Sunday, August 28, 2016

Carlyle Group May Shutter Remaining Hedge Funds

FT reported:

Carlyle is weighing whether to withdraw from its hedge fund activities, as the private equity group struggles with its offerings and as one of its remaining vehicles has shrunk by almost 90 per cent in two years. 

One of the hedge funds majority owned by Carlyle, Emerging Sovereign Group, told investors this month that Carlyle was selling its stake back to ESG’s partners. Assets in another Carlyle hedge fund, Claren Road, have fallen to less than $1bn, from $8.5bn two years ago.

Another Carlyle hedge fund, Vermillion, was reconfigured last year. It has been renamed Carlyle Commodity Management and lumped into the group’s other commodities business. In February, Carlyle shut its fund of funds business, Diversified Global Asset Management, and three months later the head of the Global Market Strategies unit, Mitch Petrick, stepped down to start his own investment management company.
Two Carlyle funds failed in 2008, just months before the financial crisis. Affiliate Carlyle Capital Corporation declared bankruptcy (March 2008) and Carlyle announced it would liquidate Blue Wave Partners (July 2008). 

Carlyle current hedge funds exit may be because the PEU doesn't want to throw good money after bad.  Is it capital preservation time?

Do Management Fees Open Door for PEU Liability?

Despite hold harmless agreements on paper and corporate shells set up to insulate liability, it is logical that a private equity underwriter (PEU) could be held accountable for management decisions it makes on behalf of its affiliate.  PEUs generally charge their company millions in annual management fees.  Take casino giant Caesar's, owned by PEUs Apollo Global and TPG. 

An acquired company pays its private equity owners an annual sum for ongoing management and advisory services. You might have heard about these recently in the context of troubled casino company Caesar’s Entertainment CZR , which each year pays nearly $30 million to its private equity owners — Apollo Global Management APO and TPG Capital — despite annual losses north of $1.4 billion (Caesar’s could have killed the arrangement during last year’s IPO, but it would have been forced to pay $195 million the privilege).
That's on top of the transaction fee charged by PEUs when they consummate the deal.

When they took Harrah’s (now Caesar's) private, TPG and Apollo collected a $200 million “transaction fee” for the deal, split evenly between the two companies.
Caesar bondholders sued the operating company and just received the right to sue the next shell up, Caesar's Entertainment Corp..   Courts have not granted the right to sue Apollo Global or TPG directly.

Caesar's organizational structure is shown in their annual 10-K filing.  The list of Caesar's subsidiaries is five and a half pages long.

Here's what the 10-K said about the bankruptcy:

As a result of CEOC’s highly-leveraged capital structure and the general decline in its gaming results since 2007, on January 15, 2015, CEOC and certain of its U.S. subsidiaries (collectively, the “Debtors”) voluntarily filed for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. Because CEOC is under the control of the Bankruptcy Court, CEC deconsolidated this subsidiary effective January 15, 2015 
And who set up CEOC's highly leveraged capital structure?   That would be Apollo Global and TPG. 

CEOC bondholder's are one step closer to Caesar's sponsors given their right to sue Caesar's Entertainment. I'd love to see the day when PEU sponsors have to defend their actions in court for their decimation and looting.  Maybe one day they'll have to pay.

Saturday, August 27, 2016

The Public Gets It on EpiPen Price Gouging

Mylan CEO Heather Bresch said in her CNBC interview on her company's EpiPen price increases:

"I understand better than anyone that facts are inconvenient to headlines."  
That's pathological level spin and complete horse hockey.  Bresch completely ducked the greed that underlies the story.

As for facts here are a few.  NBC News reported one mother's experience with EpiPen pricing:

In 2008, Bush said the price was $145.99. In 2010, it was $220.99, then jumped to $649.99. This year her pre-insurance costs were $1,118.08.
The fact is EpiPen's price rose by several orders of magnitude, as did her CEO pay.  NBC News reported:

Proxy filings show that from 2007 to 2015, Mylan CEO Heather Bresch's total compensation went from $2,453,456 to $18,931,068, a 671 percent increase. During the same period, the company raised EpiPen prices, with the average wholesale price going from $56.64 to $317.82, a 461 percent increase, according to data provided by Connecture.
Here's the concession President Obama, White House Health reformer Nancy-Ann DeParle and Senator Max Baucus wrung from big pharma in 2009:

The pharmaceutical industry maintained that proper use of medicines can be one of the most effective ways to achieve better health outcomes and reduce costs.

The Pharmaceutical Research and Manufacturers of America (PhRMA) said in a statement Monday that non-adherence to prescribed medicines has been estimated to cost $100 billion to $300 billion annually, including costs from avoidable hospitalizations and nursing home admissions.

Addressing this issue is part of a quality-focused way to lower healthcare cost growth, the trade group said.

"The coalition also recognizes the importance of encouraging medical innovation as a key element in both improving patient health and reducing the growth of overall health costs," PhRMA president and CEO Billy Tauzin, said in a statement.
The Obama team dangled a $2,500 annual savings in health care costs in 2009.  It didn't happen.

