all good.   That is a little bit bothersome, so how do we interpret that?  One way is the heterogeneity does not matter and buyouts just find a way to work. The other extreme -- and I do not know if this is a right interpretation, Mike, of what you said last night.  But there is a lot of things that LBO companies get right, and it is really the whole package that matters.  That is the other extreme but, obviously, all countries do not have the whole package.  So I think that somewhere in between, and what I would like to see a lot more work on, is what buyout characteristics really matter.  What is really important about Mike s paper is it provides the foundation for that. There are a couple of studies in there that actually address that directly.  For example, the one that shows the relationship between legal structure and return is the kind of thing I really would like to see a lot more of.  For example, throughout the paper, it is just -- here are these differences between these countries.  And I kept saying that is interesting, but does it matter?  Is it important?  To me, does it matter means, How does it affect performance? So I have that particular bias.  But one of them that was striking is that in Europe, private equity tends to be more associated with banks and insurance companies than independent companies as in the U.S. and U.K..  I got to believe that one matters, and that performance is going to be different between those kinds of buyouts.  That is the kind of stuff I would really like to see Mike s paper taking and focus on those key differences so we can understand what types of characteristics matter with respect to buyout performance.  John Chapman asked me to make comments on the paper and also make some general comments.  I think part of it was he was hoping that I would spend a little time to represent the anti-buyout perspective.  I have historically been associated with the anti-merger perspective but the truth of the matter is if you go and look at my work, it was that conglomerates did not work, which I think is now well-accepted.  Unfortunately, I told John -- I said, My work on buyouts would be along [sounds like] in the 1980s.   It was generally pretty positive on buyouts. I think I would like to take -- attempt [sounds like] at that anyway.  I should say that I think from Josh to Steve to Mike s talk last night, to Karen s, there has been a lot of balance there, a lot of, Here are some concerns as well.  This is what is working.   But I have some real concerns with them, so maybe I m just adding to those list of concerns. The first one I do not think got enough attention is that, yes, post buyout performance improves but maybe much of the evidence suggests that that is only short-term, that those performance improvements decline over time.  To some extent, if you put on your strategy hat -- I mean, strategies, that does not concern them at all; strategy thinks returns are never sustainable.  The trouble when you put on your finance hat, you do valuation.  If you try to do valuation where returns are not sustainable, where they decline over time, you cannot get anything like 20 or 30 percent premiums.  So there is really a conflict between that to get those premiums to justify the kind of price we need to have sustainable returns.  So that is problem. Part of it, as you heard, that private equity characteristics change over time -- they go public; the debt gets paid off over time.  So when we expect the returns to decline -- but still that says, Well, these are short-term effects.   That is somewhat bothersome. Something that would be more bothersome is that Jensen s free cash flow -- and I think a lot of evidence in the U.S. suggests that there are cutbacks in capital investment and R&D.  The question, I think, there is really important:  Are those cutbacks leading to those short-term gains and therefore will impact long-term gains in the future? My work with Bill Long looked at that in particular.  It was my most -- if I can use this Jensenesque paper that I wrote -- and it is in the Strategy Journal, unfortunately.  But what it found is that, in fact, when they do leverage buyouts in the 80s, they cut R&D by half.  That is somewhat disturbing, but they targeted low R&D firms to begin with.  And, furthermore - and I think this is the important part - what we did -- it was not great but we looked at cutbacks in R&D and then looked out two or three years and see if there was any impact on long-term performance, and there was not.  So I think there needs to be more of that to look at these cutbacks in investment and see if it affects long-term performance. That leads me to another concern about the research is while we are saying the 80s and the current period is similar,  there are lots of differences.  I m doing a study with Fernando Chaddad, and we are just starting it.  And it is going to be a very complementary study to the one you heard with Steve Davis yesterday.  We are going to use QFR [phonetic] data and whole company data.  I m starting to replicate some of the stuff I did in the 80s with that data, and look at more current periods.  But I looked at R&D and the R&D of those firms that do it tend to be much higher than the ones in the 80s.  And certainly, you can look at firms like Biomed [phonetic], not the kind of firms that were taken private in the 1980 s.  So I do think there needs to be more research to make sure that these cutbacks are not affecting long-term performance. Now, another explanation for the decline in short-term performance is that if there are imitations that this -- whatever the buyout companies learn to improve performance gets spread and that is very possible, that sort of classic economics. That one is interesting and I cannot help but -- I m trying to represent a little bit the anti-perspective but I m going to talk out of both sides of my mouth.  If that is true, there is actually a multiplier effect.  Any benefit there is from private equity gets spread to the whole economy and there is a huge multiplier effect.  And in that case we ought to subsidize private equities for all the benefits they are giving.  The point of all that is we need to know how short-term and long-term these gains are, and what is causing if it is -- there is decline in performance which I suspect there has to be what causes it. Now, there are other factors and I m going to go through those quickly to get to the one that I think is most important.  Whether companies are undervalued or not -- I think in the U.S. they do not tend to be but I think there is some evidence in Mike s paper that in the U.K. and Europe there is some support in some cases for undervalued hypotheses.  And certainly, as we went to, say, China and other places where the market is less developed, we are going to see more evidence of buyouts of undervalued companies.  There is some transfer between employees; that has been talked about.  Taxes -- Karen talked about that a little bit.  Ken Lehn talked about they improved the working capital, but some of that is just transfers because sometimes they just say to the suppliers, Hey, we cannot pay right now.  We need better terms.   And then they go to the buyer and say, You have got to pay really quickly because we got all this debt.   Some of that working capital is transfer.  So there is some of that going on.  Importantly, how much of it comes from the bond whole [sounds like]; as most of the evidence suggests, not much.  But here I have a concern, and John, here I ll play that role as far as I can carry it. I mean, to some extent what is going on is that we get smaller deals and they work.  So we do bigger deals and they work.  We do bigger deals and they work.  And that process went on into the 80s and went on this current period until we get really big deals and then there are pretty large failures on the debt side; I m not saying on [indiscernible] related company side, but on the debt side.  And those are pretty big losses that need to somehow be calculated in all of this.  And here is where I go out on a limb.  I mean it is a little bit like a gambler - I win, I win, I win so I keep reinvesting my money in bigger and bigger bets and then eventually I lose. Okay, let me get back off the limb.  Corporate governance - I do not have an argument with that.  I have trouble arguing that anything that manager or ownerships and incentives and active boards are not anything but good; I think the evidence is just too strong there.  The one I want to focus on and I do not think it has gotten enough attention is leverage.  I really wonder what the role of leverage is, how important leverage is, how high it has to be.  And that is where I think we do not know enough.  And we need to know more. Again, our own research tried to tease that out by controlling for corporate governance since the 1980s and we found that leverage still played an important role of trying to control for all of that.  The more leverage, the more efficiency you have got out of the corporation. Now, interestingly in the U.S. you heard Steve talk; it is like 70 to 85 percent leverage.  In U.K. it is more like 60 percent and it changes on various factors.  But leverage is different across countries.  We need to utilize the differences across countries to get at that.  And I think when you go to places like China I do not think there is going to be much leverage used.  And the question is are we still going to get some of the benefits? I think that is a really key issue.  And here is why - because I also think that leverage is the big constraint on the system.  I mean where the system falls down consistently in the 80s and currently is on the debt side, is on the leverage side.  And so this is not a question whether buyouts are good.  I think there is a question of to what extent, how many firms in the economy can benefit from buyouts.  And probably here is where I think I would feel most comfortably debating with Mike Jensen is that I do not think it is quite as extensive as he does.  But I think the evidence is open. The problem is every time we get to the point where we are really getting something in terms of increase to size and impact of private equity, we are getting that through bad behavior in the debt market.  I mean, what went on in the 1980s was just absolutely atrocious.  I did a study of West Point-Pepperell and that deal was done because Drexel had raised the blind pool where people had given Drexel money expecting to get 15 percent when Drexel was putting it into treasuries for a raider to be named later for a company to be named later and eventually finding that.  And then the investment bankers knew that they had to do that deal and just took them to the cleaners and there was a pre-packaged bankruptcy.  Whether that affected West Point-Pepperell or not, that is open for debate.  But the debt holders took a huge, huge hit.  And as a result, good leverage buyouts could not be done anymore at the same level.  And the same thing has happened to some of us because of subprime, but the abuse of the debt market is just absolutely unbelievable.  And I sort of blame the funding; it is the funding source.  But, I do not know.  I liked what I heard last night with Mike Jensen.  I think those that took that money, those that allowed covenants to be totally stripped off of this debt, those that allowed payment in kind to be for debt, I think they bear some of the burden.  So unfortunately, I think maybe it is Schumpeterian competition; I do not know.  But the system gets out of control and as such we keep getting to the point where we are going to see how extensive private equity is and we keep falling back.  And that leads me to my prediction of the future.  And, you know, I have a PhD in economics so when you get that, you read the fine print and it says you are allowed to make predictions for the future now.  So I m going to use that license. And I think, unfortunately, that in the U.S. the private equity market needs the debt market.  I think the debt market is in really bad shape right now.  And it is going to take a while for it to come back, a substantial amount of time.  So I think we are back to where we are in the 90s.  And one thing interesting we got from our initial research just looking at sort of the numbers of buyouts, the number of buyouts -- there were as many in the 1990s as there were in the 1980s; it is just they were half the size, okay? And I think that is kind of what is going to happen.  This is going to continue; the equities there is going to continue, but it is going to continue at a much, much smaller size.  And, unfortunately, we will not then get the answer to how extensive this private equity leverage buyout phenomenon can be.  I also think we will see the M&A market taking over because I do a lot of work with companies on M&A and I can tell you, except for those that want to sell pieces of their company, they are not disappointed to see 80 percent drop off in private equity deals.  They were really driving out those deals.  We are going to see more of that recession.  Of course, all bets are off but short of recession, I think M&A will start dominating private equity.  And particularly since the dollar is cheap - we have seen that historically - there will be a lot of M&A investment into the United States. There will come a time when private equity will rise again and my hope is that this time we will have learned the lesson of the 1980s and the 2000, and the debt markets will not get out of control and then we can see how far we can carry private equity and how extensive it can be.  But I think it is going to be awhile.  And in the meantime, papers like Mike s, to come back -- Mike Wright s -- is very, very important because I think there will be a continuation of the buyout market internationally and particularly in those places we do not know much about.  In places like Japan, I think there will be a role for that; in part, that is because they use less leverage.  And I would come back to it.  There is one thing I would like to know, and I hope our research will help us better understand because we have data on leverage and whether it is bank leverage or not is what is the role of leverage.  And all the things you have heard about what private equities do, what is the role of leverage -- if they can do it without that, then all bets are off and private equities can do great.  Companies do mergers without leverage.  If really we can get these operational benefits that others have thought and do it with equity, that is great.  I m skeptical, but that is the case.  Thank you. Nick Schulz:  Thank you, David.  Now, we will hear from Adam Lerrick. Adam Lerrick:  Well, it is very seldom that I have the pleasure to talk about markets that actually function.  As you may have heard, I spent my career dealing with financial crises and usually only get to call Don when there is a real mess, such as in Argentina in 2005 or when Ecuador just announced they were going to default when they did not need to and we are going to consider it.  Or the current collateralized debt adjustment that we are now watching.  And that is why my colleagues find it particularly appropriate that I name my dogs Crisis and Chaos. Coming from this from a different standpoint, I read Mike s paper with great interest.  And, clearly, Mike is one of the leading authorities on this subject; he studied it for a long period of time and his paper provides a very valuable reference for policy makers and legislators who have to consider the impact of private equity and large pools of private capital on their financial systems and their economies.  It is an excellent survey of the trends and the empirical evidence in a number of economies, and most of the conclusions make common sense.  Higher leverage leads to higher failure rates - I think that sounds logical.  The largest, most successful firms have higher returns. But what I think is missing - and it is not in Mike s paper but in the literature at large - is a survey of the impact of private equity and its business model, as Mike talked about last night, on different cultures and how it interacts with the values and the fears that different societies have.  And that is what I would like to talk about a little bit today. Whether you call them private equity funds or hedge funds, pools of capital that seek the highest absolute return with a management compensation structure that commands a high share of profits are the purest form of market investors.  They do not care about fairness; they do not care about the environment or worker rights; they do not have a long-term interest in any particular industry or in economy.  And though their time horizons may be longer, companies are simply tradable assets no different than a treasury bond, a pile of Malaysian ringgits or a barrel of oil.  They have a single-minded concentration on increasing the value of their investment. But unlike financial instruments, where the only external constraints are prevailing laws and regulations, when investment seeks control of a business, money and operational skill are not enough to guarantee success.  What will be the impact on employment and wages, on the tax base, on the future of the local economy, on the public identity of the company?  These are questions that suddenly appear.  Well, they do not appear when you talk about buying a position in some distressed bonds.  In essence, what will be the impact on society?   Everything that determines profitability and even the viability of private equity comes back to the fundamental beliefs of the host environment.  Is disproportionate individual financial success justified?  Are all people entitled to a secure, comfortable standard of living regardless of work effort?  Do owners of enterprise have absolute power over their companies or do workers, local communities, and society at large have effective ownership rights and a say in their policies and operations?  In every economy, these questions determine regulation, determine taxation, and determine public acceptability.  And if public sensitivities are infringed, success is not attainable. Private equities model creates an inherent conflict in social democrat societies.  And that is one of the issues that comes very much to the fore when you think of Continental Europe.  A French finance minister once said that France wanted a market economy but not a market society.  