UPDATE 1-Carlyle--Private equity to transform over 2-3 yrs

* Industry to grow larger than pre-bubble burst

* Says private equity made mistakes in bubble

* Deals will be smaller, less frequent; holding periods up (Adds quotes, fixes typo in bullet point)

By Megan Davies and Nicolas Parasie

DUBAI, Oct 13 (Reuters) - Carlyle Group [CYL.UL] co-founder David Rubenstein said the private equity industry will grow larger than before its bubble burst, as it transforms itself over the next two to three years.

Private equity firms struck ever larger deals during the 2005-07 period, fueled by cheap debt. But since the credit crisis, they have been unable to strike deals of such scale and have had problems keeping their portfolio companies healthy.

"Private equity contributed to the problem; I think we made some mistakes ourself," Rubenstein said on Tuesday.

"Clearly we contributed a little by paying higher prices. We rely on very cheap debt. It was intoxicating to get debt with no covenants -- people wanted to do more and more deals and there was a greater focus on very large deals," he said at a conference.

Rubenstein said the industry will transform itself -- investments will be smaller and less frequent, equity levels put into deals will rise, debt will be more expensive than before and holding periods will rise. Ultimately, however, the industry will grow larger than before, he said.

The emphasis will be more on changing companies rather than leverage in the future, he said.

"Private equity will probably come up with a new name. It went from bootstrap deals in the early days to leveraged buyouts to management buyouts to private equity," he said. "Maybe it will go to change capital or value-added equity," he said.

Private equity firms have been constrained from doing deals from a lack of cheap financing. Rubenstein said the largest deal that could be done right now as a pure private equity deal would be in the $3 billion to $5 billion range.

D.C.-based Carlyle, one of the largest private equity firms in the world, with more than $86.1 billion under management, has investments in companies such as fast food chain Dunkin' Donuts, semiconductor firm Freescale Semiconductor and pharmacy chain Alliance Boots. (Editing by Gerald E. McCormick)