The average general deductible for workers with single coverage totaled $1,077 this year (2015), compared to only $303 in 2006. That deductible has climbed nearly seven times faster than wages, on average, over the past five years. 

CNBC's Brian Sullivan asked Mylan's CEO why are people paying more for pharmaceuticals and insurance is covering less.  Simple:  It was the design of PPACA, widely known as Obamacare, where employers and Uncle Sam would shift the growing burden of health care costs to the individual. Seven years ago I wrote the 30,000 foot view of PPACA showed:

People having to buy insurance, which over time will shift greater and greater responsibility to the individual.
 It's come to pass.  I offered in early 2014:

(Employers) continue their longstanding practice of shifting responsibility and costs to employees.  For the individual rising deductibles and co-pays are a larger hurdle for using healthcare services.
CNBC's Sullivan reference people going bankrupt under healthcare and prescription drug costs, a predictable occurrence under health reform.

It;s not optics the public is livid about, it's experience.  The average worker's pay hasn't gone up enough to keep up with the additional healthcare cost burden under PPACA.  Greed was the implied foundation for PPACA and EpiPen is a window into that world.
In 2015, Mylan's profits from the sale of EpiPens rose to $1.2 billion.
As for CEO Health Bresch's shifting Mylan's "headquarters" overseas for tax reasons and lying about an MBA that she didn't finish, those are things Americans have come to expect from the executive suite and board room.  We've learned the last fifteen years:

1   Image is everything.  
2.  There are few limits on strategies that boost CEO incentive pay at the expense of workers or consumers.
3.  CEOs have adopted the language of politics to avoid responsibility and divert people from the question/issue at hand.
For Heather Bresch it doesn't hurt that her father is former Governor of West Virginia and a current U.S. Senator.  I wonder if one of his people coached her prior to her CNBC interview.  It was D.C. level slop.

Update:  ZeroHedge noted the Government-Corporate Monstrosity's tentacles in the EpiPen fiasco.

Thursday, August 25, 2016

PEUs Lever at Multiple Levels

NakedCapitalism reported:

Subscription line financing makes it possible for general partners to borrow at the fund level on a routine basis, as opposed to its previous status as an unusual event. The bank provides a credit line with that borrowing secured not by the assets of any portfolio companies, but by the unused capital commitments of the limited partners. In other words, while these borrowings were expected to be rare and repaid by other means, from the lender’s perspective, legally they are advances against the limited partners’ capital commitments. 

Some managers use lines of credit instead of calling investor capital, thereby easing limited partners’ capital call burden
Having to borrow at the fund level is odd, especially with all the dry powder supposedly at private equity's disposal.  It makes me wonder if their fundraising commitments are as solid as presented.

If capital commitments are suspect fund level borrowing adds several stories to the PEU house of cards.

Tuesday, August 23, 2016

Political Hacks Turn Management Gurus

Washington's Blog reported:

"our society is a layer-cake of pathologies, our economy little more than institutionalized racketeering and our politics a corrupt auction-house of pay-for-play, influence-peddling, money-grubbing and brazen pandering for votes."- Charles Hugh Smith
This statement confirmed my unease over the marriage of corporations and politics, such that the pursuit of power and greed consistently trump decency, fairness and justice.  

CEOs once studied under renowned management theorists.  Dr. W. Edwards Deming's "There is no knowledge without theory", has been jettisoned for management pragmatism.  It happens that excessively enriching executives for the work employees perform is pragmatic.  

CEOs now study under a Clinton hack who failed to operate the family charity in an upright and ethical manner.   Teneo helps CEOs get richer and more powerful for a $250,000 monthly retainer.  Teneo Capital and Teneo Ventures act like private equity underwriters (PEU).  

Teneo Capital is an independent investment bank providing strategic and financial advice on mergers, acquisitions, divestitures, capital raising, valuation and capital markets transactions. 

Teneo Ventures partners with companies run by visionary but pragmatic CEOs, focused on solving large, real-world problems. In addition to providing financial capital, we leverage capabilities across our platform to offer operational capital, relational capital, and intellectual capital.
Teneo Founder Douglas Band was described by a Clinton White House colleague as "a gatekeeper who charged tolls."  Teneo combines the financialization of everything with gross politics. 

Management, like politics, focuses on self image and personal enrichment.  Substance and truth take a back seat to hollow narratives corporate chiefs and officials foist on their workers and the public.  There is no depth, only shiny shallow surfaces that enable people at the top to see their best reflection.  Woe to anyone who asks for real relationship or mutuality in today's mirror, mirror on the wall world.

The marriage of business and politics has not improved the lives of workers the last two decades.  It has however produced a new class of ex-politician business consultants whose practice involves the continued exercise of greed and power.  