And you have the leader of the German Social Democrats who characterize private equity, as you heard yesterday and this morning -- private equity in hedge funds is locusts that destroy and disrupt in order to extract quick profits. And the concern and the reason for the violence of this political reaction comes from a very simple fact that private equity s core principles question the social democratic core beliefs.  And that is where you have to start thinking about how private equity will adapt going forward in new environments because these societies claim to like markets but they prize stability, orderliness, continuity and predictability.  In essence, they prize control and the status quo.  But these are the antithesis of markets in a globalized economy.  Technological change, free trade, mobile capital bring benefits but they reduce the power of individual nations to make their own choices. Private equity and hedge funds are not disruptive speculators; they are simply dispassioned agents that expose fundamental weaknesses and speed up inevitable change.  If companies operate efficiently, minimize their cost of capital, and set a productive global strategy, there is no opportunity for profit for an outsider.  And therefore, they are impervious to any attack from a private equity firm or a hedge fund. Financial capital is simply the agent of competition in a global economy.  One of the most interesting examples of governments recognizing this conflict between the economic goal of efficiency and the social goals of stability took place in Germany in April 2006.  Blackstone purchased a five percent stake in Deutsche Telekom from the government s 36 percent holding.  On the surface, this deal did not make any sense.  Why would a private equity firm buy a minority stake in a large publicly traded company whose controlling shareholder was a government and a country that favors consensus?  Why would the government sell to the locusts that its coalition Social Democrat partners and the German public decried? We now have an experiment because the government saw in Blackstone a foreign catalyst for change in a major underperforming company that would provide the government with the political cover for the unpopular but necessary reforms for the company to succeed.  If this experiment is successful, not only will the government s remaining 32 percent rise in value, but a prototype for the adjustments necessary to compete in the global economy would be set for lagging German enterprises. The majority of the increase in value from Blackstone s efforts would be shared with the company s existing shareholders and the German public at large.  In essence, Blackstone was willing to give a 95 percent free ride as the price of admission to the German economy.  Is this the perfect solution that mobilizes the private sector s power for change while protecting society s other interests?  Or is this a compromise of core principles to gain social acceptance that can only lead to failure?  Because what we are going to see is can the benefits of private equity materialize when its core hallmark values, which are single-minded purpose of value enhancement and absolute control of management are diluted by multiple stakeholders with different incentives and agendas.  Going forward and picking up on the right of PhD s to make predictions, I will not go that far because I deal with markets for predictions, deal with minutes and not with days.  But as long as inefficiencies create profitable opportunities, financial capital is going to reinvent itself to adapt to the host environment.  Whether this requires state-owned partners in China or minority stakes in India or collaboration with labor unions in Europe, the game remains the same - only the rules change.  The private equity industry is following a classic life cycle path.  The success of the early pioneers has attracted more and more firms, and more and more investor capital until average returns have reached the risk-adjusted norms of other assets.  In countries where restrictions are minimal, the prices of targets are being bid up continuously.  In economies with constraints and private equity freedom of action, the limitations are lowering the possible increases in value. There are only two rationales for regulation of the financial activity - protection of the small and sophisticated investor and stability of the financial system.  And neither one of these applies to private equity.  And that is why all the discussions of what should be the regulation of this industry are based on faulty premises. Controlling private capital is worse than the proverbial killing of the messenger who delivers the bad news because what you are actually doing is killing the messenger who is actually bringing the solution to the problem.  Harnessing its power for change in a world of free trade and rapid technological advance is an opportunity but not a choice.  Governments that oppose these forces are going to see their economies falter under the weight of protected uncompetitive industries and will eventually be forced to redirect their agendas and accept the changes to their social values that are necessary to survive in the new globalized economy.  Thank you. Nick Schulz:  Thank you, Adam.  We have some time for Q&A, but I want to give Mike an opportunity to say a couple of things in response to the discussions. Mike Wright:  I think if I responded to all these comments, we will be here until next week.  But I ll try to pick up one or two things.  In David s first comment -- and thanks very much indeed for the comments.  David s first comment about heterogeneity -- I think part of what I was trying to do and trying to draw attention to is I think some of the recent debate has either painted product [indiscernible] all bad or all good. and I think you just need to necessarily get beyond that kind of simplistic dichotomy.  And part of that is actually understanding some of the heterogeneity and maybe we cannot just simplify and crystallize what that heterogeneity is.  But I think without doing that, then we will not really get to understand cases where private equity can be more appropriate, can [indiscernible] cases where problems are going to arise.  And I think also that applies not just to different types of deals but as private equity spreads internationally - and it has spread internationally - then for that to work in these different contexts and unless we understand the heterogeneity then we are going to come up against these brick walls or this resistance from people trying to kind of hold back the inevitable as Adam was just saying.  And I think in the longer term that would be detrimental to global economic performance. I think the issue about sustaining these things in the long term is a good one.  I think also that raises issues about how one creates value in the long term, not just once for all improvements in efficiency.  I think that raises issues about not just funding for R&D and capital expenditure going forward.  We [indiscernible] some of the houses and I think Karen earlier this morning was referring to that -- have done for a long time.  But I think also it raises issues about the skills and expertise of private equity executives to be able to do that.  That kind of human capital expertise -- I think there is room for development in private equity firms. I think [sounds like] secondary buyout phenomenon which is growing -- and I see no end in it.  This is also an area where, on the one hand, one might expect to see this kind of sustaining of the private equity model into the longer term but you just kind of recreate the players in that model.  I think there are some interesting issues there that again need to be worked through as to how in those cases we can create the sustained gains.  Or are we seeing a situation where management is cashing out and [indiscernible] management to sellers rather than buyers in those deals.  And how does one square that circle? On the debt side that David referred to -- I think almost his last remark about learning the lessons -- the banks learning the lessons.  If my memory serves me right, I think that is what we said last time at the end of the 1980s.  And I m rather more skeptical -- we said something about either the incentives or something.  But whenever I see the more exotic instruments coming out of the horizon, I know it is time to pack up and go home because it is a sure enough sign that the market is overheated.  And I do not see anything learning [sounds like] from that. And then, finally, the comment that Adam made about the different economies trying to resist this inevitability, I think in Europe I do see that, a very worrying trend that is marking a shift from what had become almost a new consensus, in my view, after the 90s and the early part of this century.  I think we are almost seeing a shift again in this resistance.  And I think this does not bode well for a number of European economies who do need to make these changes on a wider level.  And there are going to be wider social impact I think if we do not resolve this issues.  But that is another agenda. Male Voice:  [indiscernible], Embassy of Mauritius.  Given the different stakeholders in a society, what are the specific policy measures that you would recommend to governments in emerging markets that want to encourage the development of the private equity industry? Adam Lerrick:  I think the most important recommendation I would make is to distinguish redistribution from economic policy.  The greatest mistake a government can make is trying to use control of economic activity to achieve social or redistribution goals.  And instead, one should try to think in terms of allowing markets to function, allowing private equity to come in and structure or re-structure enterprises.  And the consequences that may be viewed as undesirable from a social standpoint - there may be layoffs; there may be plant closings; there may be investment moving to other areas - those must be dealt with in a different format.  They should not be dealt with by trying to stop the private equity investment or stop the restructuring; they should be dealt with through taxation and government spending programs that try to mitigate the consequences and those that are hurt by the structural reforms and changes that are going on.  I think that would be the best -- the greatest lesson that developing countries could learn from the industrialized countries. We are going through a debate right now in the United States.  It is probably one of the most important debates in the presidential campaign that is going on, as to the benefits of free trade.  And what is troubling is that most of these candidates actually speak as if it is an option to basically opt out of the system.  It is not an option.  We cannot suddenly say, We just do not like this.  We are not going to have free trade.  We are not going to allow technological advance to occur.   That is the mistake because what they are worried about is they are saying there are redistribution consequences to free trade and, more importantly, to technological events, and we are going to cure those redistributions by just refusing the benefits.  And that is a terrible mistake.  Now if I were to give one advice on policy to developing countries is distinguish redistribution policies from economic activity policies. Mike Wright:  I think just one point I would add to that is -- and I think some of the lessons from privatizations in the transition economies and also the privatizations in the U.K. was the -- I think it made quite a difference to broaden out the ownership in the buyout private equity deals to the wider employee base which gets round some of the gain-distribution type issues.  And you get buy-in by the broader body of the employees into these kind of transactions.  And I think that was used quite successfully in a number of cases, and I think that is something that has perhaps not been used as widely as it might have been.  [Inaudible] specific comment I would make. Female Voice:  [indiscernible] from Polaris Investments.  I just want to make a comment on the emerging markets of private equity development and especially in China in the past few years that it has a tremendous growth in private equity.  The reason has been the government of China has been - even though put a tremendous effort into banking reforms, however, the banking is still largely owned by the government and the debt market is simply non-existent in China. And so, that is the big effort they are putting into because of the tremendous growth and the entrepreneurs badly need funding for their economic activities.  And that is how private equity becomes such a tremendous force into China and attracts a lot of foreign capital to aid the private equity activities and build up the entrepreneurship in the business environment. And I think -- I just want to make another comment about the whole notion actually -- currently in light of these -- I do not know [indiscernible] the policy makers.  I think this is a very timely event [indiscernible] the policy makers should be educated when they are making decisions.  A lot of notion of putting the hedge fund and private equity together as if -- as one asset class, even though they both belong to alternative asset class [indiscernible] hedge funds and is very much different from private equity. Hedge fund is basically public traded securities, and hedge fund managers are exploring the inefficiency of the information in the market using trading strategies to cut their gains.  Private equity -- I think the core of a private equity is value creation mostly in the industries in different areas and creating a business for entrepreneurship.  And it is a value-creation proposition which is very different. And I just think that is probably why I think private equity in its own way -- and it is creating effective changes, which in emerging markets is really badly needed.  And I think we heard a lot of the so-called -- trying to be [sounds like] democratic complaints from -- often the parties from Germany, which I think it probably has to do with the corporate structure and the unfunded liability on the balance sheet for the pension assets. If you look at the United States, a lot of these large participants in private equity funds are the pension funds.  The public pension funds, corporate pension funds have been one of the largest investors in private equity.  And indirectly, a lot of the public and private pensioners and benefited from investing in private equity and the private equity growth, which is now the case in Europe - some of the countries. Adam Lerrick:  I would like to comment briefly just on the attack on hedge funds that we just heard.  In addition, I also run the hedge fund project at AEI and so it is my duty to come to their rescue at this defense. I think you are taking a very narrow view and definition of what a hedge fund is.  Hedge funds certainly do pursue the types of trading strategies you were talking about, seeking out momentary distortions or discrepancies in the price of public security assets.  But hedge funds are much more than that.  A hedge fund is nothing more than a pool of capital where the management compensation structure gives a high percentage of the profits to the asset management.  That is all it is. Hedge funds today -- they may have started 20, 30 years ago with these very tight trading strategies.  In fact, one of the original hedge funds was the proprietary trading department at Salomon Brothers, and that is all they did with those types of strategies.  But today, hedge funds, they buy distressed debt of companies in reorganizations; they are running nuclear waste facilities; they are buying control of infrastructure highways around the world.  So they are actually -- and they are buying control of companies.  I think if you looked at who are the competitors of KKR and Blackstone, who are traditional private equity firms, you would find there are a lot of hedge funds that they are finding they are winding up bidding against. And so I think you have to think of them as the same basic type of organization.  They require -- each type of asset requires different skills.  Mike Jensen was talking about last night that a private equity investor has to be able to bridge the gap between how financial markets interpret actions from how managers who have experienced running factories make decisions.  Well, that is what has made a successful private equity fund.  Why does that -- if that person changes his hat from working at Blackstone to working at Servers [phonetic], which is traditionally viewed as a hedge fund, what difference is there?  Thank you.  [No audio from 02:33:38 to 02:52:34]   Panel Five - Practitioner Panel: The View from the Trenches     John L. Chapman:  All right, we are going to start our next panel.  Well, good morning, everybody.  My name is John Chapman, and here is where we are in the program.  For the last day, we have had outstanding presentations from the leading economists in this line of research, and that is my opinion because they are the ones I picked because I have learned from them.  But they really have given us a great background into the set of issues and the research that they are conducting.  We are now going to turn to the practitioner world. We have got a distinguished panel of four outstanding private equity investors, one from Europe, three here from the United States.  Following this panel, we are going to end right at noon and have a buffet lunch, and the lunch speaker is David Rubinstein, founder of Carlyle Group.  And a poor rendition -- I should have had a slide on this but if you picture a triangle or a pyramid, the Carlyle Group is a $75 billion mega-firm.  They are one of the big buyout firms.  KKR, TB [phonetic] -- there s a few of them.  So, picture Carlyle at the top of the pyramid; then we have got three investors in sort of the mid-part of the pyramid and then Rick Rickertsen is sort of the [indiscernible].  Over the luncheon and this panel, you are going to get a good purview of the entire range of private equity investors.  The biographies of these four distinguished investors are in your packets.  