Sunday, May 21, 2017

Blackstone's $100 Billion Infrastructure Plans Dovetail with Trump's

Forbes reported:

Private equity giant Blackstone Group is unveiling a $40 billion infrastructure fund with the gulf nation, which will primarily invest in the United States. Saudi Arabia will commit $20 billion to the Blackstone infrastructure fund and another $20 billion will be raised from other limited partners, readying cash that could lead to $100 billion in total infrastructure investments on a leveraged basis.
I'm sure the American public is comforted by the fact that our future tolls, air travel fees, water bills and other public services will help billionaires and the Saudis profit further.

Saudi Arabia's Public Investment Fund has agreed to commit $20 billion to the Blackstone infrastructure fund, which will be set up a permanent capital vehicle
Recall Saudi citizens flew home when everyone else in America couldn't take a plane after 9-11.  Those Saudi citizens were in Washington, D.C. for the annual Carlyle Group investors meeting.

The Carlyle Group is also interested in infrastructure.  COO Glenn Youngkin told CNBC:

Airports, right out of the box, is the No. 1 target area right now.  They are an understood commercial entity, and there are airports starting to move this way” already. 
Puerto Rico has the only commercial services airport operated under private management according to a Feb. 2016 Congressional report.

Chicago Mayor Rahm Emmanuel cancelled Midway Airport's planned privatization in 2013.  Emmanuel made his post Clinton White House fortune as an investment banker for Wasserstein, Perrella and Company.  Rahm made $18 million in two and a half years.  Emmanuel served Bruce Rauner of GTCR Golder Rauner, a Chicago based private equity underwriter (PEU), according to Dealbook

Instead of private equity, Mr. Rauner advised Mr. Emanuel to pursue investment banking, where his political experience might be more valuable in landing deals in regulated industries.
Mr. Emanuel called him back after starting at Wasserstein and asked if he could take over coverage of GTCR for his new employer.
Rauner is currently the Governor of Illinois.  Both Emmanuel and Rauner are in position to privatize public assets to their PEU peers.

President Trump not only appointed billionaire PEUs to key government posts, he is touring the world intent on giving them the opportunity to get richer.

The partnership comes as top executives, including Blackstone Chief Executive Officer Steve Schwarzman and KKR & Co. co-CEO Henry Kravis, descend on Riyadh for the inaugural Saudi-U.S. CEO Forum, a weekend of deal-making. The meetings, which have already yielded billions of dollars in deals between companies including oil giant Saudi Aramco and General Electric Co., are taking place as U.S. President Donald Trump visits the kingdom.

Infrastructure investing has gained renewed attention as Trump’s administration vows to direct more private money toward improving roads, bridges and airports. 
Trump's infrastructure plan involves more leverage than Blackstone's:

The president's budget proposal, expected to be unveiled next week, will include a call for $200 billion in federal funds over 10 years for infrastructure projects, according to Bloomberg, citing a senior Office of Management and Budget official.

The White House budget blueprint would also provide incentives for at least $800 billion of infrastructure investment by the private sector and state and local governments, the official said.
Private equity hates paying taxes.  We'll see how much Blackstone's $100 billion permanent capital vehicle pays, if anything in taxes.  We might have the Trump PEU infrastructure tax rebate.  If so, the little people will pay and some of that will go to a Saudi investment fund.  It's a flash back to 2007, only that deal was with a United Arab Emirates sovereign wealth fund. 

Carlyle to Lick Fingers on Lily O'Brien

While retailers implode across the globe The Carlyle Group is ready to monetize its investment in specialty chocolate maker Lily O'Brien's.  Irish Times reported:

The Post also reports that chocolate company Lily O’Brien’s is up for sale for €50 million. It says the business, which is majority owned by US-Irish joint venture Carlyle Cardinal Ireland, has hired IBI Corporate Finance to find a buyer. 
The Carlyle Group purchased a majority stake in Lily O'Brien's in January 2014.  BusinessIrish reported in December 2015.

A joint venture between US private equity group Carlyle and Dublin-based Cardinal Capital, Carlyle Cardinal Ireland, acquired a majority stake in Lily O'Brien's (around 80pc) last year for a rumoured €15m.