Monday, August 22, 2016

Clinton Circle: Sophisticated Influence Peddling

It used to be people left public service for private enrichment.  Under the Clinton circle that no longer needed to happen.  Take Huma Abedin.  Vanity Fair reported:

One of Clinton’s most trusted aides is Huma Abedin, vice-chairwoman of the current campaign, who began her work with the Clintons in 1996 as an intern. Abedin is as secretive as Clinton herself, if not more so, and she is the primary gatekeeper. She often forwards press coverage and other messages, highlighting once again the mediating membrane that exists between Hillary and ordinary reality. Abedin is one of the State Department employees who had a e-mail account, and in 2012, after she stepped down as deputy chief of staff, she was granted “special government employee” status, which allowed her to continue at the State Department while working as a consultant for the Clinton Foundation and Teneo (a firm co-founded by Douglas Band, a former Clinton aide).
Politico noted how Abedin navigated her state department role:

When Crown Prince Salman of Bahrain wanted face time with Hillary Clinton in the first months of her time at the State Department, top aide Huma Abedin worked as a go-between for the Clinton Foundation and the secretary of state to facilitate the appointment, working official channels while coordinating with top Clinton Foundation executive Doug Band.
Judicial Watch added:

Included among the Abedin-Band emails is an exchange revealing that when Crown Prince Salman of Bahrain requested a meeting with Secretary of State Clinton, he was forced to go through the Clinton Foundation for an appointment. Abedin advised Band that when she went through “normal channels” at State, Clinton declined to meet. After Band intervened, however, the meeting was set up within forty-eight hours.
That's the same Doug Band who blurred the lines between the Clinton Foundation and Teneo, the consulting firm he founded.  NYT reported in 2013

None have drawn more scrutiny in Clinton circles than Teneo, a firm co-founded in 2009 by Mr. Band, described by some as a kind of surrogate son to Mr. Clinton. Aspiring to merge corporate consulting, public relations and merchant banking in a single business, Mr. Band poached executives from Wall Street, recruited other Clinton aides to join as employees or advisers and set up shop in a Midtown office formerly belonging to one of the country’s top hedge funds.

By 2011, the firm had added a third partner, Declan Kelly, a former State Department envoy for Mrs. Clinton. And Mr. Clinton had signed up as a paid adviser to the firm.

Teneo worked on retainer, charging monthly fees as high as $250,000, according to current and former clients. The firm recruited clients who were also Clinton Foundation donors, while Mr. Band and Mr. Kelly encouraged others to become new foundation donors. Its marketing materials highlighted Mr. Band’s relationship with Mr. Clinton and the Clinton Global Initiative, where Mr. Band sat on the board of directors through 2011 and remains an adviser. Some Clinton aides and foundation employees began to wonder where the foundation ended and Teneo began.
It's a big money wash, sloshing back and forth for Clinton insiders. Abedin and Band exemplify the low ethical standards in the Clinton camp.  They also symbolize those who've been enriched in outsize ways, while most suffer from stagnant wages and dwindling retirement/healthcare benefits.  

Teneo caters to the corporate CEOs who've capped wages and shifted benefit responsibility to workers and retirees.

Just like the political world, everything boils down to image management.  Those who uphold the myths receive a king's ransom while truth tellers are eviscerated. It's necessary to keep one's good name.

Sunday, August 21, 2016

GM's Akerson: Clinton Campaign Ignition

Carlyle Group Vice Chairman and former General Motors CEO Daniel Akerson wrote recently:

When I worked at General Motors, our global operations comprised more than 100 plants and roughly a quarter-million employees. Supply-chain management and the orchestration of commodities, parts and components around the globe required a multinational, interdisciplinary effort. In every chief executive job I have had, my team and I spent countless hours analyzing global trends, listening to experts, learning from others and making informed, reasoned decisions. 
From this description one could deduce Akerson knew about GM's ignition switch problems.  He's been silent on the matter and no Congressional hearing on the matter required he reveal his knowledge or actions.

A new investigation is opened into front crashes of Cobalts and Pontiac G5s where airbags did not deploy. Ignition switches are removed from cars in salvage yards and tested. 

Engineers notice all the crashes in which the ignition was switched out of "Run" only happened in cars from the 2007 model year and earlier. 

GM investigators notice that ignition switches in cars built in later years are less prone to moving out of position than ignitions in earlier models. GM hires outside engineers to conduct a thorough assessment of ignition switches from cars made before and after 2007. They conclude that changes were made to the ignition switch sometime after the cars first went into production. A GM committee is asked to consider a recall of Chevrolet Cobalt and Pontiac G5 cars from the 2007 model year and earlier.
We don't know if Akerson ignored the ignitions switch problem going on during CEO-ship or subordinates were pressured not to bring bad news to the top. 

When corporate actions kill people CEO's become instantly ignorant.  Praise they are happy to take but blame must be delegated.

Last June, GM CEO Mary Barra fired 15 employees deemed responsible for not tackling the problem vigorously enough.
Mary Barra did not identify the role Mr. Akerson played in not tackling the problem vigorously enough.

Carlyle Group Vice Chairman Akerson endorsed Presidential hopeful Hillary Clinton in his letter.  Carlyle made big money from President Bill Clinton's two terms in office.  President Obama dined with Carlyle co-founder David Rubenstein numerous times.

Remember politicians Red and Blue love PEU.  When future business is at stake top executives are artful, eloquent and charming.  That evaporates when their company kills people.