So I ll say two sentences about each, and then what we are going to do here is I have asked each of them to give literally a two-minute background, sort of a synopsis of their business model - the kinds of investments they do, industry type, deal structure, et cetera.  And then, this is really your chance to ask the practitioners how they do what they do.  And I encourage the critics, or at least the skeptics -- and certainly want to include people from -- we have got people from the press today and, certainly, Capitol Hill policy makers that we want to encourage to talk. So, very quickly, Rick Rickertsen has had [audio glitch] career he currently is the founder and managing partner of Pine Creek Partners, which again is at the sort of the lower end of the middle market.  Previously, Rick was at Thayer Capital Partners here in town and he has also spent time with Brentwood Associates and Hancock Park in Los Angeles. Now, Rick did not know I m going to do this so this is me and not him.  But he has written an outstanding book called Buyout.  It was again written for the intelligent layman and it is a terrific -- for those of you who are here to capture an education about the leverage buyout phenomenon, what buyouts are, and how they create value at the company level, Rick Rickertsen s book is a must.  He has actually written another book beyond this one.  So, please use that as a resource. Next to Rick is Tully Friedman.  Tully has been in the business one way or another since 1969.  He spent several years at Salomon Brothers in 1984.  He is a founding partner of Hellman & Friedman, a firm in San Francisco, did 40-some deals, and then in 1997, he founded Friedman, Fleischer & Lowe, which is again a mid-market buyout firm in San Francisco.  Tully is also on the Board of Trustees at the American Enterprise Institute and is the current treasurer.  So a long-time friend of AEI. Next to Tully, we have Thomas Putter.  Thomas is here -- he is the Chairman and CEO of Allianz Capital Partners in Munich.  He has an interesting perspective for a couple of reasons.  Not only is he -- he can give us the European perspective, but he also is a direct investor as well as in the alternative asset side of Allianz and their fund of funds operations.  So he has a broad perspective of the business from multiple angles.  Prior to joining Allianz he was with Goldman Sachs International in London for several years.  So we are pleased to have Tom.  I feel very guilty; Tom flew all the way over just for this conference.  [Inaudible] turn around and go back this afternoon.  So we really, really appreciate that. And then next to Tom is Brian Simmons.  Brian is in Chicago as a founding partner of Code Hennessy & Simmons, a mid-market buyout firm.  In my personal journeys in researching for case studies and understanding what the buyout [indiscernible] was all about, Brian was my best interview and I learned more from him in a couple of hours in his conference room than a lot of books and papers.  So just a terrific perspective, and again, that firm has done remarkably well for a long time.  He was in banking with Citicorp Leveraged Capital and then Mellon prior to founding Code Hennessy & Simmons.  So that is the background. While they are -- they are going to give, literally, a two-minute synopsis of what they do.  And then we are going to open up to Q&A.  Now, I have listed -- these are sort of my favorite topics of conversation.  I ll just let you read those and hopefully people will ask them.  And again, it is going to be your show. And then I did take prerogative, as soon as they are done with their two-minute overview, I have asked them to address --here is the first question, and then we will open up to Q&A. I was fascinated by the image [sounds like] yesterday that Michael Kinsley wrote this piece in Time Magazine where he referred to people like our four panelists as private equity pigs.  And so, I m saying critics argue that you are all involved in a mere game of trading of ownership claims; that there is no added value to the activities you do; that is actually a concept that dates to Karl Marx.  And so, I m just going to ask them: How would you answer these critics?  And ask them to describe how do you get into these companies and create value both inside the portfolio companies and in the economy at large. So we will start with that question and then we are going to open it up and run right till noon; we have our lunch.  Again, thank you very much and we will start with Rick. Rick Rickertsen:  Great, terrific.  John, thank you very much for mentioning the book, and thanks for putting on this very important conference here in Washington about private equity.  I have had the pleasure of working in the private equity business since 1987.  I think private equity, by the way, is a vital part of the American capital markets and a vital -- I think a vital tool for American competitiveness in the larger economy.  I think it is very important and it is also a terrific business to work in. And just briefly, I worked for ten years before founding Pine Creek at a firm called Thayer Capital here in Washington, a good local mid-market firm.  And then founded Thayer three years ago and worth a very, very, very small end of the private equity market.  I think we have the smallest buyout fund in Washington, but the largest buyout fund in Georgetown, I think we say.  But, nevertheless, very strong in that regard. But we are doing very small deals between $10 million of purchase price and $75 or $80 million in purchase price.  And what we like about that part of the market is we are paying -- the three companies we bought last year, we paid an average of 5.7 times cash flow.  And when the whole industry is kind of an eight to nine times cash flow, we like the smaller end of the market; it is very interesting for us.  There are different risks with small companies but we are at the very small end, so we are one small slice of the pie in private equity. Tully M. Friedman:  My name is Tully Friedman.  I have been in this business close to 25 years.  I did cofound Hellman & Friedman and was a co-managing partner for 12 years.  Let me talk about why we founded Friedman Fleischer & Lowe, what we have been doing, and how we did. The notion was to create a firm where there was a core partnership of people that had a very broad set of skills, not just financial engineering skills, but operating backgrounds, strategy backgrounds.  The founding four partners came together with that spread of backgrounds.  That was an interesting proposition for the initial LPs [phonetic] most of whom did not have a clue what that was all about.  I was the only private equity professional.  The objective was to drive growth and value in the companies and to do with as little leverage as possible.  The firm is highly collaborative and we are very much into [sounds like] companies.  We are investing in companies with high returns and tangible capital, and in every case we have to believe we have substantial influence.  The reason for mentioning that - and this has surprised a lot of the people who have talked today - is about half our investments have been minority investments.  So later, if someone wants to get into that, I can explain how we do that.  And so far, we have never failed to be able to exercise appropriate influence. We are what I call a no-excuse investor so we set a strategy 10 years ago; we have not changed it very much.  We do not look at vintage years.  We do not look at the external environment and we are after a certain level of return, sort of regardless of what is going on in the industry, and so far we have achieved it.  The way I put it to our LPs is, Look, you have dozens or hundreds of funds; we have one or two.  We care about the returns. How have we done?  I guess one metric would be growth in the companies over the companies that we [indiscernible] long enough to measure it.  We have grown the top line about 30 percent; we have grown EBITDA about 35 percent compounded.  We have the most -- the average price we paid for a company in our portfolio over the last eight years was 7.5 times and it has ranged from eight times to 5.8 times.  And we expect to continue doing what we do from this point on.  We actually like the environment because an environment in which debt is hard to come by is interesting for people who do not use a lot of debt and eventually - it may take a couple of years - should impact the prices that we have to pay for the companies. Thomas Putter:  Good morning.  My name is Thomas Putter.  I m German-born, English bred; I have an English wife, English children, two English dogs, but they are bilingual by now.  I am U.S. financial trained.  I have been in this business for 20 years in direct investing in some form or another.  I think I will be in it an awful lot longer. I work for an organization that is the largest insurance company in Europe and manages somewhere north of � 1 trillion of assets, of which about 400, 450 billion are our earned money; the rest are client money.  Out of that, there is an alternative asset pool of about 40 billion; I m one of three managing directors managing alternative asset business.  And then when I have a little bit of spare time in my day-to-day operations, I m responsible for the direct private equity activities, which is basically a control investing business in buyouts.  We write equity tickets from somewhere around 50 million to 550 million per individual transaction. We are not a fund; we have currently no external investors, although we are reviewing that at the moment.  And our single mandate is to provide risk-adjusted superior returns and we are in a daily competition as we beg for this money on individual opportunities that we identify against every other investment opportunity that our fund has had to channel that money towards.  So we have to justify on a transaction by transaction basis what we do. Final comment - I do not like the word deal, which is used in the industry.  I m famous in Europe for a saying it is disrespectful to what we do as investors; it is disrespectful to the companies and to the employees.  Investing is not deal- doing; investing is doing something fundamental in enabling change in companies to take place, which, if that change is beneficial and sustainable, will translate into higher prices when we exit the investment.  So much for now.  Thank you. Brian P. Simmons:  Good morning.  I m Brian Simmons.  John, thanks for having me.  It is a pleasure to be here.  I m a partner and one of the founders of a Chicago-based private equity firm called Code Hennessy & Simmons.  Before founding CHS I was at Citicorp, and before that, Mellon bank in both Pittsburg and Chicago.  CHS, founded almost 20 years ago, has raised five private equity funds.  Our goal is to partner with management teams, to build businesses internally and through strategic acquisitions.  Our firm focuses on four industry sectors; they include business services, consumer products, distribution and infrastructure and industrial products.  Today, we have approximately 50 employees and we operate out of one office in Chicago. John L. Chapman:  Great.  So, again we are going to have one quick opening question then open up to the audience.  And I'm going to start with Tully Friedman because he is the senior veteran here.  Tully, how do you answer the critics when they say, Tully, we do not understand how and why you create value in the companies you invest in. Tully Friedman:  Oink.  I cannot resist; I m sure all of you have heard this.  There is an old saying that bulls make money, bears make money, and pigs get slaughtered.  And my prediction would be is there is going to be a lot of bacon around for the next few years.  I think I have said it.  I think what I have said is that we are in a business of driving company improvement and creating growth and, ultimately, value. The way we say it to our young people is we try to find good businesses with good to great management and turn them into great companies.  We leverage -- we use the words appropriate - we do not use a lot of it in our current portfolio of eight companies.  Four have no leverage; the four that do have leverage started out with no leverage and the leverage on those four is 2.2 times to a little over four times, which is relatively modest in today s world.  So we create value by growing companies. Rick Rickertsen:  Well, we heard all the statistics yesterday.  There is value creation in private equity, there is no question.  There is economic data, there is real return data, and there is academic review of private equity.  It is a business that creates value.  One of the things that people do not focus on is I think the biggest beneficiary of value creation in private equity is pension funds.  It is retirees at the end of the day that benefit.  When private equity started going to the moon five years ago, one of the reasons was that interest rates where very, very low and pension fund managers in their [indiscernible] the expectation for the retirees had models that all had eight or nine-percent rates of return built into getting the money back to the retirees, and the real rates of return and interest at that time were 2.5 or 3 percent.  So their models did not work.  So they had to look for higher rates of return environments and that is part of what drove so much more money coming into private equity.  And if you look at the rates of return, they have been excellent on a net basis and a lot of that money has gone back to reinvigorating those pension plans that would have been under water otherwise. So it is a side bar that I mention, but I think it is often overlooked in kind of part of the political conversation that goes on about private equity.  Obviously, the pig comment -- some folks in private equity have made intergalactic amounts of money and that always brings scrutiny, particularly when it is done under public environment.  And so that creates a difficult political situation, but I think it is important to see who the primary beneficiaries are of some of the good success of private equity. Thomas Putter:  You know, I was for many years, until April this year, chairman of the German Private Equity Association.  And this was the most frequently asked question by politicians and other interested parties in society.  And my answer was always the same - private equity is not an altruistic activity; it is a business.  It is a very hard-nosed, cold-nosed business where you survive if you are successful, and if you are not successful then you die and you become bacon. Success is measured by your clients.  Your clients, believe it or not, are not the companies you invest in.  Your primary clients are the people who give you money and they will only continue to give you money if you give them back more than they have given you in the first place; that is their measure of success.  And then they become, unfortunately, very sophisticated about it because they keep doing things called due diligence; they keep benchmarking you against others.  Then they start being sophisticated and return-and-risk-adjusting you.  But if you are successful then you will continue to get money.  I have been doing this for the Allianz now for 10 years and I have to justify this on a case-by-case basis.  We do not publish our returns, but McKinsey credit us with being what is called the top quartile performer. Now, the top quartile universe of performers in this industry, however, is relatively small.   The dynamic evolution of business model private equity, which is incredibly dynamic, arises or springs from the competitive tension of people trying to justify that they have gathered money against a promise and then having to live up to the promise and trying to be in that top quartile because the fact of the matter is if you are not, if you are in the third and the fourth quartile, you are not going to survive.  It is just of question of equity - you die.  And if you are in the second quartile, you may linger a little bit simply because there are not enough top quartile funds for the huge massive liquidity that is trying to get itself invested to get into. So the fact of the matter is good private equity, successful private equity firms by definition have to create value because it is an exit-driven investment model and you have to sell a business for more than you acquired it and you have to justify your share existence through that capitalist phenomenon.  It is just what it is.  It is a hard-nosed business where failure is punished.  So the debate of whether successful firms create value or not to me is a complete non-debate, frankly. Brian P. Simmons:  Well, it did not sound like much fun, does it?  I think one of the misconceptions in the world today is that you can lump all practitioners, all private equity investment firms together under one set of generic descriptors.  And in my opinion, that just could not be farther from the truth so I am very reluctant to speak for the entire industry.  I m perfectly comfortable speaking for my firm and my partners and me. The approach that we take to creating value is pretty simple and it has driven, John, from a lot of the things we talked about three years ago when you came to see me.  There were very few ways to create value in these investments.  You can grow earnings, you can pay off debt or you can sell a company for a higher multiple of earnings than you paid for it.  That is it - three ways.  If you find a fourth, please call me immediately. And so the approach that we take is to try and identify companies where we can accomplish those objectives.  Obviously, they are interrelated.  Obviously, the ability to pay down debt is somewhat driven by the amount of earnings that you create and the attractiveness to a potential buyer may be driven by the growth rate in earnings.  So it is not the case that they operate independently, but all of those factors contribute to the underlying value that is created in a private equity investment. In the case of our firm, over about 20 years, it has been about a third, a third, a third in each of those areas.  We have kept track of it.  I had to convince a college professor once that we really did keep track of it by showing him some graphs.  We update them too.  