Asked what an expanded company would be like in five years, Mr Donnelly said he would like to see the business heading towards the "magic number" of €50m
Might Carlyle work their magic and get €50m sooner than planned?

Aside:  Carlyle had $185 billion in assets under management when it invested in Lily O'Brien's.  At last report AUM stood at $162 billion. 

Saturday, May 20, 2017

Healthcare Experts Fooled on ManorCare Ownership

In a sad sign of the times a respected media publication cannot decipher the complex legal and investment relationships for firms intent on making a fortune in healthcare.  Modern Healthcare could not get The Carlyle Group, a politically connected private equity underwriter, owns Manorcare, an owner and operator of nursing homes in the U.S.

Carlyle Partners V purchased the company in 2007 for $6.3 billion.  It later sold the nursing home buildings to HCP for $6.1 billion and entered into an agreement to lease them back.  HCP is a real estate investment trust.  Carlyle still owns HCR Manorcare, the operator of nursing homes   

There is a lawsuit against HCP by shareholders upset that HCP entered into a bad deal with Carlyle.  The Carlyle Group charges Manorcare annual management fees to direct corporate strategy and deal fees to undertake the $6.1 billion sale of nursing home real estate to HCP.

Between a decade of management fees, deal fees, special dividends/distributions and proceeds from the HCP sale Carlyle has already made money on ManorCare. 

Modern Healthcare erroneously reported:
Real estate investment trust HCP has been sued for allegedly hiding Medicare kickback allegations against its skilled-nursing provider ManorCare from investors.

In a proposed class action lawsuit filed in an Ohio federal court Monday, HCP shareholder Scott Weldon accused the Irvine, Calif.-based company of violating the Securities Exchange Act by hiding from investors that ManorCare, an HCP-acquired skilled nursing facility operator, was repeatedly accused of fraudulently billing Medicare for more than $6 billion.

Before it was acquired by HCP in 2011, ManorCare was sued three times for insurance fraud. The Department of Justice joined the suits in 2015 after it investigated the company. That information was not disclosed to shareholders, the suit alleges. 
ManorCare operates 281 skilled nursing facilities in 30 states..
The nursing home operator is owned by The Carlyle Group, not HCP.

HCP was effusive in their praise for the ManorCare real estate deal, calling it a high quality transaction with best in class management team.  That was before things went south.

HCP shareholders are suing because their company did not disclose or act on critical information in a major deal, which has since gone bad.

HCP tried to isolate the asset by spinning it off into a separate publicly traded vehicle.  It spun off the ManorCare facility portfolio into Quality Care Properties (QCP) in October 2016.

QCP's recent 10-Q cited ManorCare's getting a "going concern" qualification from public accountants.  It also stated:

On April 5, 2017, the Company entered into a forbearance agreement (the "Agreement") with HCR III and HCRMC (together, "HCR ManorCare"). Among other things, the Agreement requires HCR ManorCare to make cash rent payments of $32 million for each of April, May and June of 2017, with a deferral of payment of the additional $7.5 million per month otherwise due until the earlier of (i) July 5, 2017 and (ii) an early termination of the Agreement, with all deferred amounts becoming immediately due and payable upon an early termination. The Agreement also required HCR ManorCare to deliver its 2016 audited financial statements and auditor consent to QCP not later than April 10, 2017, which were received on April 10, 2017 and included a "going concern" exception for HCR ManorCare in the auditor opinion.

During the term of the Agreement, which will end on July 5, 2017, unless earlier terminated, QCP and HCR ManorCare intend to engage in good faith discussions concerning a long-term restructuring of the terms of the master lease, the guaranty of the master lease and certain other matters. To facilitate the exploration of restructuring alternatives, QCP also agreed to provide HCR ManorCare with a temporary secured extension of credit of up to $7 million per month during each of April, May and June of 2017 (up to $21 million in the aggregate), which would be due and payable in full not later than December 31, 2017, subject to acceleration upon certain events.

HCR ManorCare made the reduced cash rent payments of $32 million for each of April and May of 2017. HCR ManorCare borrowed $7 million for April 2017 under the temporary secured credit agreement.
Oddly, The Carlyle Group is never mentioned in articles about ManorCare's financial turmoil, nor is it identified as ManorCare's owner in QCP's SEC documents. Carlyle is skilled in keeping their good name

Wednesday, May 17, 2017

ManorCare to Renege on Lease?

Senior Housing News reported:

ManorCare management “plans to request a waiver from its lenders regarding expected areas of non-compliance with the terms of the credit agreement and to continue good faith discussions with the lessor concerning a long-term restructuring of the master lease.” 
Carlyle paid $6.3 billion for ManorCare in late 2007.  ManorCare sold its real estate for $6.1 billion in 2011, so one might think there would be plenty of cash to pay leases.  Not so. 

Earlier this month, QCP entered into a forbearance agreement with HCR III Healthcare, LLC and its parent company HCR ManorCare, Inc.

The Agreement also requires HCR ManorCare to deliver its 2016 audited financial statements and auditor consent to QCP not later than April 10, 2017, which is expected to include a "going concern" exception for HCR ManorCare in the auditor opinion. 
The question is what happened to the $6.1 billion. How much did Carlyle siphon off in special dividends and management fees during its ownership of ManorCare?

ManorCare's promised quality committee fell down on the job, given the company's quality problems.  That should have been no surprise if government officials looked at LifeCare Hospitals, another Carlyle Group affiliate.

WSJ reported last week Carlyle hired restructuring advisors for ManorCare.  Will bondholders try to claw back Carlyle's massive ManorCare withdrawals? 

Sunday, May 14, 2017

Will Jared Kushner's Cadre Holdings Thrive Over Time?

The Real Deal reported:

When filling out his government disclosure forms, Jared Kushner omitted a few things, including his stake in a real estate tech company and at least $1 billion in loans.

The president’s son-in-law and senior advisor didn’t disclose his stake in Cadre, a tech startup he co-founded with his brother and Ryan Williams in 2014, or loans totaling at least $1 billion from 20 different lenders to properties and companies co-owned by Kushner, the Wall Street Journal reported.  (5-2-2017)
New York Post reported:

Cadre is an online investment portal co-founded by CEO Ryan Williams, who has had stints at Blackstone and Goldman Sachs. Thrive Capital’s Joshua Kushner and his brother, real estate developer Jared Kushner, are backers and strategic advisers.
Business Insider reported:

Joshua Kushner is also the cofounder of health insurance startup Oscar and runs a startup investment firm, Thrive Capital. His brother Jared Kushner, who owns the New York Observer and runs his family's real estate business Kushner Properties, is the third Cadre co-founder.
Prior the election of father-in-law President Donald Trump Jared Kushner was General Partner of Thrive Capital,  a private equity underwriter (PEU).

Thrive Capital invested in Cadre's Series A financing of $18.3 million.

An attorney for Kushner noted that a revised version of his disclosure forms includes his stake in Cadre. According to the papers filed with the Financial Industry Regulatory Authority, Kushner holding company JCK Cadre LLC, owns 25 to 50 percent of Quadro Partners, Inc., which owns at least 75 percent of RealCadre LLC, which operates Cadre. 
The attorney omitted any stake Kushner might have in Cadre via Thrive Capital.

Residual stakes in private equity affiliates are potential conflicts of interest.  Obama Health Reformer Nancy-Ann Deparle never declared her residual stakes from CCMP Capital Partners, a :J.P. Morgan private equity underwriter.  Payouts came during her public service despite having disposed of "all conflicting assets."

Kushner's General Partner role with Thrive is more significant than Deparle's Managing Director position with CCMP.  How much does Jared hold in residual stakes for Thrive's many investments?

Kusher's attorney is Jamie Gorelick, who was personally enriched during a period of fraudulent Fannie Mae accounting and collaborated with the White House to minimize BP's liability for the Gulf Oil Spew.

Kushner has reduced his Cadre ownership stake to less than 25 percent, Kushner’s attorney Jamie Gorelick told the Journal.
Jame did risk management for BP and is now doing the same for Jared Kushner.  I'm sure she will be rewarded for her shepherding Jared.