I m not sure that we use them to make good decisions yet, but we have them. And so I think it is interesting that not once in that short simplistic description of how value is created did I mention leverage or cost reductions or layoffs or asset sales. Those are all tactics; they may all become relevant in one investment or another but they are not a core part of what we do and they are not a requirement of value creation.  What we are trying to do is identify successful businesses with good management teams where we can help them make their company better, where we can take a regional business and transform it into a national player; where we can take a company with a relatively few product offerings and transform it into a business with a broad group of product offerings; where we can help leverage manufacturing needs and create a better cost position either in this country or elsewhere to reduce cost.  And all of those activities, if done correctly, will lead to earnings growth, debt repayment and a higher multiple on exit.  If you get all three you are doing really well and we do use leverage, which tends to enhance our successes and our failures. Rick Rickertsen:  If I could just follow up on that point, I think one of the perceptions of private equity is that a lot of the money is made by cutting, and I think that could not be farther from the truth.  I mean 95 percent of the firms in the business only make money -- you only make money on these deals if the company grows, if earnings grow, if you create jobs, if you build the companies.  Everybody in our business is trying to build businesses - you are adding, you are growing, you are expanding geographically.  It is not about cutting.  You know, what percentage of the firms are really about cutting and financial engineering?  It is really about building companies. Brian Simmons:  We make leveraged bets on earnings growth. Tully M. Friedman:  I want to come back to the implication behind Kinsley s canard.  It is interesting that we are sitting around here and people are sitting around other rooms talking about what good private equity does.  How many meetings do you think there are looking at deep-value investors and thinking about how much good they do, or Paris traders or momentum investors?  This is no different, and it just happens to be a moment in time where some bad behavior on the part of a few people, a level of activity, and political need converge.  It puts me in mind to the late 60s when Teddy Kennedy introduced remedial legislation for conglomerates and it was self-correcting.  It only was introduced when it reached the point when the phenomenon was over and was self-correcting.  And I think we are at the same point here in terms of the excesses of private equity over the last few years.  It is a cyclical business.  I have seen three of these cycles; there will be more.  But the notion you have to justify yourself by doing some higher good strikes me as a sort of bizarre notion in a free market economy. John L. Chapman:  Okay, great.  Well, now we are going to open it up to the audience.  If you would, we have microphones coming around.  Please state your name and who you are and then ask your question.  We will start.  Yes, sir, right here. Warren Miller:  My name is Warren Miller, founder of Beckmill Research in Lexington, Virginia.  I value private equity.  And my question is this:  Why do so many people in investment banking - and I have heard at least two of you on this panel - refer to EBITDA as cash flow?  It is an astonishing thing to me. Tully M. Friedman:  Can I take a crack at that? Warren Miller:  Aside from the fact that everybody does not [sounds like]. Tully M. Friedman:  Yeah, it is a convention and, probably, a pernicious one.  What I have said over the years - and it has been a few years since I have had a chance to make this observation - is when people stopped talking about EBIT or free cash flow and start talking about EBITDA, you are near the end.  Now, the near-the-end period has been years and years, but it is not the right way to talk about it. Warren Miller:  I ll follow up -- but an unrelated question.  But it does tie into the poor [sounds like] sign allusions this morning.  There is a website, <A target=_blank href="http://www.peigg">www.peigg</A>, pronounced pig - .org, PEIGG has, you know, unfortunate -- this stands for the Private Equity Industry Group Guidelines, and these are valuation guidelines set up for portfolio companies by a cadre of, I think, fairly prominent folks in your industry. And my question is why was a lot of valuation guidelines out there already especially from organizations like the American Society of Appraisers?  Does private equity feel a need to carve out its own, which can only serve to muddy up the waters and probably confuse auditors and raise the price of audits? Thomas Putter:  Valuation guidelines were made for the benefit of, and in collaboration with, the investors.  And in particular, pension funds had a need for a stable benchmark across all funds to compare returns because an industry that competes on IRR measure, which in itself is questionable whether that should be the right measure, but that competes on IRR success to raise new funds, you know, the same cash-on-cash return can be calculated to have substantially different IRR successes and competition for money being what it is in fund raising has in early days of private equity led to abuse.  So, in Europe, the European Venture Capital Association has sat down with major investor groups and defined valuation guidelines so that that abuse stops. Warren Miller:  I might respectfully beg to differ.  What these guidelines look like to me, who makes his living in this business, is a justification for general partners to use whatever valuations that one has [sounds like] rather than having much more objective measures of valuation. Brian Simmons:  There is another piece to this.  I think it is important to understand the distinction in relevance of asset valuations between private equity firms and hedge funds.  And there is a big structural difference between a private equity firm and a hedge fund.  A hedge fund is an open-ended pool of capital with negotiated redemption rights.  The managers retain the profits they make on investments and they are paid an annual incentive based on asset values typically at the end of the year.  A private equity fund is a closed-end pool of capital with a defined life and the managers are paid an incentive over the life of the fund.  We do not get carried interests on an annual basis; we get carried interests over the life of the fund.  We may get some of it on an interim basis if we need certain benchmarks, which may be driven by valuations but we are always subject to giving back money if we have ever received more than 20 percent of the profit. So, the valuations of assets in private equity funds have almost no consequences whatsoever for the general partners with one exception and that is that they are used to raise successive funds.  So when an investor looks at investing in your next fund, they are going to look at the returns on your current funds which may have some unrealized numbers in it.  But they were -- those valuation -- I participated in the development of those guidelines in a minor way and those guidelines were absolutely developed at the request of our clients - the pension funds, foundations, endowments, high-net worth families for whom we manage capital.  In general, living by them is a huge pain in the rear for fund managers because the honest answer is we do not know what a lot of these things are worth and I ll be the first one to admit it.  And it was a lot easier when we could simply say, Well, we think it is worth X.  We are going to put it on our books at about half of that, which is what we used to do.  And no longer are we permitted to do that; our clients, our investors do not want us to do that, interestingly, because many of them are paid on IRRs on an interim basis.  So, well, we do not get paid on an interim basis based on our unrealized marks; they do.  Many of them do.  And, also, the accountants and I m in a running battle with Ernst & Young -- any body here from Ernst & Young?  I m in a running battle with Ernst & Young over their FASB 157; I m sure everybody is familiar with what it is.  And I finally said to them, Well, why don t you guys just tell me what you want me to value these things at because --? Male Voice:  They will not do that. Brian Simmons:  They will not do that either.  And so I think if your concern is that the PEIGG valuation guidelines have somehow served to enhance compensation or other dynamics for the fund managers, that is not true. Warren Miller:  No, no.  And let me just say, I do not know how hedge funds got in this conversation.  I certainly do not have anything to do with them.  But my point is this -- Brian Simmons:  Unrealized marks do matter a lot for hedge funds. Warren Miller:  I appreciate that, but that is something you brought up; it is not me-- Brian Simmons:  Right. Warren Miller:  My question is why did the industry think it needed in my view, my professional opinion, a weak set of guidelines when there are strong sets of valuation guidelines already out there by long established organizations, professional organizations like the American Society of Appraisers?  That is my question. Brian Simmons:  Yeah.  And I guess I would say you would probably have to ask the people that insisted strongly that we develop these guidelines. Warren Miller:  Well, I will tell you that when I first heard of these two years ago at a CFA Institute conference in Chicago, I asked two of the gentlemen who had actually participated in the writing of these guidelines how these guidelines related to, for instance, the American Society of Appraisers guidelines and they gave me the thousand-mile stare in the four-foot room.  They never heard of them. John Chapman:  All right.  Thank you, Warren.  Yes, sir.  Here and then blue shirt next -- two and three. Rod Colerina [phonetic]:  First, John, thank you.  Rod Colerina, Asian American Chamber.  First, an operational question:  Could you all comment a little bit about portfolio companies and how you could combine purchasing, combine government affairs strategies to the extent that there is no conflict of operation or conflict of interest?  And, secondly, I m glad Thomas is here.  I think something on international must be brought up because if you are looking at both operational strategies of your potential investing company or some of your LPs or in fact some of your competitors, other international private equity groups [indiscernible] situations as partners, suitors [sounds like] to new opportunities or your current exit situations.  Thank you. Brian P. Simmons:  I can talk briefly about the operational question and we have a fairly long history of more and less of what you are talking about.  And at one point, we had -- and typically, our firm has call it 25 portfolio companies at anyone time and they are all over the country in all different industries.  And we went through a fairly exhaustive project probably almost 10 years ago where we looked at all the opportunities to combine various aspects of portfolio company businesses, everything from telecom and small package delivery to corrugated and steel purchasing.  And we have realized some benefits.  The biggest areas were telecom and small package because it is pretty easy to go to UPS or FedEx and bid out one big contract and get a quote and let all your companies buy off of it. But in a lot of areas, it is just very hard to generate the sort of savings you might expect because of the differences among the companies.  Also, you run into an interesting dynamic with management teams where every management team has its favorite suppliers, its favorite service providers.  Sometimes, those are smart business decisions and sometimes, they are driven by where someone s seats are at the football game.  So we found it to be a little harder to create that change than you might have expected. Thomas Putter:  I m not sure I understood your second question.  Was this about secondaries [sounds like]? Rod Colerina:  [Inaudible] Thomas Putter:  We have -- you know, if there is a significant-sized company being sold - and I m sure it is in the domestic market here the same - it is going to be intermediated.  So it is an option, some kind of formalized process.  And you will have resident private equity bidders; you will have London-based bidders bidding into the continent and you will have U.S. firms who cyclically predictably come in every three years, four years in cycles.  And so the time is right; we do not want open our office yet in London but let s go buy some businesses. And that is fine.  My personal view is that investing is still largely a local cultural issue.  The technology of LBO, the financial approach of an LBO is clearly a U.S. American invention; it was exported to the world.  But there have been a number of examples of lack of cultural understanding leading to difficult situations where foreigners who did not have -- there was a case mentioned today by one of the speakers of the German business that -- oh no, that was Deutsche Telekom.  I m sorry.   The locust debate was mentioned today and the locust debate was sparked by two firms who bought a German company very sensibly. Everything they wanted to do was okay but what they forgot was that when they timed the announcement of major layoffs in one factory, that that factory was right in the middle of the German vice chancellor s electoral district at the time of the most significant state election of the largest electoral state, Northern Westphalia full-stop [sounds like].  Now, no German private equity house would have done that.  It is automatic to check those types of things and two people who were not -- did not have the affinity to the local environment blundered into a buzz saw and, thanks to that, we now have the locust as a brand of that.  Now, the world is a zoo anyway, right?  You know, I ve been called a locust today; I hear I have been called a pig; I m surrounded by sharks; I deal with hyenas and jackals.  And then, actually, when I come to events like this one I come in a honeybee costume.  But I tend not to find it. So, I think the cultural aspect sometimes gets underestimated.  And, you know, when I go and invest in a really good business that I find in Latin America, I would not because I do not know the mentality; I do not have the language skills.  It never ceases to amaze me how certain firms think they can invest internationally without having indigenous language skills in the team.  I find it extraordinary.  We would not do it. Tully M. Friedman:  I think where there is a very significant international nexus is the capital.  So in our case, about a third of our capital comes from non-U.S. institutional investors; I m sure that is probably to some degree your case.  So there is a very big pool of capital investing in private equity all around the world and some with us.  We do have companies that have international activities, but we invest only in North American companies at this point. John L. Chapman:  Sir, you will be next and then -- Josh Cosman [phonetic]:  Hi.  Josh Cosman.  I m a journalist.  Tully, this question is for you.  You have enjoyed great success and earned a lot of credit for Tempur-Pedic for being a minority investor in the company, along with TA Associates, which is also considered a growth buyout firm, not the conventional model.  How do you think a larger conventional firm, a KKR-type of firm -- how do you think they would have done with Tempur-Pedic if they would have bought it and not your firm in TA? Tully M. Friedman:  Yeah.  We do not style that a minority investment.  When we talk about minority investments, we own less than 50 percent and there is either an ownership group or a management group or both that control the company.  In the case of Tempur-Pedic, we and TA share ownership there; we own 90 percent of it.  We had equal governance and it worked very well.  So I think there would be no difference if a KKR or someone else had owned it in that respect. Josh Cosman:  Do you think they would have [inaudible] Tully Friedman:  No. Josh Cosman:  Now, I can speak more softly into a microphone.  You know, at the same time you were growing Tempur-Pedic very successfully -- you know, and TA.  You know, you could argue, you guys were taking a lot of market share from [indiscernible] Simons that were owned by PE firms. Tully M. Friedman:  That would be a fact. Josh Cosman:  Yup, okay.  And you guys -- Tully M. Friedman:  I was just arguing that would be a fact. Josh Cosman:  Right.  And it is amazing. I mean you guys were -- Tempur-Pedic was -- it s not a small buyout but I mean dollar-wise, you guys are worth more than Celia [phonetic] at this point.  Do you think --? Tully M. Friedman:  Not those guys. Josh Cosman:  Right, okay.  So what do you think -- how much of Tempur-Pedic s success -- I know it is a great bed, but how much of the success do you think is based on the fact that Celia and Simons were caught flat-footed and maybe were not actively trying to grow their companies? Tully M. Friedman:  Well, I m going to give you an answer; it is a little long.  But when we first saw it, my reaction was, Hey, it is a mattress company.  That is not our kind of deal.  It is commoditized business; it is leverageable so private equity firms trade them around.   Then we looked at the numbers, and the numbers looked like Tiffanies in a great year; the operating margin is about 25 percent, gross margin is in the 60s.  We said, What is going on here?   And we concluded with the help of some investors who have very deep branded package goods [sounds like] backgrounds we have involved in our business that it was a very rare differentiated consumer product.  And it was.  We all bought the mattresses; we all liked them.  And that is what has been driving the business. Male Voice:  At a discount? Tully M. Friedman:  No, no, before we owned the company; we paid full price.  And by the way, they did not really discount in any way, which was another interesting thing.  Look, how many people in this room own a Tempur-Pedic?  A few.  How many people in this room know the brand of the mattress they sleep on if it is not a Tempur-Pedic?  That is the point. So we were competing with companies that have ancient technology with a better product that ultimately we were able to communicate the value of to enough consumers to take a significant market share.  And they tried very hard -- the concern we had and there was a massive short against the stock once we got it public and violated our trust to someone in terms of that point that was made earlier today.  That the reaction from the legacy mattress companies would roll right over us.  They could not do it, and I m not sure why. One problem we knew they would have is the more you talk about the benefits of foam, the more you call on to question your legacy product.  And my guess is that is the dilemma they have.  But for whatever reason, they have not been able to blunt the growth of this company.  So, I would say the lion s share of the credit goes to the differentiated product.  Again, I think we took a very good business with a great product and transformed the company so it was able to take full advantage of its position.  But the product is a very, very powerful product. Male Voice:  [Inaudible] Tully M. Friedman:  Our moderator -- John L. Chapman:  Sir, we got a few more questions.  Thank you.  We have a gentleman in here and then -- Josh Cosman:  I wanted to ask you about returns looking forward.  There is a lot of talk that returns will be coming down -- lower expectations.  And I am wondering what you think is a realistic return for a top quartile fund or what you are expecting in your own portfolio? Tully M. Friedman:  Who are you asking? Thomas Putter:  I can tell you that in Europe - I do not know about the U.S. institutional investor base - I can tell you in Europe that you will have an awful lot of pension fund, insurance fund managers state publicly that they expect net of all costs and charges an out-performance of the medium term public equity prospect of about five percent.  So I am not saying that is right or wrong but they are a setting benchmark out there as to what they think is acceptable to them to bear the risk of an illiquid investment in a 12-year partnership with a private equity firm.  It s around five percent over net of all costs.  So you can extrapolate upwards what the gross return has to be for the firm to deliver that. It is interesting how the private equity industry only ever starts talking about real returns on investment in falling return environments to justify why suddenly [indiscernible] is good one day, had been fund raising on the promise of 30 percent.  Having said that, somewhere in the institutional universe people do think about real returns as well because the bulk of the investor-base is concerned with old age provisioning and very long-term contracts that they have to meet liabilities that they have to meet ahead of time.  The incentive structure of the industry is such that you want to have returns as high as you can.  That is just what it is. Brian P. Simmons:  Let me add a couple of comments on returns.  There is a lot of media in here.  The top quartile return threshold seems to be right around 15 percent.  It has been there for a while; it seems to be holding steady there.  And I think that if you talk to most buyout fund managers, they would tell you that all the investments they have made or are making would significantly exceed that benchmark. The risk in what they are telling you is that buyout fund managers tend to calculate returns using the same exit multiple as they paid for a business.  Remember we talked about how you make money in these deals?  Arguably -- ideally, you sell companies for a higher multiple than what you paid and that is a lot easier to do when you are paying lower multiples.  So when investors are paying 10, 12, 13 times that horrible -- you know, it started out as EBIT, then it went to EBITDA; now it is an EBITDA which is next year s EBITDA, okay?  And when you are paying 13 times EBITDA for a business, it is pretty hard to convince yourself if you are going to sell it for a higher multiple and it may even be the case that you do not sell it for 13; you sell it for 10 so that those projections you made that suggest outsize returns were based on an assumption that ultimately will not be realized.  And there is a lot of money in the ground right now, today, in my opinion where that negative fact is going to come home to roost. The other piece of the return equation that we at CHS think is critically important is risk.  Everybody talks about return.  Everybody talks about IRR.  Nobody talks about risk.  And obviously, if you have a choice of making 20 percent in an investment with X risk or you can make 18 percent in an investment with half the risk, you are going to take the 18 percent all day long.  And that dynamic is not included in top quartile returns and it is not included in much of the public discussion about IRR. Tully M. Friedman:  You know, any investor, any real investor that cares about the answer to that question is in trouble because of a point Brian made.  You really have to disaggregate this business.  It is well-known that the big university endowments have earned a thousand basis points more in this asset class than [sounds like] some average is because they are very selective.  So, if you really have to put large amounts of money out against many or large funds and you cannot be highly selective, I think over time you are going to end up unappetizing [sounds like] result. Thomas Putter:  I would just like to add to this return on risk point is vital and I think it will grow in importance, going forward, because the regulatory environment for life insurance is in banks so a lot of source of this funding has become much harder and they have to make risk capital allocations from their capital base against these types of investments.  And it is in their interest to be able to define the risk parameters or the risk characteristics because it may mean they can put less risk capital against it.  We who started at ACP quantifying, writing quantitative models to model the risk profile against the return expectations that our forecast give to try and get that balance.  So it is pretty sophisticated stuff. John L. Chapman:  I m afraid we are down to our last question - about three minutes.  Yes, sir. Male Voice:  What is the argument to support capital gains achievement for a GP that has no cash in the deal in Washington, D.C.? John L. Chapman:  Anybody want to handle that? Tully M. Friedman:  No. Brian P. Simmons:  I ll give you an answer. John L. Chapman:  Go ahead. Brian P. Simmons:  I ll give you an answer.  First of all it is -- Male Voice:  [Inaudible] Brian P. Simmons:  I would have been shocked if somebody had not asked that question.  It is not -- I mean, GPs always have some money in the deal, but the obvious issue is that their percentage of the profits exceeds the amount of money they have in the deal.  And look, our business model is no different than any other business where we have chosen to structure what we do in the most tax efficient way possible.  And private equity firms and venture capital firms take advantage of long standing partnership rules, which say that investors can come together, form a partnership, allocate the profits among themselves in whatever way they choose to.  Everybody pays taxes based on the underlying character of the income.  If its capital gains, you pay capital gains; if it is ordinary income, you pay ordinary income.  We all receive salaries.  We all receive management fees and we pay ordinary income taxes on all of that.  And so the argument would be that we are doing nothing more than taking advantage of the same partnership rules that oil and gas and real estate and families that start restaurants use when they set up their businesses.  And I think the argument of fairness is a lot less relevant than the argument of how do we want tax partnerships.  And if we want tax them this way, then that is great.  And if we want to tax them in some other way, then I imagine there will be some behavioral changes among people who set up businesses to structure their business in the most tax-efficient way possible, which [audio glitch] result in their paying high taxes. Thomas Putter:  In Europe, we have exactly the same debate.  The principles of it are the same.  The treatment of taxation for current [sounds like] interest comes from general taxation of these types of income classes.  It is not a private equity taxation class; it is a taxation class for limited partnerships.  But there is an additional dimension in Europe which you do not have in U.S. We have acute competition within Europe between member states trying to attract vibrant private equity industries to be located in their country as opposed to the neighbor s country.  And out of that and the U.K. has been I think the main driver in this in forging a very beneficial regime for taxing private equity individuals.  And the French have just introduced a favorable regime because they want to attract it.  The Germans are chewing on this because they hate it, but there is a philosophical debate in Germany getting on the locust debate.  By the way, I have to say this:  It was actually not a private equity debate.  The locust debate in Germany was a debate about capitalism, about fundamental functioning of an economy and the type of economy you wish to have and it was just very nice to have this hook on which you could hang it to have that discussion. So, we have this added dimension that there are different countries in Europe trying to attract home bases of private equity industry and the best way to do that is through fiscal frameworks. John L. Chapman:  Great.  I would just add to that. The debate about how to tax capital gains, what is capital and appropriate policy is actually not a new one.  There is an Austrian economist named Bohm-Bawerk who had three volumes on capital interest in the 1880s and, believe it or not, discussed this issue.  With that, listen, we want to thank you very much, to our distinguished panelists. And this is the end of the proceedings in terms of the conference itself.  We are going to close it over lunch.  So I want to thank the National Research Initiative of the American Enterprise Institute for sponsoring the conference. What we are going to do now is there is a buffet lunch that is going to be served out in the foyer way here.  Please go get lunch, come back here, and David Rubenstein and Carlyle group will be on in about 12:30.  Thank you very much.   Keynote Speaker:  David Rubenstein, Carlyle Group     Jim Glassman:  Good afternoon everyone.  Good afternoon everyone.  I hate interrupt your lunch, but we do want to have time to hear David Rubenstein and to get some questions from the floor.  I m Jim Glassman.  I m a senior fellow here at the American Enterprise Institute and I m also the editor of AEI s relatively new magazine, The American.  It is just an enormous pleasure to introduce David Rubenstein.  Before I do that, though, I want to thank John Chapman and Henry Olsen for putting together this conference, which has occurred over the past day and a half.  I have heard lots of really enthusiastic comments and cannot think of a better luncheon speaker than David Rubenstein.  I know David a little bit because I spent quite a long time writing what was a historically long article in a local magazine - 17,000 words - about the Carlyle Group.  David is one of the three cofounders of the Carlyle Group, of course.  He was born in Baltimore where his father was a postal clerk.  He attended Duke on a scholarship and then the University Of Chicago Law School where he was a classmate of Chris DeMuth, next to whom he is sitting right now.  And Chris, of course is the president of AEI.  David then went on to practice law at Paul Weiss in New York, and he was attracted to Paul Weiss because it was the Kennedy era.  David was particularly drawn to Paul Weiss because Ted Sorensen was there.  David said, actually, in his interview with me, I did not think that I had the looks or the money or the personality to be John Kennedy, but I was inspired by public service and Sorensen was the advisor to Kennedy.  I figured maybe I d be an adviser to somebody. Well from there, he went to the Carter White House - this was a long time ago - where he was a 27-year-old deputy, a domestic policy adviser to Stuart Eizenstat.  He became famous in a Newsweek story by Eleanor Clift that carried the headline, White House Workaholic.   I mean in a town of workaholics, David was king of the workaholics.  The Newsweek story said, When Carter calls it quits about 16 hours after the day has begun, Rubenstein is usually still toiling.  He rarely leaves before 11 o clock at night even on weekends and he frequently stays as late as two in the morning.  He lives in an efficiency apartment.   He did not have enough money to buy a car.  He skipped breakfast.  He ate lunch at the White House mess, and he dined on yogurt and crackers from a vending machine.  Machine food , David has famously said, is underrated. Then in 1987, he founded Carlyle with Dan D Aniello of Marriott and Bill Conway of MCI, and they formed the triumvirate DDB.  And, actually, we have the instigator of the Carlyle founding here as well, Ed Mathias.  It was a remarkably successful partnership, in part, because each of the three plays a different role.  David is the money raiser and the public face, although he certainly makes investment decisions as well.  Last week he was named the new head of the Economic Club of Washington, DC; tonight, he will be inducted into the DC Business Hall of Fame.  A few years ago, David decided he needed to give back, and in typical fashion he became a member of 28 boards.  He has also won the Horatio Alger award.  He is a member of the board of Johns Hopkins University at the Kennedy Center, the Lincoln Center, CSIS, and he is on the visiting committee at the Harvard JFK School of Government.  He has been a generous philanthropist.  And, you know, David is a hard worker in a town of hard workers.  David is also a smart man.  But in Washington as one of my friends says, Smart is the baseline.   And far more important in my experience, David is a fine human being.  In my article about him, I wrote that to those who know him, Rubenstein is a subject of much wonderment and speculation. One clue to his personality is this: I asked him whom he admired, and he said George H.W. Bush, Bush 41.  Why?  David said he is an easygoing, nice, polite, gentle, and charming individual without a big ego.   And, actually, that is a pretty good description of David Rubenstein as well.  But I would add that he loves gossip, and he has a wit that is as dry as Scottsdale in the summer. As for Carlyle, it has a particular style; it has two facets, I think.  First, it tends to be very cautious with its investors money and I think that comes from Bill Conway, mainly.  Second, the partners decided early on to be a global private equity firm; others have followed but Carlyle did it first and still has the best global network.  Carlyle was started 20 years ago with $5 million of other people s money, raised by Ed Mathias, by four people who had never made a private equity deal.  And today, it has 33 offices in 21 countries and 995 employees, $75 billion of assets under management, about $30 billion in dry powder. David has been a champion of the industry.  He gives speeches and interviews around the world trying to educate people about what private equity is, and how it adds value.  In a way, he has kind of come back to his policy roots, reluctantly or not, as private equity has suddenly become the center of attention in Washington.  He will talk to us today about the opportunities and challenges for private equity in a new age, in which it is not enough just to make money for your investors in a time of a credit crunch; you also have to deal with regulatory issues with unions and with tax matters.  And David has graciously agreed to answer questions after the talk.  I will sit over here and David will come up here and talk to you.  I present David Rubenstein. David Rubenstein:  Tim, thank you very much.  I am not going to speak because there is nothing I can do that will improve the image that you have just had of me.  Everything I m going to say is going to deflate your impression of me probably from this point on.  I m sorry that my mother was not here to hear that introduction; she actually would have believed it.  Before I start, I would like to just get a sense of who is here, and I would tell you that I was a little reluctant to speak at this conference because (1) it is more of an academic conference, I understood, and I am not an academic.  So I am going to give you my impressions of the industry as a practitioner, not so much as an academic.  Secondly, whenever you are the last speaker at a conference, you run the risk that everything has already been said, just not everybody said it.  And probably everything that I am going to say may have already been said, so I apologize for those of you who have listened to everybody else and heard everything I m going to say. I will just give you my impressions of somebody who has now been in the business for twenty-some years and take it for what it is worth.  But I want to make sure I know who is here and I m just curious:  How many people here are actually, let s say, investors in private equity funds?  Are there any LP s who actually invested?  Okay.  How many GPs are there?  Okay.  How many people here are vendors to private equity - their lawyers, their accountants, or hangers-on, or whatever?  Any hangers-on?  How many people work in the government here?  How many people are from the press?  Any press people?  Okay.  How many people are just lost and want a free lunch?  Anybody here?  How many people from outside DC?  Oh, wow.  How many people are from outside the United States?  Anybody?  Oh, okay.  Wow, more than I thought. How many people have a positive view - just so I know who the audience is - of private equity?  Oh, okay.  How many people have a more jaundiced view of private equity?  One in the back, okay.  Two.  I can see my friends in the SCIU were not in here today, okay.  How many people have an unclear view of private equity - they just do not know whether it is good or bad?  Anybody?  Everybody has made up their mind?  One over here, okay.  How many people think it is a good time to invest in private equity now?  Okay.  How many people think it is better to wait for a year?  Okay.  