Saturday, May 13, 2017

China Trade Deal to Fuel Carlyle Group's LNG Assets

U.S. Commerce Secretary Wilbur Ross announced a China trade deal that could benefit his fellow billionaire private equity underwriting (PEU) brethren.  Chicago Tribune reported:

The United States would also allow U.S. companies to ship liquefied natural gas to China as part of the bilateral agreement reached following President Donald Trump's meeting with Chinese President Xi Jinping in April.
The Carlyle Group has at least two affiliates in the LNG space.  4Gas had this to say on the company's website:

4Gas is the world’s only independent LNG-terminaling company with a global reach. Our objective is to establish a terminal network that will play a crucial role in fulfilling the increasing needs of countries and companies for access to natural gas and that will provide LNG producers access to multiple markets on a global scale. The company is developing terminals in continental Europe, North America and Asia.  
The day before the Trump administration announced the China-U.S. trade deal Carlyle had its own LNG newsPEHub reported Carlyle affiliate Neptune Energy will buy oil/gas assets from a French company:

The EPI business that would be acquired by Neptune includes significant North Sea operations in Norway, including operatorship of the Gjøa field, in the Netherlands where EPI is the #1 offshore operator and the UK, with operatorship of the recently commissioned Cygnus gas field, as well as onshore Germany, and the Jangkrik LNG project in Indonesia. In all, EPI operates some sixty producing oil and gas fields. It also includes the large Touat gas development underway in Algeria, where ENGIE would retain a substantial interest alongside Neptune. 
Law360 reported

“Engie remains a major gas player in Algeria through its LNG activity, and Engie’s experience in Algeria is considered key to bring the first gas to the Touat project.” 
Carlyle inked a deal on LNG assets in Southeast Asia the day before the Trump team opened doors into China.  That's timing!  Carlyle co-founder David Rubenstein should thank President Trump the next time they meet at Mar-a-Lago.
President Trump and Commerce Secretary Wilbur Ross want to help more than Carlyle's founding billionaires.  Trump Advisor Stephen Schwarzman can win as well.  Schwarzman's Blackstone Group is also in the LNG business.  Yes, under President Trump the rich can get much richer.

Update 5-17-17:  ZeroHedge ran an OilPrice piece on a coming LNG boom.

Update 5-21-17:  Alaskan LNG has historically been exported to Asia and Alaska Governor Bill Walker has big plans for LNG.  With BP, ConocoPhillips and ExxonMobil dropping out Walker needs a new developer for the $45 billion project.  Walker petitioned President Donald Trump for $40 billion in federal loan guarantees.  Will Carlyle enter the Alaska LNG picture and help Governor Walker and President Trump get a big infrastructure win?  Watch the news.  Chess pieces are being moved for LNG to boom in Alaska.

Monday, May 8, 2017

Red Team to Fold Up SEC's PEU Review

AltAssets reported:

The Financial Choice Act, a Republican proposal to reform the financial regulatory system, would see the SEC switch its “scarce resources” away from private equity in favour of protecting retail investors.

It states that “although private equity funds did not cause nor contribute to the financial crisis, Dodd-Frank imposes burdensome requirements on advisers to private equity funds, which unnecessarily punishes their investors and impedes job creation”.
At least one private equity investment contributed to the financial crisis.  Carlyle Capital Corporation (CCC) imploded in March 2008, six months before Lehman Brothers fell.  The Carlyle Group birthed and nurtured Carlyle Capital Corporation, a highly levered "safe" bet on mortgage backed securities.  Carlyle turned its back on CCC, claiming no role or responsibility for it's huge failure.

The burdensome requirement the SEC placed on private equity underwriters is that they charge their stated investment fees and no more.  SEC's Andrew Bowden talked tough on PEU fee dalliances but softened his stance under the prospect of private equity employment for his son.   

The Trump team wants to do one better than Obama's private equity regulator who kicked sand before running away.   Trump's Treasury wants to fold up the PEU review tent, no surprise since the President scattered private equity underwriters among his cabinet picks.

High leverage, poorly collatoralized loans and credit seizure can begin in any asset class and spread like wildfire.  Private equity is at higher risk for participating in the next crisis given deal multiples, the need to rollover affiliate deal financing at regular intervals and their wide freedom to value holdings at something other than mark to market. 

President Trump;s team can service his PEU friends but that doesn't make the world a safer place.  It returns us to conditions in place before September 2008.