How many people think the U.S. economy is growing?  How many people think it is slowing down?  How many people think we are in a recession but just do not know it?  How many people think taxes on private equity will go up?  How many people think taxes on private equity should go up?  Could you get their names?  How many people think private equity should be the dominant and most important issue in the next presidential campaign? How many people think that their children should go into private equity?  This is the ultimate test.  If you think children should be -- okay, that is the right answer.  I m trying to get my children into private equity but they are not quite there yet.  Here is an interesting thing before I start [indiscernible] my point of view.  I have worked in government and politics and now I m in the business world.  And because I have been in the business world I made so many enemies, I cannot go back to government politics but I m still interested in it.  I would like you to think about this question for a moment.  Would you trust your country to someone who you would not trust to invest your money? Now we are about to have a presidential election and somebody is going to be in charge of a $2 or $3-trillion federal budget, and they are going to be running our country.  Would you actually entrust a million dollars to these people to actually invest your money?  For example, who would you trust to make private equity decisions for you?  Raise your hand.  How many people would give this person money to invest?  All right, one.  Okay.  She did a very good job in investing in cattle futures years ago, so there is no reason to think she would not be a good investor.  Barack Obama?  A couple.  One.  Edwards?  Anybody think he would be a good guy to give money to?  No?  Richardson?  No?  Biden?  Nobody thinks he would be a good investor?  God, these people are going to run the country.  Chris thought he was the chairman of the banking committee.  Guess not.  Dennis Kucinich.  Okay.  All right.  Now how many people would give this man money?  I guess not too many.  All right. On the other side, how many people would give Rudy Giuliani money to manage?  One?  That is it?  Now, this guy -- okay, obviously, right?  All right.  Anybody give John McCain money to manage?  Okay, there is Ben.  Fred Thompson?  No?  Any takers for him?  Mike Huckabee?  Ron Paul, for those who do not know.  Nobody would give him any money?  All right, what about this guy, Bloomberg.  People would not give him money?  Okay.  Lou Dobbs is another candidate.  All right.  Now, here is the most important one.  How about this guy?  How many people would give him money? Now everybody has to raise their hands on this one.  Right?  Okay.  So, my view is that private equity is really at a crossroads right now, and the question that I really want to address today is will private equity grow and prosper by meeting its current challenges, or will it go the way of the 60s conglomerate, which kind of dominated the business world to some extent in the 60 s but did not adapt to the times and basically became obsolete in many ways?  And so the question for private equity is as it is now at the crossroads, which way is it going to go.  Is it going to grow and prosper and continue to be an important part of the U.S. economy or is it going to kind of wither and, basically, its days best days are behind it?  Now, it is an interesting thing.  Why would I say it is at a crossroads?  Let s take a look at where we are right now.  Over the last two decades, the industry has enjoyed financial success that is really unparalleled in the world of wealth creation.  It is hard to think of anything that has created as much wealth as the entire private equity.  When I say private equity, I m by and large talking about buyouts and venture capital, but more buyouts probably because that is more controversial and that is really the subject of a lot of the attention on private equity has been buyouts. But buyouts and venture capital or just buyouts alone have created enormous amount of wealth around the world.  Probably, I cannot think of anything else that has created as much, so you can say this is pretty successful.  Over the last 10 years, approximately $430 billion of profits have been created for investors, much of which [indiscernible] public pension funds, which are the biggest source of investors in private equity funds. Revitalized the once lagging U.S. productivity and renewed iconic American companies.  And what I mean is this:  When I worked in the White House in the late 70s, it was said that Japan was going to dominate the world s economy in the early 80s.  Some of you were too young to remember this and some of you maybe do not remember it.  But it was thought that Japan was going to be dominating the world s economy.  That did not happen.  It did not happen in my view because what happened in the early 80s is people began to worry about shareholder value, began to worry about investor concerns, and began much more to kind of do things in the United States to make companies more vibrant again.  We were a little bit flabby for a while, and I think private equity played a role in that.  It does not get all the credit I think it deserves but it did play a role, and I really think it increased U.S. productivity.  So I would give it a high mark for helping our U.S. economy. Now, a lot of people would say, Who cares about this?   But the truth is that as Wall Street goes, to some extent, the U.S. economy goes, and this has been the largest source of profits by far for Wall Street - private equity.  It has employed increasing numbers of Americans.  More than any one company, the biggest employer in the United States -- anybody know who the biggest private sector employer is?  Wal-Mart is right; it is almost a million -- maybe more than a million employees.  Federal government has several million employees.  Private equity probably employs -- when all is said and done, probably about 10 million employees in the United States work for various private equity firms.  So, it is a gigantic employer.  It has become the face of American capitalism in many ways.  U.S. Steel, General Motors, these were the face of American capitalism in the 50s and 60s.  Now, it is Blackstone or KKR or Carlyle.  We are the ones that to some extent have become the face of American capitalism.  And this is an interesting point.  It has become one of the few industries in the United States where we are the clear world leader.  How many industries can you think of right now where we are the dominant player in the world?  Maybe, entertainment; in some ways, maybe some Silicon Valley software-type companies.  But there are very few industries now where we are the dominant player in the world without question.  But in private equity, we are the dominant player in the world. So, this is the situation.  It is pretty successful, I would say, over the last two decades and this is the position it has taken us to.  Why are we being picketed?  Everywhere I speak these days, I seem to be picketed.  This is one of the picketing people, one of the firms picketing saying that we are not paying our fair share on taxes and so forth.  This is a picture of a Carlyle fat cat and I guess this is in front of our offices.  So anyway, why are private equity firms being picketed?  And this is an interesting thing.  You have a situation where people in the industry feel they have done a wonderful job.  They have created wealth.  They have created productivity, and in fact, they have a very high view of themselves.  But the view outside of the industry is not all that favorable, and you kind of think where else is there a disconnect that is so big?  The only one I can think of where the people in the industry think so well of themselves, but the people outside think so poorly of themselves is -- Congress. Congress has a 17 percent voting approval rated, but everybody in Congress thinks they are doing a great job.  It is the same kind of disparity here.  People in the industry think, Look at all the wonderful things we have done and look how much profit we have made, how much employment we have; we revitalized the economy, and all that.  Yet, people outside the industry have a relatively jaundiced view, and jaundiced is a polite word of the industry.  So why is this happening?  The industry is under attack now by Congress for the first time; labor unions, community groups, consumers, regulators, the media, foreign governments, even presidential candidates are planning left and right on what the taxation should be for private equity, and so forth.  And you see these headlines all the time now.  Gluttons at the Gate was one of my favorite ones headlined in Business Week. Why is this?  Well, it is my view that profitability breeds concern, criticism, and visibility and extreme profitability breeds extreme concern, criticism, and visibility.  And what has happened is -- Balzac, the French writer famously once said, Behind every great fortune is a crime.   And that is maybe a European attitude to some extent but it has maybe become an American attitude too, which is to say if somebody is making a lot of money, maybe they are doing something illegal and immoral.  Private equity has made a lot of money and a lot of people are beginning to say, How can they make this much money and not be doing something wrong or inappropriate?   I think the people in the industry have not really paid attention to the various constituencies of the private equity world.  In other words, I have spent all my time telling our investors how wonderful our returns are, and they give me more money.  But over the years, nobody has ever asked me how many jobs we have created, or at least none of the investors have.  No investor has ever said to me, How many community organizations are you supporting?  How many new factories are you building?  How are you treating your labor unions, and so forth. Now, like other private equity firms, we are beginning to focus on this.  But for many years, we did not pay attention to these other constituencies and the ignorance or, I would say, ignoring them has produced let s say some resentment.  And we did not do a very good job of explaining to the public what were doing.  We basically said, We have high internal rates of return.  Give us more money and we are going to make more money for you.   We really did not explain to the public what we were doing and the industry and has been relatively insular by nature.  So I think that is why some of the criticism has come about.  Now industry has now recently been slowed by the debt crunch that everybody knows about.  A lot of the previously announced buyouts were not completed.  The little availabilities now there -- a little financing is available now for new buyouts, and I think returns are likely to decline for a number of reasons.  Harder to sell existing companies at once anticipated prices; it is harder to buy new companies and the economy is clearly slowing down.  You take a look at how much debt is becoming more expensive.  [indiscernible] it is costing roughly 200 basis points more, which is a big deal for high-yield debt in our world, so it has become much more expensive.  The result of the debt crunch that we now face, which came about because of the subprime market -- and let me explain -- everybody here probably is aware of the subprime crisis.  And my view of it is that it was something we could not have anticipated.  Everybody thought the private equity world was doing wonderfully.  It was doing so well, could not get better.  We did not know when it was going to end.  We thought, or at least I thought, it would end when the economy slowed down, the stock market went down, there was a 9/11 event, energy prices went out of control, or major buyouts failed.  None of those things happened.  What really slowed it down was in the terms of the debt crunch is that the subprime world kind of fell apart, and the reason it has fell apart is because a lot of the loans as everybody now knows cannot be serviced.  And so what happened is many of the people who were buying the buyout loans were also the people buying the subprime loans, and the people buying the subprime loans said, Well if I m losing money on subprime, I do not have as much money to put in buyouts.   And so there was less money.  They also began to think that maybe buyouts were going to be like subprime falling apart, so people began to pull back. My own theory about the subprime market is that the person who deserves the most credit or the blame for it is the person who came up with the word, subprime.   Let me explain.  If you go to a restaurant and you order the best steak, it is called prime.   And if you cannot quite afford prime, you get choice.   So 5 percent below in quality, but you can say a pretty good steak.  Well, the person who came up with the name subprime figured that if you had the word prime in it and just change it a little bit, people will think it is like five percent lower in quality.  So like the difference between prime steak and choice steak, prime and subprime.  So the brilliant marketing technique was to call these not- credit-worthy loans subprime.   So all the dentists in Germany who were buying these things as part of a syndication did not really know what they were getting.  If they had said not credit-worthy loans, my view is people would not have been buying these things.  But they were called brilliantly, subprime.   Subprime.  Its sound rolls off the tongue.  It is a brilliant thing.  But nobody thought at the time that that would cause the problem, but it did. And the industry now because of that is in what I call a pause mode.  We will be able to jumpstart it, but there was a first pause mode in 1989, in 1990.  That was the buyout where it really sort of started and, let s say, the late 70s and went pretty well.  Not that big, but went pretty well until 1989 and 1990.  Lumber deals failed and everybody said these things are over-leveraged [sounds like]; they are hurting the economy, and no deals were done for a while.  Then it came back in the 90s, but then around 2000-2001, there was what I call a second pause, and that was when the tech bubble burst occurred.  And all of a sudden, the buyout world kind of slowed down for a lot of reasons. Now, we are in what I call a third pause and because of this third pause, we are in a different situation.  But take a look at the deal volume, how it has gone down.  In the second quarter of 2007, there were roughly $200 billion of deals that were announced.  And in the fourth quarter or third quarter -- you can say a third quarter of 2007, about $50 billion.  So, you can see a dramatic decline in the volume; that is because we are in this pause.  Now, is the pause different than the pause we had, the first pause I mentioned in 89- 90 or the second pause in 2000-2001?  Is it a different pause?  I think it is a much different kind of situation that we had then.  One, the press and the government and public are much more focused on private equity.  Industry faces greater challenges in getting jumpstarted.  These are I think the major challenges facing the industry in getting jumpstarted and getting out of the pause mode:  One, improving the industry s image; two, fending off tax increases and legislative regulatory constraints; maintaining the returns needed to hold current investors and attract new investors; dealing with new competitors; overcoming protectionist impulses and actions operating in the public domain, and sustaining firms past the founder generation.  These are what I see as the major challenges facing the industry that have to be dealt with if we are going to really prosper. Now, the challenges are the result of problems created over many, many years; it did not happen overnight.  So I think it will take several years to fully meet these challenges.  Now, on the image challenge, what are we going to do about that?  Well, it is interesting that the private equity issue, as significant an industry as it has become, really had no effort as an industry to unify itself and present a common face.  There are probably 37,000 registered lobbyists in Washington but up until about a year ago, there was no registered lobbyist for the private equity industry.  We formed a private equity council, which is designed to kind of explain to people what the private equity industry does, but it was only formed about a year ago.  And we are only now beginning to put together the information that shows how many jobs we have created and the profits we have created for pension funds, taxes raised, and so forth.  But, amazingly, for so long, we did not really have anything like that.  We needed to do a much better job.  We are beginning to explain to people what the industry has actually done.  And we need to spend time presenting the facts, and this is what I mean here. It is very good for people like Ed Carlyle to say, We got great rates of return and KKR and Blackstone, and so forth.  But now, that is not enough.  You have to explain to people why your industry is an acceptable industry, why it is doing good things for the economy.  And you have to go to members of Congress, regulators, people in the government, and explain this -- or the press.  And we have to spend a lot of time doing that.  If you ignore this needed function, you would not be really a very successful private equity professional in my view.  I think we cannot run away from our critics; I think we have to engage them and be direct in trying to explain what our position is.  I think what we need to do also is inform and involve the beneficiaries of private equity.  The biggest beneficiaries are the public pension funds but our investors are also beneficiaries.  But the public pension funds are enormous beneficiaries of private equity.  By and large, they have not been that willing to talk about it for a lot of complicated reasons, but I think we ought to try to get them to be more involved in explaining what the benefits of private equity are to the people who are critical of the industry. The tax regulatory challenge -- this is an interesting situation.  Most people in the world, or certainly in the United States, did not spend any time figuring out how private equity was taxed; it was just nobody paid attention to it.  The private equity world essentially followed a pattern that the oil and gas of the world had followed and, earlier, the real estate industry followed, which was to say if people put together a deal, they get compensated by getting what is known as a carried interest.  And the internal revenue service had said for 50 plus years, this carried interest is to be taxed at capital gains rates.  And the theory was that you are putting together something; you are creating value; you are taking some risk and, therefore, that is what capital gains treatment is all about.  A law professor at the University of Illinois - I think, Victor Fleischer - wrote an article saying, Well, by the way, do you know that members of Congress -- I think he circulated it to a lot of members of congress and others, people in the Hill, and generally the public: Do you know that the private equity people are getting taxed at capital gains rates for their carried interest?  Carried interest is being taxed at 15 percent, not, let s say, 34 percent.   Well, a lot of people in Congress did not know this.  I doubt if there were five members of Congress who really had paid attention to this before.  But now, when members are looking for new revenue sources, they said, Aha, here is a big revenue resource we can tax, the private equity people, and the difference between ordinary and capital gains, and that is now a serious effort.  The House obviously passed a bill that would do that.  And we would do that not just for private equity but for everybody that gets a carried interest in oil, gas, real estate, venture capital, and so forth. I think we need to engage government officials on a regular and constant basis to explain why the system we have now is a desirable one, why it has worked well, and why we run the risk of changing a pretty successful thing if we change it.  But I do think we need to recognize that we may not get everything we want and probably we may have to compromise on this.  But I think we need to do a much better job than what we have historically done of explaining why the current tax system has actually been beneficial to the industry and why we ought to be careful about creating unintended consequences for changing it. On the returns challenge, there is very little that you can do with your money that is legal, that will get you a better rate of return over a long period of time than [sounds like] investing in a top-quartile buyout fund.  If you look out over many, many years - I will show you in a moment - that has probably done a better job of getting people good rates of return, certainly compared to other legal alternatives.  And it is a challenge now because the money has flowed into the industry at enormous amounts, but in part because the returns have been so good as people look at the numbers.  And I think it is going to be important as we go forward to recognize that returns are probably going to come down, and we need to make sure we explain to people that while the returns are coming down, they still are much better than almost anything else you can do legally. Take a look at this:  If you were in the top quartile - the top quartile means you are the top 25 percent of your peer group over the last, let s say, 10 years, five years, and one year -  these are the returns you would have gotten.  Over the last one year, 32 percent; the last five years, 20 percent, and the last 10 years, 21 percent, if you are in a top-quartile buyout fund.  If you are in a top-quartile large buyout fund - that is bigger than $2 billion - you would have gotten pretty much comparable returns.  Look at the alternatives you would have had if you had bought an S&P 500 Index, or the Dow Jones Index, or NASDAQ Index; you would not have done nearly as well.  So the point is people will recognize this.  They say if you can be fortunate enough to get into a top-quartile fund, you are going to do very, very well.  And those returns are really what fuel the industry more than anything else. The competitor s challenge -- we do have more competitors than we have ever had before.  Some of the competitors are the sovereign wealth funds that you have heard so much about.  These are the largest ones in the world, and they are now beginning to be very aggressive about buying companies outside of the country in which they are based, but not only taking stock positions that are passive but very large positions in companies.  The amount of sovereign wealth money is now expected to be roughly $10 trillion by the end of the decade, and some of these are some of the large investments in our own firm.  A group called [indiscernible] from Abu Dhabi bought a stake in our firm recently and you are now seeing more and more of this.  Citicorp just recently [indiscernible] a $7.5 billion investment.  So, the competitors to private equity will be sovereign wealth funds to some extent. Also, hedge funds are beginning to be competitors and these are the largest hedge funds, and some of these hedge funds have private equity arms now.  So the hedge funds are really competing with us as well.  And many of the large U.S. and public pension funds are beginning to say, Well, I have met David Rubenstein.  He is not all that smart.  And I can do the same things he is doing.  So why do I not just do these deals directly and number these pension funds?   Ontario Teachers is a good example.  They do deals directly; they bypass the private equity people and, increasingly, there is going to be more of that. So these are large competitors that we are now going to see challenging private equity, and that is a real challenge for us.  What do we do about it?  Well, we have to recognize it is inevitable.  We cannot stop it.  We are not going to put our fingers in the dike and tell people not to do this.  I think we should have more joint ventures with our competitors and I think we need to be viable going forward, have specialized areas of expertise that really are beyond the reach of some of our competitors.  But if we do not do all those things, I think the competitors will become a dominant force in the private equity world.  And the private equity firms themselves will be less significant going forward. Protectionist challenge -- I think we need to do a better job of presenting the facts to governments about what it is that private equity actually does in their countries.  We need to have local partners, local investors, local professionals.  Every Carlyle fund around the world -- we have got more investment professionals outside the United States than in the United States.  Every single one is a local of the country in which we invest, and we try very hard to get local investors as well.  We think that will help reduce protectionist pressures.  And I think it is important for us to encourage local private equity industry to develop.  I think, the more that there are local private equity firms, it actually encourages regulators to not be upset about private equity.  And I think, therefore, other non-locally based firms can operate in those same countries better. I think the U.S. government is not exactly with clean hands here either.  I think to the extent the United States government is a leader in protectionist kinds of activities, it encourages countries abroad to do the same thing.  So when Dubai Ports wants to buy something here and we act as if the world is going to end if we allow this acquisition to go forward, it encourages countries overseas to do the same type of thing.  I think we need to spend much more time convincing the U.S. government that letting private equity firms or overseas investors invest in appropriate companies in the United States is not going to be a problem.  The public arena challenge -- as a public company, increasingly, a lot of private equity firms are going to be public.  And I think they need to err on the side of protecting their investors over public shareholders.  What I mean by that is there is a conflict some people think between worrying about your shareholders if you are a public company, and worrying about your investors in your various funds.  To the extent that these publicly-traded private equity firms only focus on their public shareholders, they will go out of business because their investors will go away from them.  So they need to, in my view, err on the side of investors.  But if you are a private company - and most private equity firms in the United States are going to be private because there are thousands of private equity firms and very few of them will probably be public - we need to recognize now that even if you are privately held, almost everything is effectively public and you have to be much more transparent than you were before. The successor challenge -- most of the large private equity firms that you have read about have people who are in the ages between 55 and 65 who were the founders.  And given the laws of longevity, it is unlikely these people can do this for another 30 or 40 years; they probably would have to step aside at some point.  Our industry has not yet done a terrific job of figuring out how to deal with succession.  A few firms have gone through successions already, but most of the larger better known firms really have not yet.  I think, increasingly, to make sure it is an industry that survives we need to make sure that we have a way of dealing with succession.  I think one of the ways of doing that is kind of designating successors early and giving them a lot of visibility and responsibility and not wait until the day they take over. Can the industry meet all these challenges?  I think the industry can meet these challenges, but I think the industry needs to kind of act in a more concerted and unified way.  I think the industry needs to recognize that the golden days of private equity are probably behind us and we are in the new era, and we have to adapt to that.  But I think the key point to remember is that the private equity model really works well, and this is one of the most important things I had wanted to convey.  When the private equity world - and I talk about the buyout world - started in the mid- to late-1970s, people thought it was a very unusual idea that you would buy a company and use the revenue or cash flow of the company you are buying to pay off debt.  Now 300 years ago, if somebody were to buy a company -- or 200 years ago or 75 years ago, if somebody wanted to buy a company, they had to have all the money and they did not need to borrow money to do it.  You bought a company with all the money that you had, and you did not depend on the cash flow of the company you are buying to pay off the debt.  When the idea of buying these companies with these kind of leveraged buyout techniques came up, it was a novel thing and a lot of banks did not want to lend money; a lot of people did not want to sell to these people.  But in the end, when the model got understood and it was perfected, basically, it worked.  And which is to say that if you buy a company using some leverage - not over-leverage - and you give the manager a large economic incentive, and you have the private equity professionals that do the deal with a large economic incentive, by and large, 95 percent of the time or more, these buyouts will produce pretty good rates of return.  So the model works and I think it does make companies much more efficient. I think people have to recognize that in the end, I think it has become one of the finest incarnations of capitalism; capitalism in its purest sense is what private equity has become.  And I think if we change the system or allow it to be changed too much, a lot of the things that are good for our country, I think, will go away. Now, in the next five years, very quickly, if the challenges are met that I tried to address, I think the industry will grow but not at quite the exponential rate that we have seen in the past five years.  I think the major firms will all be public and they will be global; some of the major firms will be based overseas.  I have said that we dominate the private equity world but I do not think over the next five or 10 years that will happen as much.  I think some of the major firms that really dominate private equity around the world will probably be based in China, based in the Middle East because of those countries will -- and make sure that some of these private equity firms are based there.  I think taxes could be much less favorable than they have been.  I think loans will almost certainly be less favorable and the source of loans probably will expand.  Returns will probably be lower.  Competitors to private equity firms will probably have a larger share of the buyout market.  In other words, the hedge funds, the public pension funds, and the sovereign wealth funds will probably be doing more and more deals in the buyout world.  And, therefore, I think they will have a larger share than the current private equity funds [indiscernible] various buyouts are done. I think the greatest activity in returns will be in the emerging markets, not what I now call the submerging markets like this country.  And the emerging markets, which, historically, required a rate of return that was higher I think will require less and less of a rate of return because people will find these to be the most attractive markets.  I think private equity will be seen as a mainstream kind of investment, not an alternative investment that is [inaudible] on the side. And as a career, people will go into private equity right from college and see it as a career.  I think the difference between hedge funds and private equity funds will probably blur a bit, and there will be these alternative investment funds that will have characteristics of both.  I think the competition of [sounds like] fund terms will become much more common.  Right now, everybody [indiscernible] the same terms, and the better-known firms do not actually get better terms than the lesser-known firms by and large.  I think that will change.  The funds and the deal size will get back to and exceed the current levels, but not for two or three years.  For two to three years, we are going to have relatively smaller deals. The real challenges I think are these:  Convincing members of Congress and Cabinet members that their children just might not be -- might find private equity as appealing as I think.  I m very often getting members of Congress and Cabinet officers telling me how great their children are and I should hire them, and so forth.  That is a real challenge, convincing people that their kids really do not want to be in private equity is one of my big challenges.  When your competitors seem to be bidding crazy prizes, avoiding the temptation to call for random steroid testing of private equity professionals is a big challenge.  Maybe we should have random steroid testing for some of these buyouts I have seen. This is a very big challenge:  Finding handsome, telegenic private equity firm founders for TV appearances.  Most of the private equity professional founders are not all that handsome.  This is actually the biggest challenge, maybe, in some ways:  Explaining to the international investors why the U.S. is a developed market for which no risk premium is needed when the dollar s value is shrinking everyday and the national debt has surpassed 9 trillion, while China is just an emerging market for which a risk premium is required.  It happens to have grown at 10 percent a year for a decade; it has 1.2 trillion of foreign reserves.  Trying to explain why one needs a risk premium and one does not is getting to be harder and harder.  Finding fresh things to say at private equity conferences when you are the last speaker is probably the hardest challenge.  Now, at the beginning I kind of said what about private equity money -- letting it be managed by presidential candidates?  And not too many people here thought, other than Mitt Romney, that it was a good thing to do.  But what about if we switch that and we said, What private equity person would you want as your president?   So, how many people -- let s have some votes here.  How many people would like Steve Schwarzman as their president?  Any?  No?  Henry Kravis?  No?  David Bonderman?  No takers?  Leon Black?  All right, you have all waited for the right answer.  Thank you very much.  Jim Glassman:  Thank you David.  You met all my expectations and your mother s.  Questions?  Raise your hand and wait for the microphone, and tell us who you are.  There is one over here and there is one over here. Peter Lev [phonetic]:  I m Peter Lev and I m an angry investor. David Rubenstein:  Of mine?  You were an investor in Carlyle? Peter Lev:  Would you expect the long-term shareholders of Manor Care to be thrilled with the fact that they were paid, essentially, the market price when you bought out Manor Care?  And do you think that Manor Care executives and board were responsible? David Rubenstein:  Well, your first question is do I think the premium was enough?  I believe [indiscernible] 99.9 percent of the people who were voted on it approved it.  So I did not put a gun to their head.  I did not say, If you do not approve this, I will shoot you.   I did not do that.  All I said is, Here is the offer.  If you want it, fine.  If you do not want it, don t take it.   Ninety-nine percent approved it.  So what would you suggest?  I did not pay enough?  Or -- Peter Lev:  I would suggest that the stockholder system on this is flawed. David Rubenstein:  Okay. Peter Lev:  And that is why that happened [inaudible]. David Rubenstein:  Okay, but I cannot change the system.  I m just one person.  I cannot change the whole government and the whole way we conduct business.  I m just one little businessman.  So, your question is:  Should we change the whole system -- the way people sell companies?  Okay, fine.  But I cannot change it today.  So what was your second question? Peter Lev:  [Inaudible] David Rubenstein:  Well, 99.9 percent of them said they were.  None of them has sued me saying that I did not pay them enough.  What would you suggest?  That I pay more?  I mean, when you go buy that -- you are wearing a tie, I see, and a suit.  When you go into the store to buy it and the price is three dollars, you say, Hey, I would like to pay five dollars.  I know you only want three, but I ll pay five.   Why would you do that?  I paid a price that 99.9 percent of the people were happy with.  What should I do?  Pay more?  What would you want me to do?  What was your second question? Jim Glassman:  It was pretty much the same. Peter Lev:  [Inaudible] David Rubenstein:  Yes. Peter Lev:  [Inaudible] David Rubenstein:  Yes. Peter Lev:  [Inaudible] David Rubenstein:  Yes. Peter Lev:  [Inaudible] David Rubenstein:  Okay, what was the premium that was paid? Peter Lev:  [Inaudible] David Rubenstein:  Well, that is not true.  But if it was no premium, why would people have agreed to it?  Are 99.9 percent of the shareholders idiots?  Why would you defame the investors in the company by saying they are idiots by agreeing to this deal?  Ninety-nine percent -- why would they do that?  They are not smart enough or they are not as smart as you think they should be?  What would be the reason? Peter Lev:  [Inaudible] David Rubenstein:  What?  Okay, I cannot deal with attention - Jim Glassman:  Actually let me -- David Rubenstein:  Attention-deficit syndrome is not something I can deal with. Jim Glassman:  Let me ask you a slightly different question.  You generally do -- you always do pay a premium for the companies that you are buying.  But what is kind of amazing is you will pay at 20 percent or 25 percent -- even bigger premium.  And yet, you are getting 30 percent internal rates of return.  How come the people who are running the company - Manor Care or prospectively, or some of the other companies you bought - how come they were not as smart as you guys are? David Rubenstein:  Well, I m not saying that they are not as smart; they may be smarter.  But the system we have in our country now to some extent means it is very difficult to operate a public company and do everything in the public domain that you might want to do.  For example, it is clear that if you have a public reporting system every quarter, you have to show increased earnings.  When you show decreased earnings, your stock gets clobbered.  And as a result, a lot of long-term investment that publicly traded CEO companies -- CEOs wanted to make, they are afraid to make them.  They are afraid to make long-term investments because it will depress their earnings.  And as a result, many of these guys do not make these long-term investments and, therefore, they feel that they are short-changing the long-term prospects of the company to make sure that these public shareholders are satisfied. So, a lot of times people say, I do not want to be in a public domain.  I really want to be in a private setting.  I can worry about long-term types of things.   That is one of the reasons.  Sarbanes-Oxley, I think, is not really a big factor.  I think that is not why [sounds like] people want to go private.  People really want to take their companies private when they do because they feel that being in a public domain, they have to worry about their stock price every hour on the hour and people are obsessed with where the stock price is and they just cannot run the company that way in their view. Now, you might say, Well, if they have all these wonderful things they can do in the private setting, should they not do on a public setting?   I do not think they can do a lot of these things in the public setting because it depends on depressed earnings.  Now, I would not say the system is perfect.  I did not invent the system.  I did not invent buyouts.  I did not invent all these things.  I m just part of the system that we have now.  The system could certainly be improved for sure and, maybe, a conference like this will come up with ideas to improve the system.  Generally, we pay a 30 percent premium or so because that is what it takes to get 99.9 percent of the investors happy to sell.  But if we were to come along and pay no premium, presumably, nobody would sell and, therefore, we would not get these deals done.  By paying a 30 percent premium, we think we are going to still make money and we have to do that by doing things in a private setting that we cannot -- or the company CEO cannot do in a public setting. Jim Glassman:  Okay, there is a question over here and then there is another one. Tom Harbin [phonetic]:  Hi, Tom Harbin from Source Capitol.  Can you talk about the development of the secondaries market and trading of LP interests and how you see that affecting GPs going forward over time? David Rubenstein:  Okay, let me explain what the question is.  When you invest in private equity, most people who invest in private equity invest in these funds.  And these are funds where you commit for five years to fund certain capital cost [sounds like] and for another five years or so, the deals might be exited.  So you might be in a 10 year partnership.  So, during this period of time, you give your capital to the general partner when he calls it for the deals and then, eventually, theoretically, you get it back at least by 10 years and you get this theoretical 25 or 30 percent rate of return.  But some people go into these partnerships and say, After a year or so, I made a mistake.  I do not like the group anymore.  I do not have as much money.  I m going through divorce.  I need my money back or I just want to go into a different line of business or I hate private equity-- whatever.  And they want to get out of these 10-year partnerships.  Well, for a long time, it was very difficult to get out of these partnerships and so people were stuck with them.  And for that reason, a lot of people did not want to go in these partnerships.  A whole industry developed over the last, let s say, 10 years or so where if you were in a Carlyle fund and you do not like the Carlyle fund or you need the money back or you do not want to be in a commitment anymore, you can say, I want to sell my interest in the Carlyle fund, and there are a whole group of new type of investors who will come along and buy your stake out.  And they will value it maybe at some discount to the net asset value or maybe some premium to the net asset value, depending on how good the fund is done.  I think it has actually provided a lot of liquidity; the whole secondary business provided a lot of liquidity for the industry and has made it easier to raise money for me because I can say to people, Look, if you don t like the fund the truth is you will be able to get out probably with a premium because there are a lot of people who will buy our funds at a premium.   So I think it has actually helped the industry to have that and probably been a good thing in terms of reducing the illiquidity of the industry it has suffered from.  Is that what you mean or --?  So I think, it has been very positive.  In our case, though, we carry our things at such a low conservative number that if somebody wants to sell one of our funds, we will buy it back ourselves at the price because we just think that we are pricing our things so conservatively.  They are really worth more that if somebody wants to sell our interest, we probably would not let them sell to a third party; we would buy it back ourselves. Mitchell Whiteman [phonetic]:  I m Mitchell Whiteman with Brown Advisory.  Can you give us your thoughts on a going-public situation - Fortress, Blackstone, Och-Ziff - and then, given what you said about being a public company a few answers ago, how that affects your thoughts? David Rubenstein:  I believe that private equity firms are going public and have gone public and will go public for three principal reasons:  One, it will give them a stock or a currency that will enable them to hold on to or track employees who might be importuned to go elsewhere from a company that is public.  In other words, if Steve Schwarzman has a stock and he can offer stock to my employees, I m at a competitive disadvantage if I do not have stock that I can also offer.  Second, I think the way the private equity issue will go is the way that the investment banking industry went.  In the early 1960s, there were roughly 200 investment banking firms in New York, all of whom were private; it was thought that you could not be a publicly traded investment banking firm because you had an obligation to your clients and if you were worried about public share prices, you could not perform your obligations to your client very well.  So they were all private partnerships.  In 1961 or 1962, Donaldson, Lufkin, & Jenrette went public and then they all followed, and now all the investment banking firms essentially are public.  What they have done is with their stock currency to some extent is buy other firms and expand their reach.  So they are global behemoths now by making a lot of acquisitions to some extent. I think the private equity firms will use their currency to do the same thing.  They will fill out niches.  They will build out their businesses so that, they are managing much more money and they are growing at the kind of rate that they want to grow at.  The third reason that firms will go public is it is a way to kind of transition out the founders.  The founders want to get some value for what they built, and I do not think they want just to give it away, and I think this is simply the best way they can come up with to do it.  Now, that does not mean it is great for the public shareholders, necessarily.  And it does not mean they will operate as well for their investors as they did before with the jury still out, but I think it is inevitable that the bigger brand name firms will all go public.  I just think it is too early to know whether this is a good thing for the private equity investors and their funds, or whether it is a good thing for the shareholders who buy these publicly-traded stocks.  So far, it has been a terrible investment.  Blackstone is underwater; I think Fortress may be around the price it traded at.  Initially Och-Ziff is underwater by 30 percent or so.  So far, it has not been a great investment.  I think it will turn around, but right now it has not been a great investment.  I do think it is inevitable that these firms will go public, and the jury is out on whether it is a good thing or not for the investors and the shareholders. Jim Glassman:  Will the public-private equity firm feel the same quarterly earnings pressures? David Rubenstein:  Well, Steve Schwarzman, when he went public, said in his documents - I think, public statements - he was only going to focus on his core business and was not going to worry about the ups and downs of the quarterly market.  Whether that is true or not, I do not know.  But, I do think it is very difficult to avoid the public shareholder concerns when you are public because you do have fiduciary obligations to them.  But time will tell. Warren Miller [phonetic]:  Yes, Warren Miller, Beckman Research [phonetic].  If you look at Mr. Schwarzman s as one as Mike Jensen showed us last night, maybe the reason the prices of stock is down is that Mr. Schwarzman seems to have total contempt for common shareholders.  He gave them virtually no residual rights. David Rubenstein:  Well, I m not going to say that is right or wrong.  I would say I think the stock price is down.  My guess is much for anything else for these reasons:  One, the deal was priced in the euphoria of the pre-credit crunch time.  It was then thought you could do more deals than probably now you can do.  I think the tax debate in Congress has had an impact on the stock because there is some legislation in Congress on a carried interest and also on the PTP legislation, which will have an impact on the stock.  And I think, also, the economy has been in a slowdown and I think all those factors were it. I would say if the economy were booming and if there no tax legislation in Capitol Hill and if you could do deals as readily as you could a year ago,  I suspect that the issue you raised would be less of a factor in the stock price than maybe you think it is.  It may be a factor; I do not know.  But they did say when they went public, this is the facts.  If you do not want to buy the stock, do not buy the stock.  It sounds like to me you probably did not buy the stock.  Okay, so at least they were open about it and people have a choice. Jim Glassman:  Two more questions right here. Rob Colerina [phonetic]:  Rob Colerina.  Could you talk a little bit about private equity clubs and what you all have found on the exit basis of deals where Carlyle sponsored solely versus deals where you clubbed with others?  Was there sort of a return difference?  Thank you. David Rubenstein:  The question is for those who do not know the industry that well, as deals got bigger and bigger, the private equity firms decided that they did not want to put all the money in themselves because it put too much of a fund into a deal, or they did not have enough money to do it by themselves.  So they would tend to do club deals.  You have three, four, or five, in some cases, six firms who would come together.  We did one of them, Nielsen, where I think we have five private equity firms in it. The jury is still out on whether these are good or bad things to do because none of these deals have really failed.  Of the recent ones, there was one that failed years ago.  But by and large, when you have three, four, and five partners, by and large, they have not yet failed.  The reason I say that is a relevant thing is that when things go down then you have to say who is responsible for frying the CEO?  Who is going to make sure that the new CEO is the right person?  Who is really going to take responsibility and make things happen?  We have not had to address that so much because most of these deals have sort of worked out. In our own case, we have done some analyses and what we have learned is despite what people think is the case, there is not any great return difference from our point of view.  Whether you do a deal by yourself or do a deal on a club, whether you do an auction deal or a non-auction deal, whether you do a secondary buyout or a primary buyout.  In other words, the theory would be that a secondary buyout would have a lower rate of return because it has already bought out by somebody else.  The theory would be that in auction dealing you are paying a higher price and get a lower rate of return.  The statistics do not yet in our case bear that out, and it does not yet bear out whether you are better off to be in a single deal by yourself or in a club deal.  We do not know yet.  In our case, we do not see any real difference.  John McClay [phonetic]:  John McClay.  Cerberus recently walked out on their transaction with URI by invoking their view on their rights under their contract with that company.  Maybe they are motivated by concerns about the economy and where that was headed; maybe they were concerned about the state of their current portfolio; maybe they really are concerned about the status of the financing market and they are [sounds like] partners in that deal.  I m wondering what you took away from watching those events unfold for yourself and what you think the lessons are for practitioners in the industry. David Rubenstein:  This is a deal which is called United Rentals.  Is that right?  United Rentals?  And it is a big equipment leasing company.  We are in that business through Hertz because Hertz has a big equipment leasing company business as well, and the unusual thing here is this:  When these deals started getting stopped, they did not go forward.  Typically, there were three things that would happen.  The deal would get renegotiated because people would say the economy is different, and, therefore, we are going to renegotiate the deal or we will not do it.  And a lot of these deals did get renegotiated.  A second thing that happened is people basically swallowed it and did basically the deal that was negotiated.  In that case, the banks took some losses, perhaps, and the equity sponsor may have gotten less of an attractive deal than they thought because the economy was slowing down.  But the deals got done. And a third category was where the deals cratered [sounds like].  The sponsor walked away or the banks sort of walked away; when that happened there were two things that had happened.  And this was an unusual thing; it was the third thing.  The things that happened when the deals cratered were: One, the buyout firm would pay a fee; it was called a kill fee for walking away.  That is your penalty and that was done on a couple of occasions.  A second thing that happened is that the buyout funds said, Well, we are not responsible for paying the buyout fee.  The world changed and we have a real reason to get out of it, and you can sue us if you want.   In some cases that happened in the Sallie Mae case.  This case was the most unusual one where the private equity firm said, We will pay the fee, in this case, $100 million.  We will pay it.  Here it is.   And then they still got sued because the theory was, Well, we did not really want the $100 million.  We wanted you to close the deal.   And up until this time, most people in our industry thought, Look, you have a negotiated kill fee and that is what you pay when you do not close. So that will be interesting.  It is now in the Delaware courts and the Delaware courts are going to resolve whether or not you can walk away from the deal and just pay the kill fee, or whether you are obligated to go forward.  I do not know how it is going to come out but I m certainly looking at it with interest.  Clearly, when you walk away from these deals, if the court says you have to close the deal and not pay the kill fee and pay a bigger penalty, it will really caution people and people will be very careful when they negotiate their contracts in the future. We will see how this litigation works out.  I do not know how it will work out.  My suspicion is that the kill fee will probably be adequate compensation, I suspect.  But I do not know how the contract was drafted, so I cannot really say whether that was the only thing in that contract that was required.  I do not know.  Does that answer your question or you have another? John McClay:  And just quick follow-up.  Obviously, there are reputational concerns for the individual [cross-talking] David Rubenstein:  Of course, right. John McClay:  -- Cerberus as well as the industry as a whole.  How do you think that weighs in with other players such as Carlyle and others? David Rubenstein:  Yes, a clear [audio was cut] [End of file - The History, Impact, and Future of Private Equity] [End of transcript]    </body></html>